The aftershocks of Enron continue. The past weeks have seen the Enron, Marconi and Equitable Life debacles call the non-executive director into the witness box. Now it seems quite literally.
We hear Equitable Life is to start a £3m legal action against 15 former directors over the decision to introduce differential terminal bonuses.
To add to this, in his outgoing speech to the Institute of Directors, Lord Young did not pull any punches by suggesting to his audience that the non-executive contingent among them ought to go.
Lord Young made clear his belief that non-executives have no real role to play in a company, being ill-equipped to make timely interventions, given that their knowledge of the business comes from the very people on whom they are supposed to provide a check.
He implied that the system was farcical and called for this “pretend” check to be scrapped altogether.
Cynical scribblers have argued that Lord Young was employing yet another shock tactic to make his goodbye speech a memorable one and he certainly achieved that. Most of us do not take his spectacular call very seriously, least of all those MPs who hold numerous directorships of their own.
However, what is important is that his speech has once again stirred up the debate on the role of non-executives within the UK.
Right now, I am quite relieved to have the adjective “executive” tagged to my title, as it appears the corporate world has turned on the non-executive director.
One commentator des-cribed a “witch hunt”. Not surprising, then, that non-execs such as ex-Marconi board member Sir Roger Hurn and ex-Enron board member Lord Wakeham are stepping out of the shadows with their hands up.
Sir Roger's decision to resign as chairman of Prudential was seen by many as the honourable thing to do.He expressed a willingness to shoulder his “non-exec responsibility” for the Marconi debacle. His resignation, incidentally, comes ahead of expected criticism from the FSA that Marconi failed to keep investors fully informed about its performance early on.
Most of the papers praised Hurn, since they were largely of the opinion that he set a good example for those looking to improve non-executive director practice. The Government agrees – not on the issue of resigning over errors of judgement, if recent experience is anything to go by, but on the issue of improving non-executive director practice.
In light of the huge governance failures of the last few years, people are starting to doubt the success of the 1992 Cadbury committee report into corporate governance and the steady flow of reports and codes of practice that followed it. So, the Government has decided to publish a report on the matter – again.
The Higgs review of non-executive directors and their role is now under way and due to report at the end of the year. Top of the agenda are issues of pay, independence and limits on the number of directorships, so politicians beware.
What are its recommendations likely to be?
If we put Young's suggestion on the back-burner for a moment – his argument is based on interesting observations but his conclusion app-ears a little perfunctory, to say the least – a more realistic debate emerges between those who call for the further tightening of the current rules and those who say that the recent corporate failures themselves provide an adequate check on corporate governance practices.
Those who believe that further regulation is needed say that Enron et al demonstrated that companies cannot be trusted to use their own judgement. They need to be held accountable. They believe, among other issues, that multiple directorships cannot be effectively executed by one person.
They also call for “proper remuneration” of the non-executive director to confer more legitimacy on the position. It begs the question, though, of whether the promise of more money ever guaranteed more scrupulous candidates.
On the other hand, the opposing camp believes that Britain's code of practice on corporate governance (one of the most stringent in Europe) is already adequate and that tightening it to avoid future “Enrons” would be at best ineffective and at worse counter-productive.
Some argue that to ensure against corporate failure is to buy into the Japanese system just as the Japanese are looking to find a way out of it.
Writing recently, financial communications guru Angus Maitland told us that it is time for a pause in the pace of governance reform, warning that UK plc is in danger of regulatory overload.
This side tells us also that we should be wary of making the role of a non-executive more complicated and ridden with responsibility, since it is likely to make the challenge of recruiting high-calibre non-executives to the boards tougher than it has ever been. Directors are likely to be extremely nervous about their own reputations at stake by taking non-executive directorships.
Of course, it might also be worth pointing out the blindingly obvious – companies do not want to go under. Directors have a vested interest to follow best practice guidelines closely and recent events are likely to have heightened companies' awareness of this point. Audit firms are already finding that it is no longer acceptable to be soft on their clients in the hope of winning big consulting contracts.
On balance, I think both arguments have something to tell us. Current procedures clearly did not do anything to avert the corporate meltdowns of the last year. They were, in these cases at least, ineffective.
However, this does not necessarily mean that we need to enshrine present codes of conduct more deeply in the law. It may be the case that recent experiences have taught our corporations a valuable lesson of the need to adhere to best practice or to risk everything.
The codes of conduct are in place and the consequences of not abiding by them have been made abundantly clear. Perhaps, then, the market is doing a good enough job of providing checks and balances itself. The Government has yet to make up its own mind. In the meantime, we executive directors look on as our non-executive colleagues nervously await Mr Higgs' verdict.
Iain Anderson is director and chief corporate counsel and Cicero Consulting