Comments from ACCA
ACCA is pleased to respond to The Institute of Chartered Secretaries and Administrators (ICSA) paper on the first stage of its consultation on its review of the Higgs Guidance on best practice for boards.
We are pleased that ICSA is carrying out this review. It is obviously timely and ICSA is well placed to undertake the work. Here are our responses to the three issues on which you ask for comment. Quotations from your consultation paper are in italics.
Purpose of the guidance
The aims of the review are therefore to offer guidance which, without being prescriptive, assists boards in understanding and implementing the purpose of the Code [Combined Code] and, in so doing, delivers practical advice to boards on how they can apply the Code to enhance their effectiveness.
Question 1: Do you agree with the purpose of the guidance as set out above?
Yes, however, we submit that the central question for boards arising from the financial crisis is how to ensure that high risk strategies are identified for what they are and dealt with accordingly. This is essentially the same problem that presented itself after Enron and WorldCom, which Sir Derek Higgs tried to address and to which, as yet, we have still to find a solution which works.
A particular challenge is that it is well known that groups tend to make more extreme decisions (either very risk averse or very risky) than individuals. The Walker Review correctly identified that this is a behavioural problem but we do not feel his recommendations constitute an adequate solution.
There is a danger in your stated purpose (to offer guidance which…assists boards in understanding and implementing the purpose of the Code) that the Code is seen by boards as an end in itself rather than a means to an end.
The financial crisis has caused some to give serious thought to how we know that corporate governance works and what good corporate governance looks like. A further objective for the guidance could perhaps be to assist boards in identifying the benefits of good governance and recognising it when they have it.
Question 2: Do you agree that the paper has identified the right areas where the existing guidance could be enhanced?
Yes but it is not clear which areas will have the most emphasis. We are pleased to note that the ‘guidance will also consider how boards can distinguish the appropriate psychological traits which identify candidates able and willing to challenge convention and groupthink, and ‘ask the basic question’. We suggest that more emphasis should be given to the group dynamics than to individual competencies and experience.
We were also pleased to note that the guidance will refer to ‘ethical sensitivity, and the need for the board to take account of ethical issues in setting business strategy and the manner in which business is undertaken’. This is a difficult but vital area which deserves considerable attention.
Guidance could also be enhanced on risk management. We understand that the Turnbull Guidance is likely to be reviewed but the Higgs guidance should at least emphasise the importance of boards taking informed ownership of the risk identification, assessment and management processes.
Question 3: Are there other areas which the guidance should look at?
In addition to our points made in responses to questions 1 and 2, we suggest that the guidance should refer to the directors’ duties under the Companies Act 2006 on a wider range of stakeholder concerns. As you know, the Act confers a duty on directors to promote the success of the company and, in the course of making their decisions to that end, to ‘have regard’ to the following.
- The likely consequences of any decision in the long term.
- The interests of the company’s employees.
- The need to foster the company’s business relationships with suppliers, customers and others.
- The impact of the company’s operations on the community and the environment.
- The desirability of the company maintaining a reputation for high standards of business conduct.
- The need to act fairly as between members of the company.
The financial crisis highlighted that society can be adversely affected by the activities of companies and, clearly, regulation cannot always be replied upon for protection. Boards have a responsibility beyond achieving short term shareholder value. They have a duty to a wider range of stakeholders which should be recognised in the revised Higgs Guidance.