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While the recommendations of the Walker Report – setting up a separate board-level risk committee, including a separate risk report in the annual report and instituting a board-level Chief Risk Officer role – may be overkill for non-banking companies, all boards would be well-advised to examine their procedures for managing risk and setting a risk appetite, as well as making sure that risk is discussed in all board meetings – either as a standalone item or embedded within other discussions. The work of the board should also be linked to work done on risk elsewhere in the organisation, so that the risk process is replicated in a consistent manner throughout the organisation.
Attention should also be paid to the disclosure of risk, as mentioned above: at the very least, companies should be disclosing what the main risks are and how they are managed throughout the report.
Money for nothing Remuneration, too, is an issue that should be dismissed at peril. It is all too easy to look at the furore about executive pay kicked up in the mainstream press on an annual basis and see it as a crass over-simplification of a relatively minor issue.
However, this isn’t necessarily the case. Several investors have commented that the result of the advisory vote on remuneration can act as a litmus test for the rest of a company’s governance: so, if there’s a substantial protest vote against directors’ pay, then there may be other areas which investors have queries about. Do not ignore the damage bad press over pay can do in terms of a company’s reputation, either.
Furthermore, it’s also worth considering the relationship between the remuneration of the board and that of other employees. The Walker Report has recommended that banks report on the remuneration of non-board executives – especially those who receive high levels of remuneration – and there is
SPRING 2010
Good
governance should be considered to be an essential part of how business is done, not a compliance task to be fulfilled after the fact or in a box-ticking manner
increasing anxiety about the pay differentials between down-the-line employees and senior executives. This is an issue upon which companies should expect to receive more scrutiny in future, and as such it may be worth examining pay ratios now to avert a scandal further down the line.
Finally, there is another aspect of board-level remuneration which has received less coverage, but is just as important: the remuneration of non-executive directors (NEDs). Much of the post-crisis rhetoric has leaned towards NEDs (who are, on average, paid far less than executives) committing more time to assignments and being more robust in the boardroom. Should there be a commensurate increase in the fees paid to them as a result, or are they already healthily rewarded? It’s a tricky balance to get right, and one that boards and company secretaries will need to consider in the coming months.
A change of perspective More important than all of these, perhaps, is something else: and that something involves a wholesale change in how governance is viewed by some organisations.
Basically, good governance should be considered to be an essential part of how business is done, not a compliance task to be fulfilled after the fact or in a box- ticking manner. This may be a difficult mental shift to make – especially for those in listed companies, who may be used to dealing with governance requirements as part of their obligations under the Listing Rules, or confronted with voting agencies taking a black-and- white view of comply or explain. But it’s worth the effort, as ultimately it will lead to more robust strategies, more sustainable growth and stronger companies – even if it does look like the harder road in the short term.
Kevin Eddy is the Editor of Chartered Secretary magazine.
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