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Three Proposals to encourage more ethically run Boards

more-ethical-boards-image-by-matthew-broomheadThe basis of these three ideas came from a discussion on Radio 4’s “The bottom line” with guests: Elizabeth Corley (vice-chair of Allianz Global Investors), David Pitt-Watson (former Chair of Hermes Focus Funds) and Neil Record (Chief Executive of Record Currency Management).

1) Section 172

10 years ago in 2006 the Companies Act was passed. Of particular interest to us is the responsibility of Directors on boards. It considered how companies reconcile making a profit and CSR (Community and Social Responsibility). If you search online for Section 172 it appears to state the following:

“Duty to promote the success of the company:
A director of a company must act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole, and in doing so have regard (amongst other matters) to:

(a) the likely consequences of any decision in the long term,
(b) the interests of the company’s employees,
(c) the need to foster the company’s business relationships with suppliers, customers and others,
(d) the impact of the company’s operations on the community and the environment,
(e) the desirability of the company maintaining a reputation for high standards of business conduct, and
(f) the need to act fairly as between members of the company.”

Therefore the first proposal to encourage more ethical and better boards is to ensure the Directors are held account for what is already a legal requirement. The Chair should make sure all board Directors are fully familiar with this legislation and that they could prove it if required.

If we were to consider the recent behaviour of the Boards of BHS and Sports Direct, then how much of this legislation was considered and implemented? I will leave you to consider that.

2) Proportion of Income in shares

For listed companies to have their board Directors given a proportion of their income in shares. Note I am not saying more income as this is a contentious issue particularly at the moment. The proportion percentage is dependent on the company, but I would suggest an amount that is noticeable to the individual. Giving shares is nothing new, but this idea is to extend it over a 20 year period. Every year during the 20 year period a proportion of the total shares are given at the market rate. Instead of a Director pushing for a short term exit and cashing in their shares immediately, this alternative proposal encourages the Director to think longer term and focus on progressive ongoing profit.

In the first year they would be given 5% of their total shares at that year’s market value. The following year they would receive the next 5% at the market value. So if the share price has increased then they will benefit from the additional growth.
For example,
20,000 shares in total given to a Director. Each year 1000 shares are cashed in.

Year One
Value of share = £5
Share Income : 1000 x £5 = £5000

Year two
Value of share = £6
Share Income : 1000 x £6 = £6000

And so forth, until the 20th year. This applies even if the Director leaves before the 20 years have elapsed.

3) Yearly reporting of non-financial matters

Every year include in the company report a section to clearly and simply demonstrate what the company has done during the last financial year on non-financial matters that are relevant. For this to happen it is suggested that a think tank would need to decide how to measure this area.
It is one thing to encourage boards of companies to state what they have done, but another thing to actually measure it and prove if required.

Measuring and reporting this every year would reduce the likelihood of a “boiler plate” message where typically lawyers and PR draft up the wording and they appear to all be very similar.

This additional information will also help investors decide who to invest with if they want to ethically invest. Whether they are large scale pension funds or smaller private investors.
There you have it – three proposals for making boards better. One piece of legislation that already exists, but doesn’t seem to have been exercised adequately, one idea to improve longevity and one to make companies accountable for non-financial conduct.

I’m just curious, what new proposals would you suggest or what are you already implementing on your Boards to encourage them to be more ethically run?

Matthew Broomhead
“Raising the level of Business Skills in Britain”
Creator of Broomhead Business Channel

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