Role Of Non Executive Directors In Corporate Governance Accounting Essay
Non-executive directors play a vital role in shaping the strategy and governance of UK companies. Independence from management should allow them to take a broad, long-term view of strategy, and gives legitimacy to their role in scrutinising management plans. This also means that non-executive directors should be well-equipped for guiding and overseeing corporate responsibility. However, there is still a wide variety in the extent and nature of non-executive director’s involvement in responsible business strategy. Corporate responsibility has become a board-level concern for UK non-executive directors only recently. In the last few years (especially after the Higgs Report) it has become much more formally significant for non-executive directors of big companies. This research paper aims to understand the role and contribution of non-executive directors in effect of corporate governance of UK based companies.
1.1 Background of the Study
When the Enron scandal was revealed in late 2001  , non-executive directors were suddenly granted the level of public scrutiny. The collapsed of Enron showcased delinquency on the part of company executives and the accounting bodies like Arthur Anderson. Enron was followed by a series of high-profile bankruptcies which flooded the American market  . It soon became difficult to argue that it was merely a case of “a few bad apples”. The public’s trust in capital markets was undermined as thousands of ordinary employees and shareholders lost their savings and pensions, along with their in-built faith in the supremacy of US capitalism.
One survey  of UK chairmen showed that only 10 per cent recognised the possibility of a corporate governance failure in their own company. The advantages of an approach based on principles as opposed to rules were rehearsed over and over again, and the Accounting Standards Board’s efforts in preventing the transfer of debt off balance sheets by using a network of affiliates drew praise from all quarters.
But the UK government soon decided that the situation was too serious for the “if it is not broke, do not fix it” approach. It launched a series of consultations under the umbrella title of “Post-Enron initiatives”. Chancellor Gordon Brown and Patricia Hewitt, the secretary of state for trade and industry, set up a co-ordinating group on audit and accounting issues. They gave Derek Higgs the task of examining the role and effectiveness of non-executive directors (Neds) and they called on Sir Robert Smith to lead a review of the Combined Code guidance for audit committees. As a consequence of these reviews findings, the Combined Code is now implemented to prevent Enron like events in UK.
All this prompted a fury of agitation among accounting bodies, institutional investors, consultancies, accountants in business, private individuals and many others. The Higgs report which was published in January 2003  , drew mixed reactions from the public. The final corporate governance rules under the financial reporting council are based on the Higgs report.
Now that the reports are completed and the Combined Code is all but rewritten, it’s questionable how many companies in general and non-executive directors in specific, fully grasp the implications  . They may also be unaware of the wider context of corporate governance beyond that which affects them directly in their day-to-day work. This research work will try to determine the role played by non-executive directors in UK.
1.2 Aim and Objectives of the Study
The aim of the research is to examine the role of non-executive directors in corporate governance in UK companies.
The objectives of the study are:
To determine the role of non-executive directors in corporate governance.
To determine the knowledge, skills and attributes needed to recruit and appoint the best people to non-executive roles.
To examine the role of non-executive directors in strengthening the relationship with the stakeholders.
To examine the role that non-executive directors play in corporate governance in UK.
CHAPTER-2: LITERATURE REVIEW
Background of the Topic
A central figure in the market-based system of corporate governance that has emerged in the UK is the non-executive director  . Best practice for the governance of public companies is that one-third of the board should comprise non-executive directors. Of these, the majority should be independent of management (this means that, for example, they should not be former executive directors of the company) and free from business or other relationships that could materially interfere with the exercise of their independent judgment  . Non-executive directors are expected to discharge certain important functions in relation to the management of the companies to which they are appointed.
These include, specifically, setting the remuneration of the executive directors and, more generally, monitoring the stewardship of the company's affairs by its executive management including the executive directors  . The modern non-executive director of a public company is thus rather different from his historical counterpart. In the past a non-executive director might have been expected to do no more than to give the company the benefit of being associated with a person of his reputation and distinction but now they are expected to do rather more to justify their position.
