Mark Watson is contemplating taking corporate governance off his business card. ‘I don’t feel happy with any of the definitions people have come up with,’ he declares. ‘They all talk about systems and structures which, in my view, is misguided. The central thrust of corporate governance should be the actual running of businesses.’
Watson, who arrived at the London-based IoD just over two months ago, wants to refocus the corporate governance debate to concentrate on the issues that are really important to directors. ‘We said it in our response to the Hampel committee. There has been much too much talk about accountability and not enough about business prospects,’ Watson explains. ‘We believe a board’s duties should be based on enterprise and integrity. Over the last few years, the debate has focused on the need for integrity at the expense of enterprise. We want to change that.’
Watson came to the IoD from the National Association of Pension Funds (NAPF), where he was in charge of the research committee and helped write the organization’s corporate governance policy. He says his appointment sends out a strong signal to the investment community about the IoD’s mounting concern and wish for involvement in the corporate governance debate.
It also suggests a change of focus at the IoD. ‘Whereas my predecessor’s remit was company affairs, namely how to get more information across to directors about their technical responsibilities and duties, my role is to raise the profile of the organization,’ Watson comments.
Unlike his predecessor, Watson does not have a legal background. He comes to the governance field from politics, having worked in Westminster and at the Adam Smith Institute before joining the NAPF.
But his appointment also provides the IoD with contacts in, and an insight into, the thinking of the institutional camp. According to Watson, although the NAPF represents the other side of the corporate governance debate, it is as anxious as the IoD to change its focus. ‘There is a commonality across all parties that business prosperity is the key issue,’ he says. ‘One of my responsibilities is to increase contact with groups like the NAPF, the ABI and the Institute of Chartered Secretaries and Administrators to find out what they are doing and to get their views on what constitutes best practice.’
Good to Talk
Watson believes a lack of communication between key parties has held back the debate until now. ‘How can we meet the expectations of shareholders if we don’t talk to them?’ He points to recent research carried out by the NAPF into the link between dividend payments and R&D. ‘If we’d known about it earlier we would have given it our full backing. As it was, the first thing we heard was from the press.’
Rather than simply talking about the need to improve communication, Watson wants to find practical solutions to make sure it actually happens. ‘We want to find a way to guarantee that institutions’ and individuals’ needs are looked after. We want to see if technology can be used to make things easier, by helping boards interact more effectively with their shareholders and other stakeholders.’
Another big project is to start discussions on the future of annual general meetings. Watson has no specific reforms in mind at the moment, but he plans to get the various interested parties together to talk about what can be done.
Going Back to School
Improved communication is also important to help raise the profile of the IoD and inform people about the sort of services it provides, Watson says. One of its main focuses has always been director education, an area that, according to a recent study by Beaufort Management Consultants, a lot of UK directors have neglected.
The study found that over a fifth of directors at Times 200 companies receive no training at all, while only 27 percent have any director-specific training in their first year on the board.
According to Watson, more and more directors are now recognizing the need to educate themselves about what the job entails. ‘Since the center of director development was set up about 15 years ago we’ve been looking at how best to help directors professionalize themselves,’ he says. ‘We are therefore in a prime position to lead discussion on what sort of experiences you need to be a good director and what kind of knowledge base you should have. And we want to make sure more directors are aware that this kind of self-examination should be a continuing process.’
The center runs courses which generally last from one to three days, although directors can opt for a more detailed diploma in company direction with exams at the end of it. This is taught in association with Pitman Publishing and the Leeds Business School and, as of next year, can be taken as a distance learning course. The diploma examines issues such as how to make the jump from management to direction; how to enhance management skills; the role of the board; and how to improve strategic skills.
Other shorter courses deal with more general subjects ranging from the role of the non-executive director, to finance for non-financial directors, to improving people management skills.
‘The fact that membership of the IoD is on an individual basis, rather than via companies, means we can maintain close contact with our members and so are really in touch with their changing needs and concerns,’ says Watson. ‘We’re always asking for their input on what they think of the courses and on what they would like to see in the future.’
Another option directors can take is executive coaching, taught on a one-to-one basis. ‘A lot of senior directors opt for this kind of course,’ Watson says. ‘They might be dealing with a change in their organization, or considering taking on another non-executive directorship. This gives them the opportunity to talk about their future, to work out how to cope with their changing circumstances and to discuss things on a personal basis.’
The need for professionalism among directors is something the IoD and the institutions agree on, Watson says, but until now discussion on issues like directors’ training, their leadership abilities and their self-assessment process has, at least to some extent, been stymied by the strength of the public focus on accountability.
‘It’s all wrong,’ declares Watson. ‘Just being accountable doesn’t drive a business forward; it doesn’t say anything about where you want the business to be in ten years and how you intend to get there – which has to be the focus of any responsible board.’
Existential Governance
The overemphasis on accountability is something the IoD is not alone in opposing. Hampel is the most recent high profile figure to speak out against it, questioning the very existence of the committee he was charged with heading up. And, according to Watson, together they have been fighting a rearguard action.
‘Our attitude has been, if the debate is going to focus on this issue, then let’s at least talk about it sensibly rather than as a reaction type process,’ says Watson. ‘Hampel feels the same. He was prepared to stand up and say, my report is going to be quite bland because I don’t want to be prescriptive and dictate to companies how to run their business.’ (see Hampel on Governance, page 26).
So the IoD is intending to do what it can to slow down the prescriptive element of the corporate governance debate. Not that it is opposed to most of the individual issues that have come out of the public discussion.
Indeed, topics like the need for independence on the board, incentivizing directors by paying them in stock as well as cash and prioritizing succession planning, have been incorporated into many of the IoD’s courses. But, says Watson, this doesn’t mean companies should be dictated to on details like having a split chairman and CEO, or employing x number of non-executive directors: ‘That’s got to be decided on an individual basis.’
Against Compulsion
And the IoD is not just against prescription on the company side. It is, for example, appalled by current discussion on whether the UK should adopt a policy to make voting of shares compulsory for institutions. ‘Everyone is aware of the fact that 18 months ago the Labour party said that if it got into power it would compel the institutions to vote. We think it’s been proved that legislating about things isn’t the best way of getting them done and so would be strongly against such a move.’
The IoD also seems anxious about noises Labour has made about devising a precise definition of independence and adjusting the flexibility of the current listing rules. ‘As Hampel said, ongoing debate is good but companies shouldn’t be compelled to do it. That just brings the debate down to talking about form rather than content,’ Watson says.
Similarly, the IoD is strongly opposed to any American-style involvement of shareholders in board level decision-making. Watson points to recent evidence at Shell of such ideas infiltrating the UK – when shareholders attempted to pressurize management of the oil company to change its environmental policy.
‘We think shareholders have a right to know what’s going on and to make their views known, but the company is there to make company policy.’
