The director's new profession
Professor Bob Garratt argues that in the post-Enron era the debate has now moved on from 'Board Conformance' to 'Board Performance'.
In the currently 'hot' topic of corporate governance two aspects of the UK debate stand out. First, it is the only country to move the debate systematically from a focus on simply 'Board Conformance' (compliance) towards the crucial 'Board Performance' aspects. Second, the demand for the accreditation of directors is growing rapidly - the issues of assessing board competence and ensuring regular appraisal are now on the public agenda. Both issues suggest strongly that the days of the 'executive director' as a functional specialist are dying; consequently the old version of the finance director role is at the very least obsolescent.
The movement of the corporate governance debate towards Board Performance is driven mainly by directors' current fears following an urgent need to rethink professional ethics post-Enron. The answer to the key question 'Who is now the client?' is reverting to what it was 20 years ago rather than how it was interpreted in the Naughty Nineties.
In the Fearful Noughties it is worth remembering that the Senior Partner of Deloitt when answering to a Congressional Inquiry after the 1929 crash, was asked 'when all the required reporting systems have been exhausted, on what do you finally rely?' To which he answered 'My conscience'. This was not an answer heard much around New York , London , Frankfurt, Hong Kong or Sydney before 2002.
Now directors are becoming increasingly aware of two major issues. First, the corporate governance movement is pushing for more company law to be moved from civil to criminal law as distrust of boards and directors grows. This will put new pressures on the competence of chairmen, managing directors, CEOs and Finance Directors. Second, although directors have always has unlimited liability, it was not taken too seriously. But as this becomes a much more litigious society, and with directors and officer's' liability insurance going up in 2003 by 300% in the UK and in some cases 2,000% in the US, it is much clearer that a director's personal wealth, liberty and family stability are increasingly on the line.
This requires greater immediate clarity as to who is legally a 'director' in most companies, and then a return to the governance bases of accountability, probity, transparency and collegiality around the boardroom table, as the existing law is applied more rigorously. A quick read of the Company Law Review proposals is often sufficient to concentrate any director's mind.
What can be done? A good start is to separate carefully the 'executive' roles and the 'directoral' roles often held by an individual director. The job title of 'director' is not a merit reward with no legal meaning. Taken seriously, it is the start of a new career of direction-giving for which one needs careful induction, inclusion and directorial competence-building processes under the guidance of the chairman.
The immediate objection from finance directors, and other functional directors, is that they are already so busy that they have neither the time nor inclination to do any retraining. To which my response is that, in a more litigious society, can they see themselves standing in the witness box and answering a determined prosecutor with the answer 'I did not have enough time to become competent. I was too busy being an executive'?
A very common directorial response is also to say 'it is a career-threatening opportunity to disagree with the chairman or CEO. On this board we just turn up and shut up - real power lies with one or two powerful personalities.' This is an equally unprofessional response. The law is clear - directors of UK unitary boards are equal around the boardroom table with one vote each. To undertake their directorial role competently they must declare personal interests, debate issues, and assess risks openly before coming to their corporate decision. That this is currently honoured more in the breach than the observance is an indictment of current lax boardroom practice.
At Board Performance Ltd we have been busy on three associated aspects of board development. First, we have ensured for our clients that properly constituted 'directors' who are also executives have two employment contracts. The first is a Contract of Employment as an executive (not as an 'executive director', as the term does not exist at law). This defines their roles and responsibilities in the executive aspect of their work. The second contract is a Contract for Services as a director. All directors have the same terms and conditions for their directorial services, which are spelled out carefully to reinforce their onerous legal position. So, as is the law, there is no differentiation between 'executive' and 'non-executive' directors. They are all directors.
This has two great benefits. First, it legitimises the need for directors to budget time specifically for their policy-formulation and strategic thinking work. They are being paid separately for it. Second, they realise that they must retrain as a director. This is when careful board evaluation, competence-building and regular appraisal processes are developed under the careful supervision of the one person charged legally with ensuring the competence of their board - the chairman.
The required techniques are well-known, and I shall not go into them here. What is often less well-known is the fundamental role of a board - the resolution of the age-old governance dilemma 'how do we drive this enterprise forward while keeping it under prudent control?' - and the four key directorial tasks:1. Policy formulation and foresight
2. Strategic thinking
3. Supervising management
Notice that these are all active verbs - directing is a serious and continuous job. Budgeting time to learn how to do all four tasks is as wise a personal investment as a professional one. The notion of directing becoming a profession is growing fast. The most advanced director development form is the UK 's launch of the Chartered Director qualification. This is a tough public examination administered through the Institute of Directors in London . It comprises a written examination and an oral exam, reviewing a portfolio containing a minimum of five years 'full' director (not executive) experience.
In 2003 the UK has some 180 Chartered Directors and a pipeline of some 4,000 registering for the exams. The younger generation know that directing will be very different in the future and are preparing for it. They know that in future the MBA will not be the last of their exams. The Chartered Director notion has already been replicated in Japan , and other countries are expressing interest.
This enthusiasm for professionalising directors sits in stark contrast to today's many lax boards in the private and public sectors. Yet the politicians on both sides of the Atlantic continue to pass tougher criminal legislation because of public outrage over such scandals as WorldCom, Tyco, Marconi, Equitable Life, the dot.bombs and the pension funds debacles. As is the nature of politicians, knee-jerk legislation is having dire and unintended consequences.
Under the US Sarbanes-Oxley Act of 2002, a CEO who has signed wrongly the quarterly accounts (does anyone know of an accurate quarterly accounting system, please?) stands to be fined a maximum of US $5 million and get 20 years in jail. To illustrate the stupidity of such an approach, were I a US CEO who had mis-signed my quarterly accounts, then I would have to consider seriously murdering my Chief Financial Officer - because in most US states I would get an average of 12 years for murder, and no fine.
One hopes that the development of new accounting systems,
especially 'Director's Dashboards' and 'Director's Accounts', rather than
management accounts, should progress made here. But that still leaves the
challenge for finance directors. Will they take up their true directorial
position on the board?