Looking at conflicting pressures in corporate governance and how companies are feeling the strain
The current furor in the UK over the Higgs report on non-executive directors raises some wider issues about the regular review of governance rules. One of the main complaints over Higgs has been that the code – revised according to Derek Higgs's suggestions – is too rule-based. Flexibility, argues the London Stock Exchange among others, is the more traditional UK approach to these issues. Yes, by all means have high-minded principles, but let them be implemented in a flexible fashion.
This sort of debate tends to raise its head to a greater or lesser extent every time there are new corporate governance regulations. Nor is it just the UK that follows this trend; most markets have similar discussions at such times.
The trouble is that most of the complainers hail from the corporate side of the equation, which does not help their credibility when they raise issues of concern. Journalists, being a cynical bunch, tend to give such protests short shrift and that does mean that valid issues can get brushed aside.
One issue has to be that the increasing burden of corporate governance regulation does not come without a price. The demands for more director expertise and improved training and development at board level mean that executives and non-executives alike are becoming more expensive. That's the nature of the market: there are fewer directors with the requisite skills so their remuneration and benefits packages tend to rise.
Unfortunately, while investors are keen to see greater expertise at board level to protect their interests, few of them like to see the upward trend in director pay. Some, it has to be said, vociferously campaign against such rises while also pushing for higher-level director qualifications, knowledge and experience.
Neither desire is bad. Greater expertise is to be welcomed at all levels – particularly if it helps protect investors' money. And unwarranted pay rises not linked to expertise or performance are rightly condemned. But the conflicting nature of these pressures is often forgotten, putting companies in an impossible position.
Two recent stories highlight some of the challenges facing companies in the hiring and retention of directors – and the costs associated with that process. First, one of the world's largest insurance brokers, Marsh, announced that the cost of directors' liability insurance has increased by up to 1,000 percent. In April insurance group AIG revealed a near 60 percent rise in the cost of the premiums it pays to protect its board and executives. And many smaller companies, it seems, are opting not to insure their boards or, at the very least, reducing the level of coverage. No wonder. Some Nasdaq-listed small caps are finding that D&O insurance is now taking a major chunk of their cash.
Meanwhile, it's potentially open season for shareholder action in Germany after a court found the former heads of EMTV guilty of misrepresenting their company's health in various public statements. The court set a precedent in criminal law and is expected to clear the way for civil action.
No-one is suggesting that the EMTV case was wrongly prosecuted, but it does show the increasing pressure directors are under to get it right. And the D&O insurance issue will undoubtedly make it less attractive for potential directors to put their heads on the block in the first place, especially at smaller companies.
At IR magazine's Ireland conference last month, a panel of fund managers decided to address their own question to the audience: 'Given the skyrocketing cost of being a listed company, is there any point? Why not go private?' They were surprised that only two out of more than 100 IROs present indicated they would opt out of the equity market.
Corporate governance activism has a crucial role to play in ensuring that companies are well run and well structured. But there also has to be recognition that such moves put pressure on the director recruitment market and will make it less attractive to accept a position at a lower price. You cannot have one without the other.