Higgs: One Year On

What difference has the Higgs Review on corporate governance made to HR and to organisations generally? Scott Beagrie gets the views of some of the major players

When former investment banker Derek Higgs published his lengthy report on corporate governance 12 months ago, he was following a long line of worthy authors on the subject that include Sir Adrian Cadbury, Sir Richard Greenbury and Sir Paul Myners. The Review of the role and effectiveness of non-executive directors was labelled “ludicrous” by former Dixon’s chairman Sir Stanley Kalms and “too prescriptive” by Ken Rushton of the Financial Services Authority. Yet, what set the report apart from the works of Higgs’ predecessors was that its stern recommendations presented a golden opening for the profession to become truly influential at board level. As Lesley James, former HR director of Tesco and currently a non-executive director at Selfridges, observed at the time: “This is a great opportunity for HR professionals to initiate change.”

While it is still early days, there is scant evidence of this desired change of status since the revised code came into effect on 1 November 2003. A recent survey conducted at the Institute of Directors’ HR Forum revealed that more than two-thirds of HR directors were not involved in the board’s education regarding the new code.

But what is the reality? Has Higgs performed an important service? Will he genuinely enable the profession to improve its standing? And what impact is his code likely to have on the industry as a whole?

Personnel Today asked five leading HR practitioners and industry experts for their views.

The non-executive director
George Battersby is non-executive director of SHL Group and HR director of Amersham

Q. Do you think, in general, that the code will present more opportunities for senior HR professionals to take up an non-executive director (NED) role?

At the moment there is no evidence to suggest that there will be more opportunities. This may change as remuneration issues will have a higher profile under the code, but most companies still look for candidates for non-executive positions with previous boardroom experience. There are still very few HR directors filling main board positions in their companies.

Q. What do the changes mean for you as an NED, and will it change your status?

The changes to the code will mean that, as chairman of the remuneration committee at SHL, I will need to spend more time consulting with advisers and shareholders on remuneration policy.

Q. Will the extra time, effort and growing responsibilities make it more difficult to reconcile this with the demands of your normal day job?

When I took up my position as an NED at SHL, the requirements of the code were already pretty clear, and I was well aware of the demands of the role.

Q. What will this mean in terms of remuneration? Will NEDs take up fewer highly paid positions?

There has certainly been a significant increase in the market rate for NEDs, owing largely to an increase in responsibility and time required to devote to the job. To fulfil their obligations and perform to the required standard, many NEDs may well wish to reduce the number of boards on which they sit.

Q. Will the code deliver on its aims of improved corporate governance, increased transparency and sustainable performance without any detrimental effect on business?

For the vast majority of well-run boards, the code will simply add an extra level of bureaucracy. The time required to deal with purely technical governance issues inevitably means that less time will be available to develop a deep understanding of the business, which is essential if NEDs are to contribute to business performance. There is a real danger that the code, together with other guidelines such as the ABI remuneration guidelines and Sarbanes Oxley for companies with US businesses, will have a negative effect on business performance.

The association
Duncan Brown is assistant director general at the Chartered Institute of Personnel and Development (CIPD)

Q. Will the code strengthen the HR profession’s position in the boardroom and give it a more prominent role?

[Higgs’s] emphasis on the need to ‘widen the gene pool’ and diversity of boards and NEDs should benefit the professional group with the highest proportion of female members – 70 per cent of CIPD’s total membership. We undoubtedly have senior-level members who would make excellent candidates for NED posts on other boards. But HR professionals have to earn that place at the top table with their contributions to effective resourcing strategies, talent and performance management, and eliciting the discretionary commitment and energy of people in organisations, and so on.

Q. Will the extra time, effort and growing responsibilities make it increasingly difficult for companies to attract NEDs, thereby making HR’s job harder?

The CIPD would certainly like to see HR professionals much more routinely involved in recruiting NEDs. The indicated limit on the number of directorships held will marginally reduce the existing population. The fundamental challenge for sourcing NEDs remains a quality-over-quantity issue: getting the best people, who are most in demand from all sides – and usually extremely busy – to take on the roles and then perform well in them, to proper standards of governance. That is why you need skilled HR professionals to help secure them.

Q. Will the code have any downsides such as smaller boards with fewer HR directors?

As far as HR professionals are concerned, it’s easy to get too hung up on the issue of board membership. Many top HR executives exercise considerable influence from their places in top management teams, regardless of whether they are members of executive/governance boards. The key issue for us is this: is HR in a position to exploit the fantastic potential that exists in most companies to better leverage the contributions of their people to deliver on the strategic goals of the organisation? Because if it is, that is great news for the board, the investors, the employees and the HR professionals themselves.

Patricia Peter is corporate governance executive at the Institute of Directors

Q. Do you think the final code of conduct is flexible enough to accommodate the variations in the size and complexity of boards?

The code is flexible if both companies and investors apply it properly – it operates on a basis of ‘comply or explain’. As the preamble to the code says, this offers flexibility, but being effective requires that companies give clear explanations of noncompliance so that investors and their advisers can interpret the explanations and make judgements. In addition, there are specific exemptions for companies outside the FTSE 350.

