Sitting uneasily in the chair

Times are changing in the boardroom. The UK has placed a nine-year limit on the time people can chair the organisation while in the US growing numbers of businesses have a mandatory retirement age for directors

14-11-2019

Business

Pub chain founder Tim Martin could not have been more scathing about newly introduced UK Corporate Governance rules that require chairs of boards to step down after nine years in the hot-seat.

The vocal chairman of JD Wetherspoons, who has held the role for 36 years, told the Financial Times newspaper the measure was “deeply flawed” and arbitrary.

“Current rules institutionalise inexperience,” he stormed. “Compliance with daft rules often means adopting the mentality of the thundering herd, as Warren Buffett - 53 years as chairman - has adumbrated.”

The nine year rule is included in the Finance Reporting Council’s (FRC) UK Corporate Governance Code which was revamped at the start of the year to include a maximum tenure for chairs of nine years except in limited circumstances

The idea is to encourage effective succession planning and encourage more diverse thinking from the board of directors.

However, it is proving a challenge for some well-known businesses. According to a report by governance consultancy Minerva Analytics earlier this year, there are 110 companies in the FTSE 350 whose chairs had sat on the board for more than a decade.

And 137 companies had people who have been in the boardroom position for eight or more years. According to the figures, that means that 31 per cent of the FTSE 350 fail to meet the requirement of the revamped code.

Those business will be subjected to growing pressure to act and the rule change has already prompted succession plans to be triggered at a number of large listed UK groups.

As professional services firm EY warned when the changes were announced last year, companies that do not comply with the measure are likely to face “much more intense scrutiny”.

There have already been high-profile boardroom departures as a result of the rule and stories emerging of businesses looking for successors to long-serving chairs.

In January FTSE 250 defence and engineering contractor’s Babcock International’s long-serving chairman Mike Turner announced his intention to stand down this summer. The decision was accepted by the company “with regret.”

In a statement, Turner, who joined the business as a non-executive director more than two decades ago, said: “I believe that a successful company is not only judged on its performance for its customers and the returns to its shareholders, but also by its commitment to good governance practice.

“Following the introduction of the new UK Corporate Governance Code in January 2019, I believe it is right for me to take this step now and to announce that I will step down at the end of the company’s next Annual General Meeting.”

The changes to the code were generally given a positive response when first announced.

Dr Roger Barker, Head of Corporate Governance at the Institute of Directors, said: “The IoD welcomes the publication of the revised UK Corporate Governance Code, particularly its engagement with a wider range of stakeholders including the workforce, as well as encouragement of more long-term oriented business behaviour and recognition of the board’s role in overseeing a company’s purpose and culture.”

And there is no doubt that the drive for change is gathering pace, with some experts predicting that if few too boards pursue diversity and do not change their chairs, legislative remedies could be the next move.

Whether or not that is the case, it remains an important fact that the effectiveness of the board of directors plays a crucial part in the success or failure of any organisation.

Mala Shah-Coulon, Associate Partner in Corporate Governance at professional services firm EY, says the nine-year rule is already “having an impact” in focusing business minds on important issues, such as diversity and succession planning.

The rule is also there to prevent companies from “being complacent” about the need to refresh their boards.

Shah-Coulon points out that some company chairs have already stepped down in recognition that they would be breaching the rule if they stayed in their post.

And she adds: “All companies should be thinking about succession. It is critical to long-term success.

“The rule does make companies think a little bit harder than they have been about succession in the round.”

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