MT Expert - Legal: Getting to grips with board diversity rules

It might induce heavy eyelids in even the most seasoned director, but board diversity is a divisive issue, explains lawyer Donald Stewart.

by Donald Stewart
Last Updated: 09 Oct 2013
The financial crisis has certainly brought Britain’s board rooms into the firing line. Nothing has been more divisive than the perceptions of fat cats being paid extraordinary amounts of money for failure. Images of Gordon Brown’s government seething on the sidelines while Sir Fred Goodwin banked vast amounts of undeserved cash are still potent.

The legal assault on board behaviour started with Sir David Walker’s 2009 review of corporate governance in UK banks and financial institutions. His recommendations included balancing the skill sets around the boardroom table and insisting on rigorous annual board evaluation with external facilitation every second or third year.

But his pay recommendations caused the biggest stir. To illuminate the murky world of bankers’ bonuses, he suggested greater disclosure of ‘high-end’ employees’ pay and serious delays to bonus payments they can be clawed back if risks come home to roost. The FSA introduced its Remuneration Code for financial services businesses broadly implementing his recommendations.

Then, in 2010, the Financial Reporting Council, the UK’s Corporate Governance supervisor, changed its own Corporate Governance Code to spread Sir David’s recommendations to all London Stock Exchange’s main market listed companies.

In February 2011 Lord Davies of Abersoch reported on the role of women on listed company boards recommending a doubling of current numbers to 25% female representation by 2015.

Now the Association of British Insurers, the representative of insurance companies and pension funds investing in FTSE companies, have issued their own report. So what does this new contribution add?

While the ABI recommends that companies do far more about succession planning than repeat the usual boiler plate platitudes and that board evaluations could be improved by more open reporting and monitoring of evaluation outcomes, the report’s biggest impact is likely to be achieved through its unequivocal support of Lord Davies’ position on diversity.

It wants companies to put diversity further up the agenda and widen their search for new directors beyond traditional talent pools. While not adding anything new to Lord Davies’ recommendations, other than providing further statistics and examples of ‘best practice’, the point of the ABI’s contribution is to encourage listed companies to report on these issues for the current financial period.

As Lord Davies’ conclusions are not yet part of the official UK corporate governance framework, compliance is not yet compulsory. By encouraging institutional investors to insist on voluntary compliance, the ABI hopes to move things along without having to wait for the regulatory machine to catch up.

The cynics will take the view that, rather like nostalgia, the ABI ‘ain’t what it used to be’. There was a time when an ABI edict would be treated as quasi legislation. But those days are long gone as ABI members are no longer the titans of FTSE ownership. The exponential growth in hedge funds, alternative investment structures and private equity over the past twenty or so years has significantly changed the balance of power.

There are no guarantees that anything much will change as a result of this new report. But it is, nonetheless, a useful addition to the genre.

- Donald Stewart is a partner at Faegre & Benson LLP

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