Boardroom rules 'to prevent Enron-style scandal in UK'
Non-executive directors are to play a more “demanding” role in UK boardrooms after measures to prevent Enron-style corporate scandals were unveiled today.
The British government-sponsored Higgs Report has outlined a number of recommendations to improve the way companies are run.
One proposal would be to ensure that at least half the board is made up of independent non-executive directors.
Their performance should be evaluated at least once a year while the appointments process must be laid open to the widest pool of candidates.
Non-executives – who have no day-to-day management role – will also only be allowed to serve two three-year terms.
A full-time director of a company should only be able to take on one non-executive position elsewhere, the report says.
Other recommendations would ensure no individual can be chairman of more than one major company while the roles of chairman and chief executive should be separated.
No chief executive should be allowed allowed to go on to chair the same firm.
Today’s report attempts to ensure that a level of independence exists in UK boardrooms that would prevent the kind of corporate scandals which led to the collapse of Enron in the United States.
It also addresses concerns that non-executive directors hold too many posts and are not able to devote enough time to each company.
The report also attempts to answer suspicions that posts are filled through an “old-boys network”.
Former investment banker Derek Higgs, who led the review, said the changes promised a more demanding and important role for non-executives.
He added: “Effective boards depend on the best people and their behaviours and relationships. My recommendations reflect this.
“My hope is that, taken together, the recommendations of this review will significantly raise the bar for board practice and corporate performance.”
Rejecting a legislative approach, Mr Higgs said his recommendations would be built into the current framework of UK corporate governance. They would be implemented by the Financial Reporting Council whose purpose is to promote and secure good financial reporting.
Among other proposals, Mr Higgs said he wanted to promote closer relationships between non-executive directors and major shareholders and to improve the professional development of directors.
The proposals were backed by the Association of British Insurers, which particularly welcomed the proposals for a regular evaluation process.
Peter Montagnon, head of investment affairs, said: “Strong boards make for strong companies that deliver value to their shareholders and prosperity to their employees.
“This report contains a number of common sense proposals to help independent directors maximise their contribution.”
