The Role and Value of Independent Chairs

Transcription

1 The Role and Value of Independent Chairs 0 November 2012 Introduction P.02 What is an independent chair? P.02 Independent chairs versus good chairmanship P.03 How the group s purpose and context influence the chairs role P.05 Gemserv Limited 10 Fenchurch Street London EC3M 3BE Company Reg. No: Tel: +44 (0) Fax: +44 (0) info@gemserv.com

2 1. Introduction Repeated corporate scandals have led to significant levels of public mistrust towards the ethical standards and leadership of commercial organisations. Politicians and regulators are in the firing line from the media and the public to address these issues and ensure that business is conducted not only in a legal but also morally responsible manner. As a result, the private sector has voluntarily responded by setting up review and appeal panels and devising codes of good corporate governance, including best practice guidelines. A key component of these governance codes is the requirement for independent chairs. Based on a review of publicly available information and drawing on Gemserv s unique experience as a leading market governance consultancy in the UK, this paper discusses the varying definitions and roles of independent chairs. Furthermore, it seeks to highlight the value for all types of organisations and groups arising from compliance with best practice guidelines. 2. What is an independent chair? The importance of an independent chair has been debated continually over the past 20 years within various fora, in line with growing pressures on organisations to follow good corporate governance practices. Moreover, it is generally accepted that every entity (be that a company, charity, group or other organisation) should be headed by an effective board or panel that is collectively responsible for the long-term sustainability and success of that entity. The effective leadership of this board is normally assigned to an independent chair and requires that no one individual should have unfettered powers of undue decision making. There is, however, no agreement on the exact definition of an independent chair for the context of committees or meetings. Within the UK energy industry, Ofgem s final proposals 1 as part of its code governance review simply states that: it will be for the licensee, having particular regard to the views of the relevant panel, to ensure that they have discharged the requirement that the panel chair be independent. By contrast, a lot more detail is available from the general corporate governance literature. Having undergone several rounds of revision since its inception in 1992, the latest UK Corporate Governance Code 2010 (the Code ) 2 provides a list of criteria for boards to determine how far a chair could be deemed to be independent. A key concern with regard to a person s independence is the question of: whether the director is independent in character and judgement and whether there are relationships or circumstances which are likely to affect, or could appear to affect, the director s judgement Page 2

3 In particular, the Code defines independence on the basis of the following criteria, including if the director: Has been an employee of the company or group within the last five years; Has, or has had within the last three years, a material business relationship with the company either directly, or as a partner, shareholder, director or senior employee of a body that has such a relationship with the company; Has received or receives additional remuneration from the company apart from a director s fee, participates in the company s share option or a performance-related pay scheme, or is a member of the company s pension scheme; Has close family ties with any of the company s advisers, directors or senior employees; Holds cross-directorships or has significant links with other directors through involvement in other companies or bodies; Represents a significant shareholder; or Has served on the board for more than nine years from the date of their first election. Generally, the Code emphasises the underlying principles of accountability, transparency, probity and focus on the sustainable success of an entity over the longer term. Several other codes and recommendations exist internationally and offer similar definitions or principles as a test for independence. For instance, a European Commission (EC) recommendation from states that: A director should be considered to be independent only if he is free of any business, family or other relationship, with the company, its controlling shareholder or the management of either, that creates a conflict of interest such as to impair his judgement. Again this definition heavily relies on the belief that what constitutes independence is fundamentally an issue for the board itself to determine. In any case, the EC strongly recommends that any board should disclose proper information on the conclusions it has reached in its determination of whether a particular director should be regarded as independent. 3. Independent chairs versus good chairmanship In addition to this strong emphasis on installing chairs that are independent, that is to say, ensuring they are free of any material conflict of interest, there are also good arguments in favour of ensuring that the chair possesses the right skills and personal attributes required for effective chairmanship more generally. This raises the question whether an independent chair is automatically a guarantee 3 Page 3

4 for an effective board, or whether, on the other hand, good chairmanship might be of greater value towards achieving the common long-term aims of the company, group or organisation. For example, the UK Corporate Governance Code suggests as supporting principles: The chairman is responsible for setting the board s agenda and ensuring that adequate time is available for discussion of all agenda items, in particular strategic issues. The chairman should also promote a culture of openness and debate by facilitating the effective contribution of non-executive directors in particular and ensuring constructive relations between executive and non-executive directors; and The chairman is responsible for ensuring that the directors receive accurate, timely and clear information. The chairman should ensure effective communication with shareholders. In light of the quest to instil good governance practices, essentially the argument becomes one of whether board structure and composition matter more or less than the human characteristics of the chair. In November 2007, the executive recruitment company Directorbank 5 carried out an online survey of 392 UK company directors, which included the question What qualities make a chairman outstanding? Among the responses given were: Charismatic personality with gravitas; Good communicator and listener; Clear sense of direction; Strategic view: the big picture; Good at governance as well as managing meetings; Public presence; Broad experience; Network of contacts; Business acumen: understands the business; Able to bring people together; A mentor and coach: offers support and advice; Able to gain shareholders confidence; and Able to get to the key issue quickly. This extensive list demonstrates the versatility, as well as the breadth of knowledge and skills that are required by a good chair as identified by UK directors. Interestingly, independence is not one of the attributes highlighted by the survey respondents. There is, however, no suggestion that this list should be applicable to the running of boards of directors only. Instead, the results present a clear picture of the characteristics required for anyone charged with successfully leading a group of people in a non-executive capacity Page 4