This creates a new context within which the general duty of care and skill operates and makes it appropriate to consider the effectiveness of that duty as a mechanism for holding non-executives themselves accountable. It also raises the question whether the role and function of the modern day non-executive director as perceived by market standards has had an impact on the content of that duty so as to make it more rigorous than it was when non-executive directors were simply figureheads  .
Corporate collapse is the starkest example of circumstances where the option for shareholders to withdraw from an unsatisfactory investment by selling their shares through the market is closed  . The possibility of exit via the market acts as a general disincentive to investors to attach importance to the processes of corporate governance. It follows that where exit via the market is economically unattractive, such as where an investor holds a large stake in a company which it can only sell at a significant loss; the spotlight should shift onto corporate governance.
The growing dominance of the UK equity markets by institutional investors to the point, where at the start of 1998 they were estimated to hold a large portion of the market, may have made exit via the market more difficult, especially in periods of dormancy in takeover activity  . The political profile of the corporate governance debate is also relevant here. Questions such as whether there is a need for fiscal or other legislative measures to curb excessive pay awards to directors of public companies, whether institutional investors have short-termist attitudes which are damaging to the long-term economic interests of the corporate economy and which ought therefore to be addressed by regulatory controls requiring institutions to take a closer interest in the management of companies in which they invest, and also the accountability of institutional investors to their clients, are all part of the agenda for possible law reform  .
The development of market-based corporate governance codes of practice and changes in practice by institutional investors with regard to such matters as voting at general meeting can, at least in part, be viewed as pre-emptive strikes designed to ward off the threat of formal, and potentially more inflexible, legislative control.
The evolution of corporate governance in the UK
The UK’s corporate governance system is based on a combination of voluntary codes, which have gone through a series of revisions over the past decade, and legislation on company law.
2.2.1 Cadbury committee
The scandals of Polly Peck, BCCI and Maxwell Communications Group in the 1980s prompted UK to introduce reforms under corporate governance. The first step was the formation of the Cadbury Committee headed by Sir Adrian Cadbury in 1992. The report consisted of three broad areas  : board’s composition and appointment procedures for directors; the role and functions of the board; the qualities required of Non-executive directors; executives’ directors pay; the duties of the board to present a balanced view of the company’s performance and to maintain effective internal controls and relationships with auditors.
The scope of this research paper is limited to the qualities required by non-executive directors. (elaborate on qualities required or possessed by NED’s)
2.2.2 Greenbury committee
In 1995 there was a huge public outcry over the size of the pay increases awarded to directors in newly privatised companies. This led to the establishment of the Greenbury committee, set up on the initiative of the CBI (Confederation of British Industry) but remaining independent of it. The committee built on the work of Cadbury, adding specific guidance on boardroom pay  .
The committee felt that the task of determining executives’ pay needed to be delegated by the board to a suitably knowledgeable and independent group of people – namely, non-executive directors – who would have no vested interests16. They were also given the task of reporting to shareholders, providing full details of individuals’ remuneration and the policies underlying pay decisions. (NED are building up on remuneration policies for executives elaborate)
2.2.3 Hampel committee
Sir Ronald Hampel established the Hampel Committee in 1996 to  review the Cadbury code and the recommendations of the Greenbury Report as to how it had been implemented; as well as the roles of executive and non-executive directors; and finally address the role of shareholders and auditors in corporate governance.
2.2.4 The Combined Code
In 1998 the Hampel committee produced its Combined Code  , which embraced the work of the Cadbury and Greenbury committees as well as its own. In 1999 the Turnbull committee published additional guidance on principle D2 of the Combined Code, providing more advice on how to maintain a sound system of internal control to safeguard shareholders’ investments and the company’s assets. The three reports – Cadbury, Greenbury and Hampel – represented the key corporate governance templates throughout the 1990s. In effect, the Combined Code was the outcome of nearly 10 years of gradual reform.
