PRINCIPLES, PRECEDENTS, RULES AND ETIQUETTE GOVERNING THE RUNNING OF TEA PARTIES.
(With Guidances on the Control and Audit of Household Accounts).
THE COMBINED CODE ON CORPORATE GOVERNANCE.
Warning: This piece should not be read by any person who takes Procedures very seriously, or who stiffens respectfully at the mention of the words: "Boardroom Table", "Chairman" or "Clear Agenda and Concise Minutes".
The Code - A quick Content Analysis.
The combined Code is a lengthy document, well over 100 pages, including its various Sections, Schedules, and 'Guidances', (The Turnbull Guidance and the Smith Guidance). It concludes with Suggestions on Good Practice drawn from the Higgs Report.
We do not intend to analyse the content of the Code in detail, readers can surely do that for themselves. The following is a very quick and dirty overview of the various parts and generally what they contain.
It begins, as all good Codes should, with a Preamble, which declares that directors are appointed by 'shareholders' as the owners of companies, but that said shareholders should exercise common sense in evaluating the state of governance in companies. It concedes that smaller companies may find the full weight of the whole Code a little onerous.
It also unveils the 'Comply or Explain' principle and goes on to reveal that the current version of the Code supersedes the Combined Code issued by the Hempel Committee in June 1998 and derives from reviews of the roles and effectiveness of Non Executive Directors by Derek Higgs and Audit Committees by Sir Robert Smith.
2. Section One - Companies.
This section goes into considerable detail about the principles and practises that should guide the direction of companies from the top.
It states that all companies should be headed by an effective board, collectively responsible for the success of the company. This board should, amongst other things, "Provide entrepreneurial leadership". Directors should be challenging of strategic proposals. The board should:
- Set strategic aims
- Ensure that the necessary financial and human resources are in place
- Review management's performance
- Set Values and Standards
- Ensure that obligations to "Shareholders and Others" (our italics) are met.
Various parts of Section One require the separation of powers between CEO and Chairperson, who should from time to time meet separately with the Non Executives; a good balance between the number of executive and non-executive directors, the presence of a sufficient number of independent directors.
Also covered are a requirement for boards to meet sufficiently, the provision of good information to boards, a requirement for boards to evaluate their performance, guidance on the design of remuneration packages (Rewards should be linked to individual and corporate performance), and on service contracts.
Finally, it offers advice on the conduct of relationships with 'shareholders'.
Section Two - Institutional 'Shareholders'.
This section variously covers the holding of constructive dialogues between institutions and companies and the duties of institutions to vote on important matters.
(It should be stated at this stage that we are having a little difficulty with the idea of 'shareholders'. We understand them to be people whose money is being invested. This means millions and millions of pension fund members and individual savers and insurance policy holders of various kinds. The Combined Code does not really mean these people, the real shareholders, when it refers to 'shareholders' - in the main it means Investment Institutions, which invest money on behalf of the real shareholders.)
Schedule A - Provisions for Performance Related Remuneration.
Key elements in this Schedule relate to ensuring that a significant proportion of remuneration is related to corporate and individual performance, that companies should pay enough to attract and retain adequate talent and that reward should be designed to "align directors' interests with those of shareholders".
Guidance is also offered on Incentive Schemes, share Option Schemes and such matters as to whether bonuses should be pensionable. (They shouldn't).
Covers various formalities like letters of appointment for Non-Executive directors, stating how much time they should spend on the job, provisions for informing directors, induction procedures and procedures for lodging disagreement and stating reasons for resignation.
Deals with the full range of provisions for the disclosure of Governance arrangements through the annual report - including disclosure of the names and roles of directors.
Companies are also required to report on the number of meetings held by the board and the attendance records of individual directors.
The Turnbull Guidance on Internal Control and Risk Management.
This lengthy section (approx 47 pages) deals with Control and Risk Management.
Its various sections cover:
- Maintaining a sound System of Internal Control
- Reviewing the effectiveness of Internal Control
- The board's Statement on Internal Control
- Internal Audit
- Appendix - Assessing the effectiveness of the Company's Risk and Control Procedures.
The Smith Guidance on Audit Committees.