5 An independent chair doubtlessly embodies a number of benefits, such as being distinctively detached from particular commercial and partisan interests of some of the board s members, and potentially having a more objective outside view. At the same time, however, even if a chair cannot be classified as fully independent, he or she may be able to significantly contribute to the panel thanks to their superior technical and/or commercial knowledge gained from experience, and a shared interest in the common purpose and success of the group, i.e. where expertise becomes more important. 4. How the group s purpose and context influence the chair s role From Gemserv s experience in the energy market we believe that the most effective and efficient governance arrangements are those that are based on a shared understanding of what the group or panel aims to achieve. Only when there is clarity over the long-term purpose can the group decide how it wants to be governed. This entails a rigorous analysis of whether the group is best served by one of its own representatives as chair and the extent to which this can be independent of any vested interests or requires expertise, or by not having one of its own representatives as chair and whether this would be better placed to steer the group towards consensual decision making. The question of own representative also turns on the extent to which any inherent bias that might be present is transparent the point here is that, if the bias is known, the objectivity associated with independence may be managed. Inevitably, there are moments when any type of chair will need to be willing to raise his or her head above the parapet and provide meaningful leadership by acting as a figurehead representative of the group. Such moments can occur when the group is exposed to strong pressures and changes from the outside and when it requires an effective spokesperson to respond to, for example, emergent policy initiatives. Conversely, particularly during times of internal change, the chair needs to be perceived as open-minded and receptive to all opinions in order to canvass the full array of views of the group. It is during these periods that the chair s personal characteristics and listening skills matter most. Drawing from Gemserv s experience of overseeing many different types of stakeholder boards, panels, groups etc. (both technical and non-technical), especially where matters are discussed that have wide ranging effects on a number of stakeholders, Gemserv believes independence can also: Support credibility with regulators, government and other external groups and individuals; Create a more conducive environment to better facilitate and encourage discussion and the exchange of ideas amongst stakeholders; Build confidence in the outcomes as stakeholders will feel less railroaded towards certain solutions; Ensure that stakeholders do not perceive the chair as having a particular Page 5

6 agenda, i.e. they have greater faith in the decisions being made in their name. What this demonstrates is that a chair s independence as determined broadly by the board structure and his or her personal attributes are not mutually exclusive. Rather, they complement each other depending of the purpose of the board or group, and at times even depending on the particular context or situation. Indeed, it seems to Gemserv that crucially, it is the chair s personal characteristics and listening skills that matter most in terms of the functioning of the group. That said, there is still the matter of external perception to address and this can be equally affected by the question of independence as it can by the personal qualities of the chair. So, what should you do? It is evident from the review that good corporate governance is no longer just an issue for premium listed corporations. The principles and guidelines are increasingly used in other settings as well, particularly when different stakeholders group together to achieve a common purpose. Despite such unanimity with intent to adhere to common standards, more clearly defined criteria for independent chairs are only slowly emerging. Whilst corporate governance codes are at the forefront of this development, the application to other settings and organisations is still in development. Nevertheless, there are strong imperatives for boards and groups to familiarise themselves with these guidelines and to apply best practice wherever feasible. 1. In the first instance, boards, panels and other forums should as a minimum, undertake a review of whether and how far their chairs comply with the varying definitions and levels of being independent, taking into account boards and panels particular circumstances. 2. Findings should be published, detailing the decision on whether compliance with a definition of independence is achieved or, where that is not the case, provide explanations as to why such criteria do not apply. For example, an alternative to following the definition of independence may be justified if good governance can be achieved by other means. Although some of these suggestions may appear to be pre-emptive, Ofgem has already declared that the aspect of independent chairs could be subject to future review once its Final Proposals for Code Governance have bedded into practice. In preparation for such an eventuality a preliminary review of the existence of independent chairs would appear timely. It is apparent from the discussions in this paper that good governance requires more than simply an independent chair. Effective leadership is as much the outcome of supportive and transparent governance structures as it is the result of selecting a chair with the right personal characteristics. Regulators as well as members of governance forums, panels and boards must seek to find the right balance so that their organisations remain sustainable and successful. Page 6

7 5. About Gemserv Gemserv works at the heart of the UK's energy, environment and water sectors offering a range of services to government departments, regulators, trade associations and market participants. Gemserv provides services for a range of different groups, codes and forums. Despite its relatively short corporate history, Gemserv has become an integral player in the UK s energy markets. The experience and knowledge accumulated by our employees have turned Gemserv into a respected authority with regard to industry design and market governance. Acknowledgements: Fred Dahlmann To Contact Us: Gemserv Tony Thornton T: +44 (0) E: tony.thornton@gemserv.com Page 7

8 Gemserv Limited 10 Fenchurch Street London EC3M 3BE Company Reg. No: Tel: +44 (0) Fax: +44 (0)