2.2.5 Higg’s Report
( elaborate main essence of the report Main Relations of higgs to ned’s and how does their role affect companies) Like its predecessors, the Combined Code has no statutory force. Its implementation through the listing rules requires companies to disclose in their annual reports whether or not they are complying with its provisions and, if they aren’t, to explain why  . The Financial Services Authority (FSA) was responsible for checking whether such disclosures are made, but not for verifying their accuracy or quality.
The Higgs report put forward a suggested revised code incorporating review recommendations and Smith’s new code provisions on audit committees. Combined Code Key Recommendations are  :
Role of non-executive director, chairman and independence defined (recognition that some non-executive directors will not be independent).
Half the board, excluding chairman, should be independent.
The number of meetings of the board and its main committees should be stated in the annual report with attendance of individual directors.
Non-executives to meet annually without executives at least once a year - annual report should include a statement of whether such a meeting has occurred.
Role of chairman/chief executive clearly separated - division of responsibilities to be stated.
Chief executive should not become chairman of the same company.
Remuneration and audit committees to be entirely comprised of independent directors. Remuneration, like audit committees, to be comprised of at least three members.
Nomination committee to comprise a majority of independent directors - previously only a nomination process or committee needed to be appointed.
At least one member of audit committee to have significant, recent and relevant financial experience.
Directors' report should contain a section describing audit committee's role and responsibilities and the actions taken by the committee to discharge those responsibilities.
Performance of individual directors and the board to be evaluated at least annually - annual report to state if these reviews are taking place and how they are conducted.
A senior independent director should be identified (previously justification allowed if no appointment made).
Company Secretary to be accountable to the board, through the chairman on all governance matters.
A full-time executive should not take on more than one non-executive directorship, nor become chairman of a major company. No individual should chair the board of more than one major company.
Non-executives should not hold options over shares.
No one non-executive director should sit on all three principal board committees - smaller companies are to exempted from this.
All non-executive directors, in particularly board committee chairman, should attend AGM to discuss issues in relation to their role.
Companies should state what steps it has taken to ensure that the members of the board, and in particular non-executive directors develop a balanced understanding of the views of major investors.
Endorses government's approach to active engagement by shareholders and the Institutional Shareholders Committee code of activism. Institutional investors should attend AGMs where practicable.
The code should include reference to the need to provide appropriate directors' and officers' insurance
Chairman to address board's development needs and ensure resources are provided for developing directors' skills.
2.2.6 Company law review
The complementary piece of the corporate governance jigsaw in the UK is ‘company law’. While the Combined Code represents best practice, company law concerns the detailed legal rules intended to support a competitive economy. It, therefore, represents a wider context in which to interpret good governance  . The difference between the two is highlighted in the 1999 consultation document from the company law review steering group, which states that “the issues dealt with under the Combined Code were more suitable for best practice than legislation. The government would not intend to replace such best practice by legal rules, [providing that] it was seen to be working.”
The UK company law framework was set in place more than 150 years ago by William Gladstone. There was widespread recognition that this “archaic Victorian system”, as Hewitt once called it, had become too dated and complicated to meet the needs of the modern economy. As a result, the Department of Trade and Industry launched the company law review in 1998. After a period of extensive consultation, the review steering group presented its final report in 2001. The government published its response in a white paper in July 2002. The changes were included in the Companies Act 2003  .
The overall aim of the Debt to DTI’s review has been to reassess the structure and processes of current financial reporting practices with a view to increasing “corporate responsiveness to wider interests through transparency and accountability”. It acknowledges that the information currently provided by most companies is backward-looking, providing no real indication of their future performance, and also fails to recognise different stakeholder concerns.
2.2.7 Operating and financial review
To address the shortfalls in the current legislative approach, a key requirement of the revised company law is the mandatory operating and financial review (OFR)  . The OFR attempts to rectify the anomalies in the reporting rules by redefining directors’ duties to take into account wider stakeholder interests (while maintaining their legal responsibility to shareholders alone). It is a qualitative, as well as financial, evaluation of performance. Rather than prescribing detailed mandatory requirements, it demands that directors’ themselves make a judgment of materiality – i.e., what constitutes a relevant account of their companies’ performance, both historical and forward-looking  .