Q. Will the extra time, effort and growing responsibilities make it increasingly difficult for companies to attract NEDs?

It is difficult to generalise, but as demands on time increase we probably will see NEDs serving on fewer boards. Unless we look outside traditional sources, this may make recruitment more difficult.

Ultimately, good people are attracted to serve on the boards of companies for a variety of reasons. Some people will have a low tolerance for risk and require that the companies have sound reputations before they agree to serve. Others will relish the challenge and potential to turn companies around. A potential director should always make as many enquiries as possible before accepting an appointment. Indeed, I would say a company should not appoint someone who has not made searching enquiries about the role.

Q. Will the code deliver improved corporate governance, increased transparency and sustainable performance without any detrimental effect on business?

Many of the changes to the code focus on board transparency, its members, role and relationships. While we are moving towards governance ratings for companies, there is little evidence to show a strong correlation between corporate performance and governance. But with greater emphasis on the quality of the board and its individual members, we believe this will, in time, translate into sustained improved performance.

Q. Are there any aspects of the code that are unworkable or that you’d like to see changed?

Not immediately. This code needs time to be evaluated in practice. There are areas in which the practical implications will be viewed with interest. More than any specific provision, the underlying ‘comply or explain’ basis has to be allowed to work. Investors have to recognise that one size does not fit all, that there are circumstances in which it is better for a company’s long-term prosperity not to comply with a provision. Companies have to play their part and give meaningful explanations.

Corporate governance
Jane Fiona Cumming is director of corporate responsibility consultancy Article 13

Q. Will the code deliver on its aims of improved corporate governance, increased transparency and sustainable performance without any detrimental effect on business?

Article 13’s discussions with companies that are currently considering their responses to Higgs tell us that the value of the code will depend very much on the values of an organisation and its directors. Those boards that see risk identification, management and measurement as an obligation will approach Higgs from a cost mentality. In contrast, companies that embrace Higgs as an opportunity for business transparency, accountability and ultimately business transformation will not only reduce costs through the identification of intangible risks, as well as lower potential risks to corporate reputation, they will also encounter new business opportunities from increased levels of innovation within the organisation.

Q. How likely are firms to comply with the code?

All reports suggest that companies will be scrutinised, researched and publicised as to whether they have complied with the code. But Article 13 suggests that mere ‘tick-box’ compliance does not actually answer the spirit of Higgs. Recent workshops and seminars we have run with finance directors put it succinctly: “corporate governance is the way [policies, procedures, systems and controls] you run a company – with integrity.”

Q. Will it present more opportunities for senior HR professionals to take up an NED role?

Rather than Higgs’s code specifically increasing the profile of HR professionals, Article 13 foresees that the shift in focus on corporate governance to risk identification, management and subsequent policy and procedure implementation will train the spotlight firmly back onto the HR departments. In view of this, HR professionals seem to be the obvious choices for those NEDs required to focus on the people and intangible risks and assets of an organisation.

Q. Will the extra time, effort and growing responsibilities make it increasingly difficult for companies to attract NEDs, thereby making HR’s job harder?

We are already hearing anecdotal evidence of this happening. It is the responsibility and specialist knowledge that is making prospective NEDs, particularly those who could encourage the ‘gene pool’ (such as women, minorities and different stakeholder groups) become wary of these roles. There is a real need for clarity from companies on exactly what they are looking for from any one NED. For example, some organisations are simply looking for NEDs to take on specific issues or stakeholder championship.

The HR director
John Steele is chairman of the advisory board of Accenture HR Services, a non-executive director of internet company Via Net.works and former group personnel director of BT

Q. What does the new code mean for HR directors?

I do not think it is going to cause a seismic change of any sort because what we have seen so far is a muted response to the code. It may help encourage HR directors to develop their own senior people and peers and broaden their own experiences by getting them on to [other] boards. And if there is more opportunity to do that and it is easier than it has been in the past, then that is something they can focus on. Potentially, it is a healthy development.

Q. How will it make a difference to an HR director’s boardroom duties?

I am not sure that it’s going to make a lot of difference as many companies are already managing this process quite well. But the code will become a point of reference, and it may encourage more shareholders to raise issues and concerns about board composition and the performance of the respective non-execs they’ve had in the past. But the proof of the pudding is going to be in the eating here – we’ll have to see how it plays out.

Q. Will it make a difference to the status of the profession and give HR a more prominent role?

I would like to think so, but that’s going to come back to the HR profession itself. We now have an opportunity as a profession to make our mark and if we don’t make it, it will be our fault. We have to make sure people understand and recognise HR people as businessmen and businesswomen first and HR specialists second and [that we are able] to add value to the business performance of an organisation both in an operational and strategic sense.

Q. Will it present more opportunities for senior HR professionals to take up NED roles?

The Government’s Accounting for People taskforce’s review of human capital management points up the absolute importance of people in the business process. So it is going to give HR an opportunity, but it has to get on the radar screen and measure up to the standards that company chairmen are looking for and make sure it is both making an impact and its presence felt.

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