It is worth reminding ourselves of the history of boards. Why do we have board-led organisations and what are they there to do? The duties of directors in England are set out in legislation based on common law duties, but it is important to note that the role of boards of directors has also changed incrementally, both in the UK and internationally.
The 1992 Cadbury report (ECGI, 1992) set out the classic definition of corporate governance that is still quoted in the UK corporate governance code today:
The shareholders’ role in governance is to appoint the directors and the auditors and to satisfy themselves that an appropriate governance structure is in place.
Subsequent reports built upon the Cadbury report, setting out matters including:
- remuneration of directors’
- the requirement for companies to be led by boards of directors
- the need to apply the principles of corporate governance rather than comply with the systems of risk management and internal control.
One of the most significant steps was provided by the Higgs report (ECGI, 2003) in 2003, written in the wake of the collapse of Enron and WorldCom. Both these cases provided overwhelming evidence that, left to their own devices and without proper supervision, executive directors do not always work in the best interests of a company’s owners, or indeed its customers. It would be tempting to think of the examples of Enron and WorldCom collapses as extreme cases of company’s led by rogue directors. However, the near collapse of the banking sector five years later dispensed with any notion that corporate failures could be solely attributed to the actions of a few individuals and further exemplified the need for strong non-executive input into the oversight of the work of executive directors.
The Financial Reporting Council (FRC) took forward the good practice described in the Higgs report in its Guidance on board effectiveness. There, it recognised: "Flawed decisions can be made with the best of intentions, with competent individuals believing passionately that they are making a sound judgment, when they are not". The need for boards to challenge the executive and for key risks to be considered and dealt with as part of the decision making process could not be clearer.
Higgs acknowledged that there will never be a perfect system, a lesson that the NHS would do well to take into account. Higgs said: "Enterprise creates prosperity but involves risk. No system of governance can or should fully protect companies and investors from their own mistakes. We can, however, reasonably hope that boardroom sins of commission or omission – whether strategy, performance or oversight – are minimised".
The insightful Walker Review of corporate governance (National archives, 2009) of UK banking industry looked in some detail at whether the unitary board comprised of executive and non-executive directors (NEDs) remained the best model for the banking sector. The review considered whether the European model of a supervisory board overseeing the executive board might not work better in an industry where non-executive oversight had been found to be seriously lacking. Walker concluded that the unitary board, which encourages proximity and interaction between executive and NEDs remained the best model. He identified the crucial importance of behaviour and the interaction between directors and stakeholders in achieving sound corporate leadership and direction:
Improvement in corporate governance will require behavioural change in an array of closely related areas in which prescribed standards and processes play a necessary but insufficient part.
What is true of the banking sector is equally true of the NHS. It is the calibre of boards and the behaviour of board members that are the determinants of effective leadership. Procedures and processes are necessary but insufficient in this respect, with regulatory injunction most likely not producing the required outcomes from organisations.
The 2018 iteration of the UK corporate governance code (Financial Reporting Council, April 2014) came into force at the beginning of 2019, the new Code took account of the findings of the Walker Review as well as a call for evidence in 2010 and consultations in 2012 and 2014. The latest version of the code resulted from work conducted by the FRC on corporate culture, a government green paper and a report from the BEIS Select Committee Inquiry. The code draws on several reviews and consultations, including an inquiry by the business, energy and industrial strategy select committee which had once again stressed the role of non-executive directors: "We are in no doubt about the vital role that NEDs have in company governance and are concerned about the impact of what we heard were ever increasing burdens on their ability to perform their role effectively, particularly if they serve on several boards" (BEIS Select Committee Inquiry, April 2017).
The essence of the latest code is to reaffirm that organisations need effective well-led unitary boards to succeed, but it also stresses the need to engage with stakeholders (including staff) in a meaningful way and emphasises the need for boards to work to promote a positive organisational culture and to look to maintain the long-term success of the organisation.