2.2.8 A holistic approach to regulation
Many people believe that corporate governance reforms in the UK are based on an erroneous assumption that governance failures are to blame for the recent decline in equity markets. They argue that the movement of share prices has nothing to do with internal company regulation, but with the way the market as a whole behaves. But if corporate governance is taken to mean a whole set of relationships with different market participants – as the Organization for Economic Cooperation and Development (OECD) definition would have it – then the changes in the structure of boards and the way directors interact with shareholders, external auditors and so on will inevitably affect market operations on a larger scale  .
An important feature of the reforms is precisely this holistic approach to regulation. Hilb called them comprehensive and “mutually reinforcing” and they do in fact address what the Institute of Internal Auditors calls “the pillars of corporate governance” – namely, executives and non-executive directors, senior managers, board committees, internal and external auditors and shareholders  .
The Function Of Non-executive Directors
The emphasis on function in the development of the duty of care and skill attracted the attention onto the role that directors are expected to play within corporate governance: what exactly is their function? The issues raised by this topic are especially pertinent for non-executive directors who do not have service contracts setting out in detailed terms their role and their duties, strategy, performance, resources, including key appointments, and standards of conduct  .
This statement of the function of non-executive directors is taken from the Code of Best Practice for Listed Companies drawn up by the Committee on the Financial Aspects of Corporate Governance, which sat under the chairmanship of Sir Adrian Cadbury  . As well as this general summary of best practice with regard to the role of non-executive directors of listed companies, the Cadbury Code specifically endorsed the practice of having remuneration committees comprised wholly or mainly of non-executive directors to make recommendations on the pay of executive directors and the establishment of audit committees comprised of non-executive directors to review the management of companies' financial operations.
The Cadbury Report  , was followed by the publication of a Report of the Study Group on Directors' Remuneration in 1995 chaired by Sir Richard Greenbury (generally known as the Greenbury Report  ) and in 1998 by the Final Report of the Committee on Corporate Governance chaired by Sir Ronal Hampel (generally known as the Hampel Report  ). The Greenbury and Hampel Reports built upon the foundations that had been established by Cadbury and refined them in some respects, for example by indicating that remuneration committees should comprise only (not, as has been originally suggested, mainly) non-executive directors.
Later, refinements such as these do not detract from the fact that it was the Cadbury Report that did the path-breaking work in setting the parameters for expectations of good corporate governance within modern UK business practice  . It is only directors of companies that have gone into insolvent liquidation who are at risk of being held liable for wrongful trading  . Insolvent liquidation for this purpose means liquidation at a time when the company's assets are insufficient for the payment of its debts and other liabilities and the expenses of winding up. This is a form of balance-sheet insolvency. Cash-flow insolvency that is, inability to pay debts as they fall due may result in a company going into liquidation but, if it is not also in a state of balance-sheet insolvency, its directors are not at risk of being held liable for wrongful trading  .
Although wrongful-trading liability is thus strictly limited in its direct effect, its role as a deterrent against managerial under-performance cannot be overlooked. Also, an unpredicted consequence of the enactment of the Insolvency Act 1986, is that it seems to have provided the key to reformulation of a more exacting standard in respect of the general duty of care and skill  .
As yet, there is only a slim body of authority, two cases ?, in support of this suggestion. Both of these cases are first instance decisions and in one of them the relevant point was assumed without being decided. Whilst two first instance decisions on their own cannot overturn established law which is supported by decisions of the House of Lords, these cases are very significant.
CHAPTER 4: FINDINGS AND ANALYSIS
When the markets are in flux and the growth and expansions are unprecedented, such a scenario brings in diverse responsibilities on non-executives that they would not have generally held during periods of market stability. These situation, call for the non-executives to effectively track the markets and keep abreast of fluctuations so as to be in a position to participate with the executives in the process of framing strategies and plans  . In fact shareholders, both in public and private enterprises, do expect executives to have relevant background experience that enables them to track and understand pertinent developments instead of just possessing general knowledge and experience  . Thus, there is a greater emphasis on the professional attributes and abilities in the aspiring new non-executive directors, as well as undaunted commitment to spend quality time and effort in the related company affairs.
