Calls mount for greater number of independent directors

Among the voices calling for a shake-up is the UK actuarial consultancy RSM Robson Rhodes. It recommends that at least half the directors of listed companies should be independent.

In a report called 'Asserting Independence', the firm calls on the UK government and the Financial Services Authority (FSA) to implement this and other corporate governance changes within a year.

In the US, the New York Stock Exchange recommends that independent directors be in the majority, though this does not apply to non-US companies.

There is a growing consensus that increasing the number of independent directors would make them more effective guarantors of probity in the boardroom, thus reducing the risk of irregular or illegal corporate behaviour.

Anthony Carey, national technical director at RSM, said: "It is not just the percentage of directors chosen that counts; it is also making sure there is an open, transparent and rigorous process of selecting (independent directors)."

Carey said institutional investors should take more interest in such issues. "We are calling on them to be active shareholders. We believe that rights and responsibilities of shareholders are two sides of the same coin and they should exercise them actively."

Institutional investors have come under fire for not playing a more active role in corporate governance, as they hold a majority of shares in UK listed companies.

RSM also argues that firms listed on the London Stock Exchange should be required to comply with the Combined Code on corporate governance. At the moment the code, put in place in 1998 by the FSA, is no more than recommended practice.

The code says there should be a 'balance' of executive and non-executives on a board, so that no individual or small group of individuals can dominate its decision-making.

The code also covers such issues as directors' pay and the transparency of information given by companies to the public.

It is also important that the role and definition of an independent director is clarified, says RSM, as these have altered significantly over the last ten years,

Responsibilities have become far more onerous and pressure from institutional shareholders and stakeholder groups has grown.

But some people caution that there is a limit to what non-executive directors can achieve.

Howard Goldsobel, a partner in the law firm Michael Conn Goldsobel, said: "Banks which have very serious compliance and monitoring systems in place still get it wrong. The insurance industry spends millions on compliance and yet still manages to mis-sell policies.

"One might ask where were the NEDs (non-executive directors), but it is not realistic to expect them to operate or supervise at the micro-level."

The term 'independent director' can be hard to define - a non-executive director is not necessarily independent, for example.

RSM lobbies for a more robust definition of independence, which excludes directors with consultancy agreements and those who have been on the board for over 10 years, or were previously executives at the company.

RSM also suggests independent directors should comprise 100% of the membership of the nomination committee that appoints other independent directors.

Daniel Summerfield, corporate affairs and governance executive, Institute of Directors, agrees: "Companies and institutional shareholders need to look at the very committee which is key to ensuring the right board is put in place. Even with all the right systems and processes, the board could still be composed of individuals who don't fit the bill."

Goldsobel says there is no need to have completely independent directors on boards, as retired executives with prior insight into a company's workings might offer more.

"If you don't hire these sorts of non-executives, you probably end up with a load of accountants," he says. "By virtue of their background, they tend to have seen more business models than anyone else. They can add value, but it is a monolithic approach and does not add a great deal to the effectiveness of the board as a whole."

There tends to be a replication of boards on other boards, as companies often recruit executives with experience of large companies.

RSM argues that companies should refrain from recruiting the usual suspects, and instead seek independent directors from the public and not-for-profit sectors, as well as publicly advertising independent positions.

But how easy will it be to tap into an expanded pool of independent directors, as their role becomes increasingly onerous and subject to scrutiny? Some have been sued for failing to carry out their watchdog duties at companies that run into trouble.

"It is a good thing for the pool to expand, but people will not be prepared to put their heads on the block, particularly if the expectations are unrealistic," says Goldsobel.

Current remuneration levels are also widely criticised for not being commensurate with the level of seniority of the average NED, the increased time commitments, and the extent of their responsibilities.

Lani Bannach, managing director of the venture capital consultancy, ScanConsult International, said: "NEDs need to be paid around a quarter of a normal City of London salary, so for a large FTSE100 company, they would have to be paid around 50,000-100,000.

"They can't be expected on the one hand to be accountable, but on the other hand be accused of being fat cats. Nobody wants to put their personal wealth at stake."

The bottom line is that the strength and depth of management needs to be regularly assessed. Boards could be required to review their own performance and composition in order to assure stakeholders that they are providing the right skills, strategy and environment for the business to thrive.

Meanwhile it remains to be seen whether NED positions will continue to attract the top talent.