Directors of U. K.’s top public companies are up in arms.  Most chairmen, chief executives and finance directors that I have spoken to in recent months, diplomatically say that they broadly support the Higgs Report; scratch the surface and they complain about practically every recommendation that he has made.  Do they have a point or is it just a case of they would complain wouldn’t they?

Most of our top companies put in a creditable performance and whilst most of the directors carry out their duties and responsibilities well, there are clearly those who are not necessarily top calibre and also those who abuse their position.  The question is how to deal with them?

For one, there has been a clear abdication of duty, over the years, by institutional shareholders who can very easily remove a bad chairman or chief executive by voting against his re-election.  Even a significant minority of shareholders voting against him would make his position untenable. 

Yet time and again fund managers in a rather limp wristed fashion vote for every resolution proposed at the AGM.  It is difficult to understand why such highly paid people lack the courage of their convictions to go on the record in their criticism of the management and vote against it.  Could it perhaps be that by breaking cover they may invite a certain amount of scrutiny into their own pay and performance and the link between the two, which is remarkable only for its absence.  For years, most managed funds have under-performed index trackers.  Make no mistake what this means – far from adding value, most active fund managers have destroyed it.  Throughout most of this period, fund mangers have been awarded handsome bonuses.  No great disclosure and transparency either. 

It is far more convenient for them to have someone make a set of recommendations and then unleash the Corporate Governance police chasing every company and director ticking boxes.  The problem with this approach is that it is blunt and inflexible. 

Take the Higgs recommendations on chairmen.  Most directors feel that if you have a company which is not performing well and needs significant changes to its strategy and operations, then of course the new chief executive would be inhibited by the brooding presence of the former chief executive.  Every major change that the new chief executive makes will appear to be a criticism of the previous one who now happens to be the chairman.  However, if you have a company, which has been putting in a stellar performance, then it would be an excellent way to handle the succession by the chief executive becoming chairman until a new chief executive has settled in.  Why risk an excellent company going off the rails under a new chief executive when all you need is continuity?

It is downright bizarre to suggest that a chairman must not chair the nominations committee.  Right from the most junior manager upwards, an individual is, within certain parameters, given the right to choose and appoint his/her own team.  However, a chairman is not considered up to this task.  If a chairman it to be held responsible for the conduct of the board then he should jolly well be given the right to chair the committee which appoints the board.  Are there chairmen who abuse this? Yes, there are several examples in the FT-SE 100 itself.  However, the correct course of action is for the shareholders of these companies to get rid of the chairman and not to deem every chairman unworthy of chairing the nominations committee. 

Under our system, however, it is difficult for other directors to get rid of a bad chairman.  Most non-executive directors, justifiably, believe that it is too much to ask for one non-executive director to start canvassing others without knowing what their views on the subject are.  It would leave him terribly vulnerable to be publicly fired for being a troublemaker.  With all the PR resources that the chairman will have at his disposal, the non- executive director’s reputation will be in tatters.  For this reason, the recommendation for non-executive directors to meet once a year without the presence of the chairman is a sound one.  Clearly one of the items on the agenda will be the performance of the chairman throughout the year.  One does not need to have a Senior Independent Director in order for this to be effective.  As one Chief Executive of a FT-SE 100 said to me “If you put six people in a room, a leader will emerge”.  The downside of having someone formally appointed as the Senior Independent Director is that rather than being a stabilising force, he jumps with joy at the slightest hint of trouble as he sees it as an opportunity to lay his hands on the chair. 

The pool of non-executive directors should be broadened but the short memories of most commentators are rather amusing.  Fifteen years ago, our boardrooms were full of the great and the good.  Commentators were shaking their heads and saying that non-executive directors should be business people who can make a contribution.  Now, everybody is shaking their heads and asking why boardrooms are dominated by businessmen and not by the great and good! No chairman or chief executive would like to see a return to the old days. 

To oblige companies to evaluate the performance of its directors and the board as a whole will improve the constitution and effectiveness of the boards.  Evaluation takes place, in one way or another, in most FTSE 100 companies.  However, it can be very arbitrary.  A professionally carried out evaluation by an independent firm will deliver substantial improvements. 

The most effective way, however, of improving the performance of the boards of public companies is for institutional shareholders to be less hypocritical and start removing the under performing directors.  No number of Corporate Governance reports will ever be an adequate substitute.

The writer is chairman of Buchanan Harvey & Co., an executive search firm.