By Barry McClay
On a recent trip back to Ireland, I caught up with an old friend for a coffee and our conversation drifted to corporate governance and the role of the non-executive director (NED). My friend, the eldest of eight children, had recently been appointed to the board of the family business as part of their succession planning. She has not worked in the business since her student days but felt obliged to accept the invitation and assist the handover from her father to her siblings.
Our conversation centred on the role of the NED and the expertise she would bring to the board. The skills and diplomacy honed in her professional life over the last ten years as she dealt with local and European politicians would be tested to the full, as she now had to deal with a domineering alpha male (her dad) in this new role. Her dad believed that her role was simply to do as he said as, after all, it was “his business” and she had no relevant experience of working in it; he had invited her to join the board and was paying her a fee. In his opinion, she was simply joining the board to satisfy some of the professional advice he had received.
In summary, this is a problem of many boards in that they consist of individuals beholden to the people they are supposed to monitor. This happens in family businesses, the banking sector and in the offshore funds sector.
The record of boards at supervising management might politely be described as mixed. Yet the response to each corporate scandal in the 21st century has been to publish more legislation, force companies to appoint more independent directors and disclose more information about compensation. There is no academic evidence to show that adding more independent directors makes boards better. When Lehman Brothers went bankrupt, eight of its ten directors were independents.
Listening to my friend made me think about the corporate world I operate in. Boards of offshore funds have the same issues but with the added concern around a limited pool of suitably qualified individuals.
In addition, the offshore sector is highly regulated and this increases the focus and reliance on NEDs which does not seem to fit with an environment with a limited pool of qualified individuals!
In search of answers, I have considered the views of my local regulator and US academics with a very alternate view.
The View of the Regulator
In his address to the Institute of Chartered Secretaries and Administrators Guernsey Conference in April 2014, William Mason – Director General of the Guernsey Financial Services Commission – makes the interesting argument about ethics in governance. The Guernsey Code of Corporate Governance, like most other governance codes, is very light on this subject. Mr Mason’s view is that business ethnics is more than simply following the relevant legislation. To persist with a view that all a business must do is to comply with the law is to argue for increased compliance and legislation. Mr Mason states that “much freedom has been lost as a result of the increased regulation which followed the financial crisis”.
Mr Mason’s view is that a board should produce an ethical code for its business model based on its members’ understanding of right and wrong. This code should be presented throughout the organisation as part of its code of conduct and should influence decision making. The ability to make ethical and moral decisions – that is the ability to distinguish between “right” and “wrong” decisions – will lead to better decision making and ultimately, less additional regulation.
However, this view is still based around the status quo of the board of directors and does not address the issues around director skills and ability to monitor management.
The Academic View
In the May 2014 edition of the Stanford Law Review, Stephen Bainbridge of the University of California and Todd Henderson of the University of Chicago offer a proposal for fixing boards that goes beyond tinkering: replace individual directors with professional services firms. Messrs Bainbridge and Henderson argue that despite the zealous efforts of corporate law reformers and masses of corporate law literature, there is no sensible challenge to the existing model of only individuals being able to act on regulated boards. They propose that “board service providers” (BSPs) be appointed to provide director services in much the same way as accounting firms are selected to provide audit services.
This is not simply about individual board members coming together to get the protection of limited liability, but rather all director services being provided by a single firm. To emphasise their point, they give the example of Boards-R-Us Inc., serving as the board of Acme Co. Instead of Acme shareholders hiring five or six individuals to provide board functions, they hire one firm, a BSP, to provide all these functions. Boards-R-Us would still act through individual agents but the responsibility for managing a particular firm, within the meaning of corporate law, would be that of Boards-R-Us, the entity.
Any breach of fiduciary duties would be made against Boards-R-Us. The BSP would replace the nod-and -a -wink arrangements that currently prevail and create a new category of professional director. It would allow BSPs to exploit economies of scale to recruit best board members and introduce more rigorous training programmes.
Increased legislation and amendments to codes of corporate governance are not the solution to corporate failings. The views of William Mason are interesting in that he appears to accept this argument, but his views around an ethical code do not, in my opinion, go far enough and would not seem a logical fit with his “customers”, the offshore funds, captives, trusts and banks which he regulates.
The number of companies in locations such as Guernsey and Jersey are disproportionately high against their population size. With a limited pool of suitably qualified and experienced directors available, another option is required. The offshore market offers a disconnected and inconsistent pool of individuals prepared to offer director services with various degrees of knowledge and expertise.
BSPs would provide a professional structure, training and sharing of knowledge which would be a vast improvement on this current structure. Perhaps we should all take a coffee with an old friend and consider an alternate to the broken system under which we all allow our companies to be governed. Why does a family owned business in Ireland need the same corporate board structure as an offshore fund structure?
Chief Operating Officer, Ipes
T: +44 (0)1481 735
You can read the other articles from Ipes' Private Equity update (edition 15) at the following links: