Regulation to the left of them, regulation to the right

One year on from Higgs Non-Executives remain concerned by red tape and worry that proposals to introduce further regulation will impact on their ability to focus on corporate performance

Ernst & Young research on the UKís leading Non-Executives has revealed a community that remains confident about their ability to impact company performance despite worries of an increasing regulatory and compliance burden.

The introduction of the Higgs Review recommendations into the Combined Code in November 2003 was intended to promote a higher contribution from Non-Executives. Twelve months on what are the challenges for the successful Non-Executive in this new environment and has anything actually changed as a result of the extensive consultation process that preceded it?

The role of the Non-Executive is to challenge

The 100 senior Non-Executives that were surveyed saw their role predominantly as strategic. Gerald Russell, Senior Partner, Ernst & Young explains, ìThere was a strong positive correlation between the time Non-Executives spent on strategy and their perceived impact on business performance. They deliver real breadth and insight.î

Above all the Non-Executive has to challenge constantly both the foundations of a strategy and performance against it. As Higgs himself said in the interview with him, ìThe one fundamental right and obligation of the Non-Executives is to keep asking questions until they get an acceptable answer.î

The importance of the Chairman

The individuals surveyed said that the role of the Chairman is crucial for the board to function effectively. He has to lead from the front and engage his Non-Executives and appreciate their function and their limitations. As Gerald explains, ìA board should be a palette of various different skills and backgrounds. Furthermore one Non-Executive we spoke to summed it up perfectly ñ he said that the culture on the board depends entirely on the Chairman. Many people like him will only work for companies where there is a good one.î


One board

One strong message that kept being repeated during the research was that all the board members had to work together. As Gerald comments, ìFortunately, no one indicated that the concept of the Unitary Board was under threat. I am really pleased to know that this fundamental aspect and the consequential responsibility of running a company remains well grounded. Other systems such as 2 tier boards or split roles and responsibilities which occur elsewhere would be less effective in the UK.î

The research showed that being a successful Non-Executive does not necessarily require formal training or even previous experience in the role. Industry experience and practical insight is what really makes the difference. Gerald again, ìThe research findings were clear that some kind of qualification for Non-Executives would serve no practical purpose except to keep policy makers happy.î

Overburdened by regulation

The Non-Executives surveyed are seriously concerned about the amount of time they are spending on dealing with red tape and they worry that future trends will only accentuate the problem. Betty Thayer, chief executive of exec-appointments.com who led the research team, said: ìThe best Non-Executives are the ones with most to lose. The research shows that these skilled contributors to our most important companies and the UK economy are not prepared to put their reputation on the line if there is tougher boardroom regulation.î

As Gerald explains, ìEvery hour spent by Non-Executives on conformance activity could mean an hour less on performance activity. Is this really the best way to utilise such a scarce resource?î Even if the time spent by Non-Executives on strategy appears so far to be unaffected, the time commitment overall and hence cost for companies is rocketing. In some cases additional compliance activities have led to a doubling in the remuneration of Non-Executives in the last two years.

If there is one message that comes out loud and clear from the research it is that any new corporate governance regulation in this area will not be welcome and may seriously damage the availability of quality Non-Executives. Gerald comments, ìif the Government is intent on expanding regulation (and prosecution) it is highly likely that many good Non-Executives will opt out of listed company roles.î


New blood?

Whilst one of Higgsí specific recommendations was that the net for Non-Executives should be cast wider, the majority of those surveyed still said they had secured their boardroom place through business associates and personal contacts. One commented that while Higgs had led to greater recognition and appreciation of the Non-Executive role, ìthere has been little movement towards more open competition and little evidence of new blood being sought.î