The contributions that the non-executive directors make to board meetings are mostly considered insufficient  . As such they must have to get professionally involved in order to have a contributory role in organizational growth. In a market that is changing as fast as technology, just a few words on their part won’t be sufficient.
In board meetings, there is always a possibility when executive chairman and non-executives may disagree on certain issues concerning organizational affairs  . However, this research paper does not venture into these aspects. It is therefore, desirable to know what type of support chairman expects from an affirmed professional non-executive director, though such demands on the part of a chairman could differ from company to company. Some of the expectations that a chairman may require to be met by the executives as may be pertinent to a particular job have been described below.
In order that a non-executive director’s contribution is considered significant, he must have to devote quality time to adequately understand the finer aspects of the company rather than just limiting their knowledge to monthly rolls  . This would demand them and the executive managers to spend much time on this aspect.
The executive directors should always be aware of the information needs of the non-executive directors, and that the information-sharing process should become an integral part of daily affairs of the company’s operations  . In the absence of such an arrangement, non-executives contribution will not carry much weight. The executive directors, in such a case, will not be able to have constructive interaction with the non-executive, which situation can result in creating a vicious circle focused on self-fulfilment. Creating such a system of information transfer does not require spending much of time. It would simply need a name to be added to cc list on the e-mail and mental disposition, leadership and a sense of team spirit. Further, the percolation of information needs to be encouraged from the chairman and the chief executive to the lower levels.
The non-executive directors need to devote some additional time to: understand the nature of the problems that may occasionally and appropriately form part of monthly board meetings and the meeting records; know the business parameters, the core staff and the company’s customers in order to comprehend the scenario outside the board papers, to make the executives to understand what others, such as the customers and the community think about the company; recognize the competition and the emerging chances for the enterprise; participate in trade fairs and similar industrial meets; and thoroughly examine the issues and information before passing it onwards  . Such an action on the part of non-executives is intended to help them acquire reasonable knowledge with a view to their contributing effectively and positively, besides the formal demands of the board. It does not amount to assuming executive duties or working as entities apart from the executives. This approach will rather allow them to work more independently and obtain more information.
Armed with enhanced understanding, the chairman and the executive team would then require the non-executive director to actively participate in the company affairs  . The main objective in this regard is to take due advantage of the non-executive’s experience and speedily put the company strategies into action and minimizing the risks. It is not that every non-executive director can enjoy such privileges since each director may have different types of experience. Therefore, the chairman would better plan the non-executive’s role on the basis of his experience to take full benefit of each individual’s competency. The non-executives are best deployed as a resource, not just a monitoring tool for corporate governance. However, a balance has be struck, otherwise over-involving the non-executive would expend much time of the executive, though matching benefit may not accumulated  .
The activities that make it possible for the non-executives to contribute optimally without expending excessive time of the executives, comprise participating in the strategic planning sessions of the board and providing appropriate inputs; making sure that non-executives are placed on regular mailing lists, i.e., for e-mails, press releases, brochures, so they get the relevant information and contribute positively to discussions where desirable; assuming a mentoring role with certain executives, when asked for by the CEO or chairman; handling similar duty with regard to particular projects if so desired by the CEO; attending those operational meetings that are relevant and about which the CEO has given permission; participating in social events organized by the board, management, or the staff as these afford an opportunity to better know the concerned people  .
From the Higgs’ report on corporate governance the number of non-executives or independent directors is seen to be declining since 2008 and the balance shifting towards a small minority in larger enterprises51. Such a state in the composition of management can bring in many avenues of influence for non-executive directors and more ways to access information instead of limiting it to only CEO and the CFO.
