key: cord-0059752-cezgrua7
authors: Brown, Gerry; Kakabadse, Andrew; Morais, Filipe
title: Recommendations for Policy Makers
date: 2020-06-27
journal: The Independent Director in Society
DOI: 10.1007/978-3-030-51303-0_10
sha: 16103593698d81ade19ac5dd5d90a854a3ff3a26
doc_id: 59752
cord_uid: cezgrua7

Recommendations for policy makers include paying Independent directors in order to help attract a broader cross-section of people to become independent directors and, thereby, deliver more diverse boards. An overhaul of governance structures is also recommended in the private, public and third sectors. A culture of engaged stewardship needs embedding in all of our institutions to ensure that they are run in the interests of all stakeholders. The mandate of the NHS is too broad and also too open. As a consequence it makes the job of board trustees extremely difficult if not almost impossible to achieve. Proposals are made for a more defined mandate.

We come now to recommendations for policy makers. Too often, independent directors and boards face an uphill struggle in their quest to be more effective and make real impact. We have seen how in the NHS, in particular, governments have sometimes actively interfered with boards and made their work more difficult, compromising their independence. In many other cases boards of vitally important organisations have been left to sink or swim at times when government intervention might have been timely and helpful. If we are to resolve the crisis of governance and end the damaging stream of collapses and scandals, then boards and directors need more support from government and regulators if they are to fulfil their remit and make the kind of social impact we described in Chap. 8.

In particular, we believe that several actions need to be taken urgently. The first is to ensure that all independent directors are paid for their work. This may be controversial, but we argue that remunerating directors will solve several existing problems as well as providing fair compensation for the time they spend, or should spend, on their duties.

Our second recommendation is a thorough overhaul of governance structures across the board, in the private, public and third sectors. A culture of stewardship needs to be embedded in all of our institutions to ensure that they are run in the best interests of all their stakeholders. Additionally, it is high time that regulators were given more powers to act and intervene, to support boards that are struggling and to take corrective action in case where boards are actively failing.

In the specific case of the NHS, we argue that the organisation's broad mandate is putting too much stress on trusts and making their job very difficult, if not impossible to do. This issue needs further investigation, yet so far no government or political party seems prepared to confront it. Action is needed now.

And finally, we have alluded earlier in the book to the need for an inquiry into the coronavirus outbreak. We believe this inquiry should look into the lack of national preparedness for the coronavirus outbreak, not just in the health care sector but across business, government and the whole of society. It is too soon to say exactly how this inquiry should be formulated and what its detailed remit should be, but one thing is clear; we need to learn lessons so we can be better prepared for future pandemics, because this is very unlikely to be the last such event we see. This time, we were caught with our defences down. That must never happen again.

Some independent directors are paid, some are not. In the private sector virtually all board members are paid, and in large corporations they are often paid quite well. Elsewhere the picture is mixed. NHS Foundation Trusts pay their chairs and independent directors, fees ranging from £200 to £300 per day. Some universities pay chairs and directors, some pay only their chair, some do not offer payment at all. A recent report found that sixteen of the largest hundred charities paid their chairs and some of their independent directors, but the rest did not. Among smaller charities, payment is very rare indeed. 1 The author of this report, Alison Wheaton, an experienced independent director and former member of the Higher Education Funding Council, suggests that universities have been reluctant to pay independent directors for several reasons:

• Universities are charities • Governance is based on volunteerism • It is an honour to act as a member of the council • There is little difficulty in recruiting new members

The same of course applies to charities themselves and to sports bodies (many of which also have charitable status). Particularly in the UK there is a culture among charitable organisations which sees governance as a form of service, a higher level of volunteering. By agreeing to serve as an independent director, one is 'putting something back', using one's own experience and accumulated wisdom to serve the community in a selfless way. That is laudable, and those sentiments are to be encouraged. It is an honour to act as an independent director, and we really do need people who are willing to give time and share their skills and experience.

But there are downsides to the culture of volunteerism. In the first place, people must have spare time in which to volunteer. People who already work full-time jobs, parents of small children, carers and others will have only limited time to spare, and often are not free during the working day when most meetings are held. Some employers are willing to be flexible and give employees paid time off to attend meetings, but many insist that employees will either have to forfeit holiday time, or take unpaid leave. Parents and carers have to pay childminders or other carers to cover for them.

This has two consequences. First, many people who might be interested in serving on boards are deterred because of the cost. It is one thing to volunteer one's time, but quite another to dip into one's own pocket to subsidise that time. Not everyone can afford to do so. Second, this narrows the pool of potential recruits to those who can afford the time. Not just our research but study after study of the profiles of independent directors show they are overwhelmingly in their late fifties or older, retired people with comfortable incomes who have time to spare to devote to volunteer work.

