05 July 2006
Non-executive directors and shareholder interests
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Sir, Your article "Higgs suggests 'lite' rule regime for Aim" (3rd July 2006) suggested that the Higgs driven changes to the Combined Code entrenched independent non-executive directors as the guardians of shareholders' interests. This is a widely held misconception.
The Combined Code's philosophy is rather more that the chairman, chief executive and finance director are principally responsible for communication with shareholders (A.2, A.3.3, D.1). In contrast, "Non-executive directors should constantly seek to establish and maintain confidence in the conduct of the company" (page 63) so providing some checks and balances on the behaviour of the executive directors.
In fact a closer study of the Combined Code 2003 shows that it does not envisage that the non-executives have any specific responsibility to represent the ownership interest. Further, non-executives who have a significant shareholding in the company, or who have any longstanding relationship with the company are unlikely to be considered as independent in accordance with the codes criteria (A.3.1). A non-executive who is not independent cannot serve on the remuneration committee (B.2.1) or on the audit committee (C.3.1) and can only be in a minority on the nomination committee (A.4.1) and on the board as a whole (A.2). Non-executive directors who are not independent therefore have very limited scope in their role, and consequently can have only limited influence.
Unfortunately therefore the Combined Code has the, perhaps unintended, consequence of marginalising rather than increasing ownership representation on company boards. This is a serious problem because the natural incentives of company ownership are essential to the efficient working of capitalism.
Yours faithfully
Patrick Gerard
Sir, Your article "Higgs suggests 'lite' rule regime for Aim" (3rd July 2006) suggested that the Higgs driven changes to the Combined Code entrenched independent non-executive directors as the guardians of shareholders' interests. This is a widely held misconception.
The Combined Code's philosophy is rather more that the chairman, chief executive and finance director are principally responsible for communication with shareholders (A.2, A.3.3, D.1). In contrast, "Non-executive directors should constantly seek to establish and maintain confidence in the conduct of the company" (page 63) so providing some checks and balances on the behaviour of the executive directors.
In fact a closer study of the Combined Code 2003 shows that it does not envisage that the non-executives have any specific responsibility to represent the ownership interest. Further, non-executives who have a significant shareholding in the company, or who have any longstanding relationship with the company are unlikely to be considered as independent in accordance with the codes criteria (A.3.1). A non-executive who is not independent cannot serve on the remuneration committee (B.2.1) or on the audit committee (C.3.1) and can only be in a minority on the nomination committee (A.4.1) and on the board as a whole (A.2). Non-executive directors who are not independent therefore have very limited scope in their role, and consequently can have only limited influence.
Unfortunately therefore the Combined Code has the, perhaps unintended, consequence of marginalising rather than increasing ownership representation on company boards. This is a serious problem because the natural incentives of company ownership are essential to the efficient working of capitalism.
Yours faithfully
Patrick Gerard
