Board Evaluation For Better Corporate Governance In The U.K.
A conflict of interest is something that is often surprisingly hard for people to recognise and agree on. And yet acknowledging it is fundamental to good corporate governance. It’s surprising then, that the review of the effectiveness of board evaluations for listed businesses by external providers in the U.K was conducted by ICSA: The Chartered Governance Institute, as they do also provide such evaluations - which is clear on their website. (It has rebranded several times since the Department of Business, Energy and Industrial Strategy (BEIS) asked the body to conduct this review in August 2018.) The review just published by ICSA on their recent consultation is a small step forward after a long time on standards in a lucrative industry that may or may not be helping achieve better governance. The tone of the report also contrasts with recent U.K. government steps to uphold standards in business behaviour.
The U.K’s corporate governance code requires that an evaluation of the board of FTSE 350 companies be “externally facilitated” at least every three years. While there is a plethora of players in the board evaluation market, it remains dominated by a handful of firms with long-established relationships with veteran inhabitants of plc boardrooms. The nature of repeat business, and the independence as well as the quality of board evaluation has been rumbling as a concern in the background of good corporate governance for over a decade.
This blog has come back to the subject repeatedly in recent years, as a search reveals. The timing and content of board evaluations has gone unnoticed even after corporate failings - Carillion and back in 2014, Tesco - which I covered in Forbes - come to mind. The lack of transparency and accountability around the process of board evaluation has been a glaring hole in the construct of better governance.
The ICSA review published this week recommends the establishment of a code of practice for board evaluators, and the setting of minimum standards. It offers suggestions for principles of good practice for FTSE 350 companies to follow on board reviews, and states the need for independence in board reviewers and importantly the disclosure of the provision of other services and duration of appointments. The need to avoid conflicts of interest is underlined. But its language is mild and the tone of this review is unassertive.
Coming as it does after the comprehensive Brydon Review, which began with the question “what is the purpose of audit?” and looks like it is leading the way to major overdue audit reform, one wonders why ICSA did not begin by asking “what is the purpose of a board review and the necessary requirements and obligations of those conducting it?”
The report’s recommendations now await further action by BEIS, the FRC, and others. Given that independent board evaluation is a critical component of the workings of better corporate governance, there’s a strong argument for more clarity and control of its responsibilities.
On publication of ICSA’s review, Lord Callanan, Minister for Corporate Responsibility said: “Robust, consistent evaluation of company boards will be crucial as we strive to make the UK the best place in the world to do business. This Government is committed to learning lessons from previous collapses, which is why my department commissioned the Chartered Governance Institute to work on a Code of Practice for boardroom evaluators. “ Welcoming the review, he said the government would consider the recommendations carefully, and set out more details on next steps at a later date.
In order to keep improving U.K. corporate governance and lessen the need for legal challenges on corporate behaviour in hindsight - as has happened in the case of Carillion - board evaluation does indeed need to be both “robust” and held to consistent standards.
NOTE: the opening paragraph has been amended to reflect ICSA’s name change. Since April 26, 2021, ICSA: The Chartered Governance Institute has been rebranded as The Chartered Governance Institute UK & Ireland.
Image credit: Aaron Burden on Unsplash