We have already commented, several times, on the lack of diversity on boards. On too many boards, the independent directors all look like each other. There has been progress on greater representation by women on boards, but in other aspects of diversity-age, ethnicity, disability-progress has been glacially slow. Worse still, some boards become private clubs, where the member are all friends of each other or have some personal connection with the chair. These closed shops rarely make for good governance.

Alison Wheaton argues that remunerating directors will aid recruitment, increase board diversity and improve board effectiveness. We agree. Payment will broaden the talent pool by encouraging those who want to serve but, as things stand at present, cannot afford to do so. It will encourage people of more diverse backgrounds-young people, the disabled, those from socially disadvantaged backgrounds-to come forward. As well as improving the quality of decision-making by bringing more and different points of view, this measure will also mean that boards become more representative of the people they serve and not, as they are at the moment, overwhelmingly white and middle class.

Remuneration would need to be carefully handled. The fees paid need to be set at a level to recompense people appropriately for their time, but not so much as to risk compromising their independence, or encouraging people to apply for director posts simply for the money. Directors must not feel that being paid for their time constrains their independence or their ability to challenge and disagree with the executives.

We are aware that paying directors would of course increase administration costs. However, we believe that organisations would also benefit from having access to more high-quality directors, which would include governance and add value in many of the ways we have described in this book. The cost of paying directors would be a good investment. Some directors will not wish to be paid (indeed, our own study shows that many independent directors of charities see no reason to be paid). That is absolutely fine, and directors should be free to hand back their fees (as some in charities and universities already do). Care needs to be taken, however, that a rift does not develop within the board between directors who are paid and those who have refused their fees.

To sum up, remunerating independent directors would increase the number of potential candidates and encourage those who are not currently able to serve as directors to put their names forward. This would lead to greater diversity, better representation and better decision-making, and these things put together, we argue, would lead to greater impact. Loss of independence is a concern, but it can be addressed. We believe that government should look urgently at establishing a system of payment for all independent directors.

Our second recommendation is that our current system of governance be reviewed in order to ensure that a culture of stewardship is thoroughly embedded in our private and public institutions, and that regulators be given the powers to challenge organisations where stewardship is perceived to be failing.

As we have already argued, stewardship means that directors and boards are acting as stewards of the organisation, taking account of the long-term best interests of stakeholders and not just the organisation itself. Pressure for the development of a culture of stewardship has been growing for some time, driven in part by social change and the growing environmental crisis. Companies, public bodies and charities are all under pressure to behave more responsibly. As a result, codes of stewardship have begun to proliferate and more than twenty countries have issued codes of stewardship, mostly for the private sector, over the past decade.

In order to be sure that they are living up to their responsibilities, stewards need to be accountable to someone. Most stewards leave this up to investors; as owners of share capital, they are given responsibility for 'guarding the guardians'. The problem with these codes, according to one report, is that they 'become a compliance document, where investors tick the boxes, rather than an exercise in real engagement between investors and the companies in which they invest'. 2 Other observers have cast doubt on whether investors have the ability, the knowledge or the time to provide the level of oversight and scrutiny that is required.

The same is true in the other sectors as well. Government is arguably the primary 'investor' in universities and the health service, but in practice its interventions tend to range from toxic interference to not-so-benign neglect. The Charities Commission exercise oversight of charities, but there is little in its activities that could be described as stewardship. Donors to charity, who might also be considered investors, will sometimes ask for reports to confirm that charitable objectives are being met, but many do not even take this step.

All this leads to a vacuum of oversight, where failing organisations and failing boards slide towards the edge of the precipice with no one there to stop their fall. The Financial Conduct Authority (FCA), which regulates the banking industry, does not intervene to prevent banks from failing (the decision to bail out several banks in 2008 was made by the government, not the FCA; instead, it picks up the pieces afterwards. The FCA has the power to discipline the directors of failed banks, but this is a case of closing the stable door after the horse has bolted. Similarly the Charities Commission will intervene to close down failed charities, but rarely if ever does it practice early intervention to help keep struggling charities afloat. The Office for Students, the government body that oversees universities, has no powers to intervene and support failing universities.

