Recommendation on the role of (independent) non-executive or supervisory directors
ACCA is pleased to respond to the proposals in the consultation on ¿Recommendation on the Role of (independent) Non-Executive or Supervisory Directors' issued on 5 May 2004 .
ACCA contributed actively to the FEE Corporate Governance Discussion Paper published last July and our views on the role of non-executive directors and supervisory directors (NEDs) are covered in that document. ACCA has also contributed to the FEE response to this present consultation which we endorse. We therefore confine our comments to matters not already dealt with fully by FEE.
General Comments
There remains a lack of evidence to support much of what is presently considered good or best practice for corporate governance structures. In particular, research regarding the contribution of NEDs unfortunately does not support moves towards having a majority of independent NEDs. We also recognise that what may work in one member state may not necessarily be appropriate in all owing to different legal structures, institutional systems and business cultures. We therefore support the current intention of the Commission in avoiding being too prescriptive in defining matters such as a minimum ratio of independent NEDs to executive directors, their role and tests of independence until clearly justified by suitable evidence.
The proposals focus on the monitoring role of NEDs which is important in ensuring accountability of the board to shareholders. The proposals, however, omit to include NEDs' role in contributing to the success of the company in such areas as strategy. We recommend that the proposals acknowledge the importance of this other role.
We support the ¿comply or explain' approach but point out that the UK approach is better described as ¿apply, comply or explain'. UK companies are required to (i) state how they apply corporate governance principles and (ii) whether they have complied with the lower level provisions or explain why not. Both categories of disclosure are important and, arguably, the statement of how principles have been applied will yield more useful information about a company's corporate governance performance. The consultation in 1.3 refers to complying with principles. We suggest that the text be reworded as the word ¿principles' implies a higher level concept where a simple yes or no response may be inappropriate.
The ¿comply or explain' approach relies on market forces to enforce corporate governance. While this works reasonably well in the UK , the approach may not be so effective in countries with a less mature stock market, where companies' shares are generally more narrowly held, in the absence of other agencies which monitor corporate governance practice or where the business culture is not supportive of such an approach. The Commission may wish to consider how member states can help a ¿comply or explain' approach to work and if other mechanisms for enforcement should also be used. Some countries put more emphasis on the role of external audit in assessing governance practice.
Board structure and Composition of the board: sections 2.2
We agree with the comments in the second paragraph in 2.2.1 that the primary concerns for companies with dispersed ownership are different from those for narrowly held companies. We are not sure, however, if the challenges associated with companies with a controlling shareholder have been properly addressed. For example, in such companies it may be harder for NEDs to be effective and be properly independent.
We suggest that the key requirement to be addressed in 2.2.2 is what makes a board effective. In most cases this will require having an appropriate balance of executive and non-executive directors with a mix of appropriate experience and competencies. In a unitary board system, boards with a super majority of either executive or non-executive directors are unlikely to have an appropriate balance. ACCA research suggests that having more than 50% NEDs on a board may adversely affect decision making. We also note that the boards of US companies recently associated with corporate governance scandal had few executive directors.
Although we regard separation of the roles of chairmen and chief executives as highly desirable, we support the intention in 2.2.3 to avoid prescription. However, we suggest that member states require listed companies which have just one person in both roles to make a full public explanation to justify the practice.
Independence 2.3
We support the proposal to require a statement of the ¿general objective' for evidence of independence. We are concerned, however, that users will regard a set of indicative criteria as more important. Examples of independence criteria can never anticipate all threats to independence and rarely include such obvious threats a close personal friendship between a NED and a chief executive. We also suggest that independence of mind and being prepared to act independently and challenge where appropriate, although difficult to verify, are more important than independence in appearance.
Audit Committee 2.7
We suggest adding strategic and key operational risks to compliance risks in the list of risks which the audit committee should review in 2.7.2.
We suggest that the audit committee should have a less passive role regarding the external audit programme than that suggested in 2.7.3. The committee needs to satisfy itself that the external audit will be objective and thorough including having sufficient scope and depth, have appropriate staff, sufficient access to information and staff and be independent.
We suggest that employees could also anonymously report concerns about irregularities to the audit committee chair.
ACCA is supportive of the direction being taken by the Commission on the role of NEDs and would be pleased to respond to any questions arising from this letter and offer any further help which may be of assistance.