Gerry Brown The Independent Director

RBS, BP, Tesco, Enron, Northern Rock, Polly Peck, Arthur Andersen and Swiss Air are all companies that have been the subject of major losses in shareholder value and affected the value of the pension funds of millions of people.

Their governance and actions have led to major job losses and, in some cases, the Government has spent billions of taxpayer’s money to rescue them. Then let us consider some of the following issues and how they have damaged companies;

• Mis-selling of services by banks, for example the massive mis-selling of payment protection insurance by UK banks, which has cost them billions of pounds and damaged their relationships.

• Tax avoidance by international frms who route income through low tax domiciles in order to avoid paying tax

• Anti competitive behavior such as the persistent rumors of collusion between energy frms.

• Unethical behavior such as the phone hacking scandal - which threatened the stability of the entire News International group.

• Corruption for example the payment of bribes in countries where the rule of law is weak in order to secure contracts.

• The fnes levied by regulators against pharmaceutical companies e.g. for failure to disclose the side affects of drugs discovered in clinical trials.

• The massive fne against BP for the environmental damage in the Gulf of Mexico.

In all these cases failures of corporate governance have damaged companies, sectors and sometimes - entire economies.

As a result, over the years, various UK special investigations have been conducted, e.g. Cadbury Report, Greenbury Report, Higgs Report, Walker Report and a number of codes of conduct developed. In the USA, two pieces of legislation have been passedSarbanes Oxley and Dodds Frank. Yet, no matter how many codes are developed or laws passed, it is the behavior of the leaders of companies that counts.

In 2015 the problems of VW, Petrobas, T oshiba and the fnes against banks, to name a few demonstrate that this issue is still far too prevalent.

Yet despite many deleterious sometimesdramatic consequences, public understanding and perception of the role and importance of independent directors as the real custodians of companies remains woefully inadequate. I try to rectify this lack of understanding and knowledge in my new book The Independent Director (Palgrave Macmillan).

So why do I claim that independent directors (non-executive directors in old money) are the real custodians of our companies. Firstly and foremost, increasingly they have the majority of seats on the boards of public companies. In the fnal analysis it is the boards that have the responsibility for the strategy and performance of businesses.

Secondly they represent ALL interested parties not just the shareholders. This is particularly important since, increasingly, via their executive representatives shareholders have become focused (almost fxated) upon short-term results and it falls to Independent Directors to have concern about the longerterm health and strategic direction of the business.

Another signifcant factor is that the increasing mobility of executive directors (and their understandable natural interest in career progression) requires Independent Directors to retain focus upon high calibre management recruitment and/or the associated management succession.

Given all these factors, the role and function of the Independent Director crucially both safeguards and helps responsible management. Interestingly, this isn’t just the case in the corporate sector but increasingly also on the Councils of Universities, NHS Trusts, Charities & NGO boards along with numerous other public bodies. Unfortunately not in the world of global football as can be seen from the FIFA scandal. Responsibility for company strategy is foremost for most IDs since this together with ensuring the strength of the senior team are the key factors that impact the health of companies.

There are also critical roles to play in helping companies deal with issues of globalization and risk management as well as overseeing merger and acquisition due diligence (along with hostile approaches from predators). Finally IDs should be the eyes and ears of companies in addition to bringing best practice, experience and contacts from other sectors and g eographies.

It’s obviously the case that the job of the independent Director has become much more challenging and diffcult this refects the growing complexity of the decisions, which the boards of companies routinely face, for example;

• Should the company do business in or with countries that have oppressive regimes the policies of which may be anathema to employees, shareholders and the general public?

• How should the company make sure that local subsidiaries, suppliers and so on are not behaving in unethical ways such as exploiting child labour or failing to provide a safe working environment?

• What stance should the company take with regard to its customers?

• Will it engage in price fxing, price exploitation or dumping in order to grab market share, regardless of the long-term impact on customers?

• How safe are the company’s products?

• Is the company behaving in an environmentally friendly manner?

Palgrave Macmillan publishes Gerry Brown’s The Independent Director: The Non-Executive Director’s Guide to Effective Board Presence.