This section of only 14 pages covers:
- The Establishment, Role, Membership, Procedures and Resources of Audit Committees.
- Relationships with the Board.
- Role and Responsibilities
- Communication with Shareholders.
The Higgs Suggestions.
The Higgs report was the last (so far) of the many weighty examinations of Corporate Governance. Judging by the storm of protest it generated, an innocent bystander might have been forgiven for believing that it had been produced by the Socialist Workers' League. It was not until closer examination revealed that great heat was being generated by such things as the suggestion that a Deputy Chairman might have a role in communicating with investors that the same bystander started to realise that important people could get steamed up about all kinds of funny things. Anyhow, the more odious elements of the Higgs Report were duly sanitised and now appear as the Higgs Suggestions for Good Practice.
Again, the excellent advice contained in the Higgs Suggestions runs to many pages, which avid readers can look up for themselves. So here are a short summary and a few observations.
- Guidance for the Chairman.
This is a sort of Job Description for Chairmen, plus some Key Performance Indicators, for example, "An effective chairman upholds the Highest Standards of Integrity and Probity".
- Guidance for Non-executive Directors.
Pretty well the same for Non-Executive directors.
- A summary of the Principal Duties of the Remuneration Committee.
As it says on the tin - plus provisions that Remuneration Committees shall consist only of non-executive directors and directors will not settle their own compensation.
- Summary of the Principal Duties of the Nomination Committee.
Same as above, but with a few little twists and quirks. For example, Nomination Committees are exhorted to "Consider candidates from a wide range of backgrounds and look beyond the 'usual suspects' ". (Our italics) We can only surmise that this particular exhortation crept through unnoticed!
A second quirk is a direct reference to generating high corporate performance, a subject not much covered in the Code. This particular provision is buried deep in the duties of the Nomination Committee and goes:
"Keep under review the leadership needs of the organisation, both executive and non-executive, with a view to ensuring the continued ability of the organisation to compete effectively in the market place". So that's what it's all about!
- Pre-appointment Due Diligence Checklist for Non-Executive Directors.
Useful checklist for aspirant non-executives.
- Sample Appointment Letter for Non-executive Director.
Title says it all.
- Induction checklist for Non-executive directors.
Vividly reminds the writer of constructing induction programmes when a young management trainee.
- Performance Evaluation Checklist.
This is a quite comprehensive checklist covering the performance of the board in a strangely indirect fashion.
To explain what we mean, here are three example questions;
- What has been the board's contribution to the testing and development of strategy? Not "Is the strategy succeeding?"
- What has been the board's contribution to ensuring robust and effective risk management? Who cares, as long as there is 'robust and effective risk management'?
- Are board procedures conducive to effective performance and flexible enough to deal with all eventualities? How the hell do you answer that, if you don't yet know what 'Eventualities' will occur? Do 'Procedures' deal with all Eventualities?
Well, that's it. We have just rambled through the products of many, many weeks, nay months of work conducted by the best and most senior in the land. As we wandered through the bye-ways of Suggestions, Guidances and Codes, a little niggle began to take shape. Surely something like this had been done before? Surely years ago a weighty and comprehensive tome had been crafted to provide guidance on how to go about important and weighty matters. Wasn't there a book on the shelves somewhere?
Then it gelled: It's NOT Alice in Wonderland, it's Mrs Beeton's Book of Household Management!! Or maybe, a subtle blend of 'Alice' and Mrs Beeton would best characterise the Code.
Here are some extracts first from Chapter One of Mrs Beeton entitled, 'The Mistress', who is compared with the commander of an army, (or Chairman).
Mrs Beeton is precise and firm in her Guidance, for example:
3. "Early Rising is one of the Most Essential Qualities."
4. "Cleanliness is also essential to health".
13. "The Dress of the Mistress should always be adapted to her circumstances".
16. "A household accounting book should always be kept".
19. "The Treatment of Servants is of the highest possible moment". (Not covered much in the Combined Code).
Having dispensed guidance basic to the values and effectiveness of the Household, Mrs Beeton proceeds to give specific guidance in how to cope with many important matters, such as:
- How to dress for morning calls,
- How to receive morning calls
- How to word an acceptance of an invitation to dinner
- What to do after the guests are seated at the dinner table
- Proper etiquette at the dinner table
- How to give a letter of Introduction.