Conventionally the non-executives are required to spend annually 17 to 20 days on one directorship, assuming that the board meets 12 times in a year, and that there are occasional meetings of Remuneration, Audit, and Nominations committees51. This is in addition to a meeting or two pertaining to preparation and follow-ups to the meetings. The research paper suggest another six days for cultivating dedicated and skilled approach, which would add up to a total of 24 days in a year. At present, majority of the non-executives spend less time as their role is planned in a particular way and their annual compensation is generally linked to the time required for the formal board meetings  .
It is also appreciated that for non-executive directors who are simultaneously occupying the positions of executive directors in other companies may not able to devote additional time as advocated in this research paper. The recommendations as advanced in this research paper may possibly further create difficulties with regard to time allocation on the part of non-executives in addition to the existing commitments on time and because of other committee duties and projects underway.
It is advisable that the chairman/CEO and the non-executive directors arrive at an understanding on the scope of their functions and the compensation based on realistic parameters of professional attainment with reference to the respective activity areas  . Consequently, the number of directorships and other responsibilities that a person may assume should only be that much as would be appropriate and possible to handle justifiably at that level. In such a case a good number of non-executive positions could become surplus.
The degree of responsibility could change with the passage of time. It is, therefore, advantageous to occasionally appraise the performance of the non-executives and the board as a team  . The chairman and the board may exchange their views about the functions of non-executives and their contributions, and may also assess the working and effectiveness of the board itself. Subsequently, the proposals and suggestions may be deliberated upon by the board for implementation. This aspect is not supposed to form part of the evaluation process of non-executives.
After deliberating over the functions of non-executives directors, the issue of arriving at a reasonable pay package could be dealt with. Individuals endowed with capabilities and good track record at the levels of CEO/chairman, have many openings on offer. Such individuals can work as agents to effectively contribute towards the functioning of an organization  .
If such like people are called upon to shoulder the functions of non-executives, then they also need to be awarded remuneration that is commensurate with the level of their contribution, which could even take into account their previously drawn packages, as they would be discharging similar legal and operational obligations as they would have done earlier as executive directors. The norms that are presently operating in this regard are considered not to have given enough weight to the responsibility they are expected to shoulder and the benefits that could accrue to the company because of them.
Chapter 5: Conclusion
The Higgs report has met much criticism from various quarters. Many commentators also draw a parallel with the initial warm welcome the Cadbury report was accorded some ten years earlier, which also later on was branded as ill-conceived and harmful. The adverse comments mostly have their origin in chairmen of FTSE 100 companies or directors of small enterprises. The chairmen of the bigger companies are of the opinion that induction of non-executive directors would affect the unitary character of the boards and diminish the function of chairman. They argue that in case of non-executive directors being on the board would make the chairman a figurehead and give birth to power-groups in the boardrooms. On the other hand, the directors of smaller organizations think that it would be much expensive to comply with the stipulations of Higgs’, as they do not possess adequate resources either to have non-executive directors or to explain their not being there. This is also the case with organizations that are in the process of being established since in such a stance they will enter the market with executives-loaded boards.
The solution to both these issues can be found in the flexible nature of the ‘comply or explain’ provision, which forms the core of the Combined Code. This point was also emphasized by Derek Higgs at a discussion jointly organized by CIMA and the Adam Smith Institute. He observed that compliance or explanation was equally important. The principal objective is to institute accountability and transparency in reporting corporate governance practices. According to him, investors were more concerned about knowing what transpired certain decisions instead of in total compliance.
This reasoning reminds of the role being played by the shareholders, particularly the large institutional investors. In case the suggested modifications in the code are received by these investors just as a charge on their account or if they show indifference, then it is very likely that implementation of many of the measures would take time to get integrated into the business practices. According to Arthur Levitt, ex-chairman of the US Securities and Exchange Commission, investors also bear a responsibility as, in a democracy; corporate governance can operate successfully only when investors exercise their voting rights.
According to Higgs, though the revised Combined Code is effective, it will not be an immediate departure. It would rather usher in welcome improvement in the practice of corporate governance. The main objective of the Code is to institute gradual and easily manageable advancements. In the event of the Code having been received without any comment, then it would have appeared like a lowest common denominator and would not have resulted in any improvement in the obtaining standard of corporate governance.
