At the Heart of Company Management and Control; Business Consultant Edward Carter Looks at the Role of the Non-Executive Directors in the Eye of a Corporate Storm

The Birmingham Post (England), April 9, 2009 | Go to article overview

At the Heart of Company Management and Control; Business Consultant Edward Carter Looks at the Role of the Non-Executive Directors in the Eye of a Corporate Storm


Byline: Edward Carter

The recent rash of corporate failures should bring a new focus on company boards, and not just on the outrageous boost to Sir Fred Goodwin's pension fund.

While many companies are simply and unfortunately caught up by the recession, some have failed to keep up with the times and were headed for trouble at some stage.

Woolworths, which also had a mountain of debt incidentally, springs to mind in this connection.

For these ailing companies, often with weak business models and sometimes with suspect financial reporting, the problem has been that the recession has caused the mask to slip.

As Warren Buffett, the global investment guru, famously said, "you can only tell who is swimming naked when the tide goes out".

Well, the economic tide has certainly gone out now and the consequences of a collapse in demand and revenues is not surprising in the wake of excessive debt, falling asset values and the banking crisis.

While there are many excellent world class companies, for a few, the economic troubles of corporate Britain have been made worse by flawed strategies, poor performance and a failure to change the business for the better when the opportunity was there.

Some companies built strategies on the basis that good times would last for ever..

Many are now making cut backs that are more damaging than they would have been if they had been made earlier in response to anticipated reductions in demand.

Of course, the greed of the banks, and their own flawed business models and performance has led to their own demise in many cases, with the taxpayer footing the bill.

Whether we are speaking of bank failure or the sad end of other companies, we have to ask about how the businesses are being managed and we have to start from the top, the boards.

Business is more complicated than ever.

To succeed, a fast response to change is needed and success comes to the fast moving and determined entrepreneurs, who take no prisoners in their business dealings.

So who is going to complement the skills of such leaders by working alongside them in contributing to the right strategy, measuring performance and managing risk? This role has been carried out in companies by non-executive directors, independent people who are directors in legal terms, with the same responsibilities, but who do not otherwise work in the company.

Sounds like this should work if the right people take on this work but does it? What were the non-executive directors at RBS, Northern Rock and HBOS doing as the executive directors motored on with their high risk strategies of lending and financing? It's a while since Michael Grade, then chairman of the BBC, said that nonexecutive directors were "like bidets.

You're not quite sure what they're for but they add a touch of class".

Well, many more people have bidets these days and there are many more non-executive directors too. But how can we make sure that they are doing their job? Their role is especially important where the people running businesses are not the owners, as of course is the case with shares that are listed on any stock exchange.

The non executive board members have to be the guardian of the shareholders' interests, as well as providing a sounding board for the executive management and an external perspective to strategy, performance and risk management. …

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