Chapter Two is essential Guidance for the Housekeeper (CEO), who is described as "The Second in Command in the House, except for large houses, where there is a house Steward".
Essential Guidance includes:
- "A necessary qualification for a housekeeper is that she should be able to thoroughly understand accounts. She will have to write in her books an accurate registry of all sums paid for any and every purpose....
- ...As we have mentioned, under the head of the mistress, (see16), a housekeeper's accounts should be periodically balanced and examined by the head of the House"
This wonderful book proceeds through many pages to deal with the roles and duties of Valets, Housemaids, Footmen, Sick-Nurses, Maids of all Work and many others.
It also gives detailed guidance on diverse and important matters such as Dinners and Dining, Rearing, etc of Children, Dealing with Medical Matters and Legal Memoranda.
Truly, there is more scope for the Combined Code to grow and develop - Mrs Beeton runs to 1112 pages.
Our feeling is that the Code is an essential framework to regulate and guide the formal affairs of a board and to ensure that there are bodies and procedures in place to ensure no-body is misusing the investors' funds.
All of these matters are important, but they do not go anywhere near the roots of corporate directors real responsibilities for the competitiveness, performance and survival of companies, and their contribution or otherwise to the wellbeing of stakeholders other than investment institutions. It would also be quite possible for a company to fail whilst being able to reveal that its directors had performed pretty well in regard to the Code.
Overall, we came away with a very strong sense that there is a lot of what might be described as 'pussyfooting' contained in the Code - as though the compilers have been extraordinarily careful not to annoy a bunch of frequently disorderly, but very irascible elderly relatives. As these 'relatives' are capable of creating all kinds of mayhem, from destroying households, abusing the servants, misreporting the household accounts and gross over-consumption, we feel that a somewhat more robust approach is needed.
Commandments, not Guidances, Codes and Suggestions......
So, instead of a Code, here are our Ten Commandments, that go much closer (in our view) to the heart of matters:
- Your first and greatest duty is to inspire, direct, succour and support the company that it is your privilege to lead, so that it shall realise its full potential.
- You will give primacy of place and importance to your fellow employees, because it is you and they together who are the only source of value to society.
- You will then exert your efforts and skill to making sure that your company provides its customers with the best value and strives constantly to match or exceed the offerings of competitors.
- Then, these things having been put in place, you will avoid the temptation to let unwise ambition guide your actions - in particular avoiding foolish Mergers and Acquisitions, undeliverable strategies and damaging corporate fiats driven by cost.
- You will not consort solely with others of your status or ilk; nor with external advisers, at the cost of mingling freely and constantly with your own junior colleagues and customers, in order to learn their wisdom and impart some of your own.
- You will not let others lead you into the temptation of greed and excessive reward, rather you will carefully consider the needs and well-being of colleagues and ensure that they, also, are rewarded for their true contribution, realising that, without them, you are nothing.
- You will behave modestly at all times, not raising great edifices to your own glory, nor travelling the world with unseemly pomp in magnificent carriages. Your place of work shall also be modest, not defended by dragons, and accessible to your co-workers, because becoming isolated by physical and social barriers is the first sign of impending failure.
- You will seek constantly to learn, not letting false pride or ambition stand in the way of the realisation that many others possess greater knowledge and wisdom than you - and that the greatest sign of true wisdom is to seek to learn from others, including the most humble of your colleagues.
- You will seek to satisfy the needs of your financiers, whilst remembering always that their ambitions, needs and whims are frequently going to be at odds with the best long-term interests of the company to which you owe your first duty. You will endeavour to seek out means of financing that will make you least dependent on moneylenders.
- Last, remember always that it is your duty and privilege to lead a community of people, which, like all communities, can be inspired to create great artefacts and services, valuable financial surpluses, be a source of pride and satisfaction to its members and a responsible citizen of the world. Above all, with dedicated and skilful stewardship, it can be immortal.
PS. Just in case it needs spelling out, and it shouldn't: "You will maintain the strongest ethical and moral standards in all your doings and transactions, be they financial or with employees, customers, investors and the wider society of which your company is a part."