The appointment of senior non-executive directors should not be seen as confrontation. Rather it would make all the board members part-take responsibility. Higgs has also emphasized the importance of the role that chairman would have to play on various pertinent situations. He, under the section pertaining to the role of chairman, observes that it is the chairman who can be instrumental in creating conditions that strengthen the effectiveness of board’s functioning both inside and outside the boardroom. The role of the chairman is distinctly apart from that of the non-executive directors.
Higgs report further says that the chairman shoulders the stewardship in setting organizational values and norms, and has the responsibility of building and maintaining healthy relationships and trust among the executive and non-executive members of the board. It, therefore, does not mean that the chairman’s authority is weakened or the work profile for the non-executives is set apart. However, though the chairman’s function is crucial, yet it is not desirable to be all pervasive.
In spite of that, the government seems to be yielding ground regarding the provision that senior non-executive directors should have periodic interactions with the shareholders. The Financial Times is of the view that the ministers may modify the pertinent wording to clarify that the interactions between the non-executive directors and the shareholders should be in exceptional cases and not be a routine affair.
The objections raised by smaller organizations are satisfied when we consider the advantages that these companies can reap by having the right people on their boards, and the cost of identifying them will be outweighed by the benefits that could accrue due to them. However, there are yet some other objections to Higgs’ that pertain to the stipulation that the chief executive should not be made chairman of the same organization. Another complaint relates to the description of the term ‘independence’ and yet another to Higgs’ proposal having met much media scrutiny that suggests making the pool of non-executives broad-based by drawing people from non- commercial fields also.
All these objections and various stipulations require intensive discussions and deliberations to work out acceptable solutions before implementing the Combined Code. There are also people who doubt the intent of those who favor the status quo as they seem to be much concerned with their own selfish interests and status.
It can thus be concluded that in order to have effective and strategic corporate governance, organizations should have to garner increased contributions from professionally qualified non-executive directors. Contributions of majority of these executives though is well-recognized, yet widening the framework will lend professionalism to their contribution and attract ex-executives of high calibre to join the field. These non-executives can discharge different levels of responsibilities besides their basic roles through various committees, and they can also be assigned varying levels of functions that they may have committed in relation to their agreed contribution to wider company issues. They thus can operate as a team comprising members each of them shouldering different levels of functions, but whose external inputs to the board are effective and valuable.
Such a requirement could demand more time over and above the time needed for one function in the case of some non-executive directors in an organization. This aspect also requires reconsidering of their reward structure. Several suggestions impart the impression of their being costly to implement in the first instance, yet their implementation would ultimately work out to be self-supporting as many of the additional costs would be linked to their performance and enhanced contribution.
5.2 Future Directions
Corporate governance is an ever evolving issue, and as such harbours adequate pliancy to absorb changes that may occur in the wider business scenario. The idea of according formal recognition to best practice, as often happens in the case of the FTSE 100, and permitting flexibility at the same time, should work as a means to bring improvement and enhance the level of governance. The changes that may be incorporated should be of incremental nature and be based on actual market conditions. The new Companies Act along with the reformed Combined Code is expected to ensure the soundness of corporate governance system in the UK.
However, it does not mean that corporate governance is as important as economic success, though it takes care of the fundamentals and forges a congenial milieu for economic growth. Even then it has to be supported by improved business performance which is subservient to well-framed strategic plans and sound decisions. In this respect, the Higgs’ report and the programs initiated by the government are steps that aim to create a balance between accountability and wealth creation.
The obligation on the part of financial professionals requires them to provide a clear picture of the financial health of a company to the board. In such a way they also offer a broader perspective for arriving at appropriate decisions and thereby helping in value creation rather limiting the board’s approach to short-term considerations. It is indeed true that the finance professionals in business cannot accomplish all single headedly, and as such require the support of other stakeholders, such as investors in the market.
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