There are examples to the contrary. In education, Ofsted conducts frequent inspections of schools, usually unannounced, and has draconian powers to force improvements if they are seen to be needed, but its powers do not extend to higher or further education. In health care, the Care Quality Commission conducts regular inspections of health care facilities including GP practices and also social care organisations. It has the power to put failing organisations into special measures, or even close them down, and it has done so. However, on several occasions including at Basildon and Thurrock Hospital in 2009, Winterbourne View Hospital in 2011 and Furness General Hospital in 2012, the CQC was accused of failing to notice deficiencies and/or ignoring the views of whistle-blowers. It would seem that here again, someone needs to watch over the regulator.

In general, though, despite the scandals that have arisen and continue to arise, the position adopted by government and regulators is either (a) further regulation and compliance procedures or (b) a renewed focus on the role of the director with codes of conduct spelling out in every more exhaustive detail what director should do. Investigation has clearly shown that neither of these is effective at promoting good governance. Board failure comes from a lack of oversight and stewardship and a reluctance to exercise personal responsibility on the part of the independent directors and the board as a whole. This is the issue that policy makers and regulators need to confront. Why is stewardship not promoted or highlighted as a fundamental part of what boards do? Why is it not seen as a critical part of the director development? Certainly stewardship cannot be legislated for, but the vital nature of its role needs to be emphasised. The board is responsible for compliance, but stewardship is about much, much more. Thus far, discussions of stewardship have been mostly just words. But telling directors they should be stewards and enshrining this in a code of conduct is far different from actually explaining what stewardship is and embedding it in board and corporate culture. That is what needs to be done now.

To date, enabling and enforcing a culture of stewardship has been left to investors, in whatever form they come. This is not working. Investors are clearly failing to engage with the organisations they invest in and scrutinise their activities. Far from ensuring that the boards these organisations are acting as good stewards, they are failing to behave like stewards themselves. This is not entirely the fault of investors themselves; they cannot be everywhere at once, paying attention to everything. This is an area where government needs to intervene, on several levels.

First, as we have already argued, more and better training needs to be provided for independent directors, and the concepts of stewardship and engagement need to be embedded in that training. A thorough review of training provision for independent directors in all types of organisations needs to be carried out as a matter of urgency, and support for new training programmes is required. These training programmes must have the concept of stewardship at their heart, and aim to embed this in boards and directors across every sector. We recommend that as a first step, the Department of Trade and Industry should convene a working group including the CBI and the Institute of Directors to consider a professional qualification for independent directors.

Second, regulators need to be given more powers to inspect and intervene across a much wider range of organisations. The vacuum of oversight needs to be filled. It is painful to contemplate putting a university, a charity or a bank into special measures, but how much damage is caused when they fail? Far more than money is involved here. Jobs are lost, careers are cut short or wrecked, lives are blighted, the economy suffers, society as a whole feels the impact. In some cases, where ill or vulnerable people are involved, the end result can be harm or even death.

For this reason, we need regulators-who are themselves fully aware of their own responsibilities and capable of acting as good stewards-who can intervene when needed and get organisations back on track before they fail. There will be cost, to government, to society, to all of us, but the cost of failure is far greater. We need to turn the culture of governance around, and we need to do it now, before any more damage is done. Independent directors are one of society's greatest assets. They need protection, encouragement and support. If they receive it, then we will all feel the impact, and our lives will be better for it. If we let them fail, then at the end of the day it is us that foot the bill.

We also recommend that NHS mandate needs to re-examined and overhauled. Nowhere is the crisis of governance more strongly apparent than here. The first mandate between the government and the NHS was issued in 2012, and every year since it has failed to be met. Our own research showed that 20% of NHS directors now do not believe it can be met. Unfortunately, no government or political party has been prepared to deal with this steadily worsening problem. Given the complexity of the issue, which involves not just government and the NHS but also local councils, the private sector, the voluntary sector, staff, carers and patients themselves, we believe a Royal Commission should be established to look into this as a matter of urgency.

Independent directors are society's unsung heroes. They have no public image or face, and there is widespread ignorance about what they actually do. They rarely receive credit when things go well, although society is all too happy to blame them-often with good reason-when they do not. Many are underpaid, or receive no pay at all for the service they give. Yet without them, the vitally important institutions that serve society and bring benefit to us all would collapse. We need to recognise the role that they play, and we need to give them the support and assistance they deserve so they can carry out their role more fully. Investing in support for independent directors will be repaid many times over, in the forms of more efficient and effective institutions, contributions to tax income, a prospering economy and a healthy, happy society. The time to begin reforms and end the crisis of governance is now.

Payment for University Governors? A Discussion Paper', Higher Education Policy Institute report 118

Stewardship: Fostering Responsible Long-Term Wealth Creation