Time to Re-Assess the Role of the Senior Independent

A guest post from Chris Haynes. Once the Inquiry reports, the agenda will turn towards accountability and reform. Here is one idea...

Introduction

Corporate governance standards in the UK have been shaped by scandal and failure. The Cadbury Report was written in the shadow of BCCI and Maxwell, and the banking crisis influenced a later version of the Financial Reporting Council’s (FRC) UK Corporate Governance Code. Sir Wyn Williams is due to publish the Post Office Inquiry’s final report shortly, and it seems likely that, as before, this will be a catalyst for changes in UK corporate governance standards.

This article does not seek to pre-empt the report’s recommendations. Instead, it uses evidence presented in the inquiry to explore the role of the Senior Independent Director (SID) in a wider sense. A government owned entity, such as the Post Office, is different to a listed company, but there are important parallels.

The SID’s role has remained remarkably constant in the 20 years since the Higgs Review. It is focused on the internal workings of the board and the relationship with shareholders.

Should there be a reassessment of the SID’s responsibility for corporate governance standards generally, including as an interface with senior executives?

The best SIDs already take a lead role in ensuring high standards of governance and probity and act as intermediaries with senior management. A handful of FTSE100 companies emphasise those aspects of the role. However, they are the exception.

Messaging and empowerment are important and, as boards and regulators reflect on the Post Office scandal, it would be an opportune time to re-assess the SID’s responsibilities under the UK Corporate Governance Code.

Soundbites from the Post Office Inquiry

The Post Office Inquiry addressed many issues, from the personal distress suffered by sub postmasters to the advice given by leading lawyers. That deluge of evidence contained the following, seemingly uncontroversial, statements.

The first comes from Neil McCausland, Post Office SID from 2011-2016. In explaining his role, he commented: ‘In my role as the Senior independent Director, I was a sounding board for the Chair, Alice Perkins and an intermediary for the other Non Executive Directors (NEDs). I was also a conduit for the shareholders in accessing either the Chair or Executive team.’

In a heavily abbreviated form, this reflects much of the description set out in the FRC’s Corporate Governance Code Guidance.

The second is an observation from the inquiry’s governance expert, Professor Dame Sandra Dawson, about the role of the General Counsel (GC): ‘Effective governance […] depends on a strong relationship between the Chair and the GC, based on mutual trust, respect and capability.’

The juxtaposition between the statements is revealing. Professor Dawson emphasised the significance of the relationship between the Chair and GC as a pillar of governance and went on to describe some of the signs that it had broken down at a key time in the Post Office chronology. Meanwhile, McCausland’s statement gave no indication that, as SID, he had any wider responsibility for corporate governance, including towards the GC in a situation where the relationship with the Chair was clearly failing.

It would be easy to dismiss the disconnect between these statements as a symptom of the wider governance problems at the Post Office, but that would be to ignore an important question: should a SID’s formal governance responsibilities be broader than those defined by the FRC today?

What’s the Problem?

The Chair plays a key role in shaping the culture of the board and that includes fostering relationships and open communication between non-executive directors and the executive team. Ideally, a GC will have an effective relationship with both the Chair and the CEO and can leverage that to provide quality advice to the board in the most challenging situations. A high calibre GC will attend the board routinely, contribute on a range of legal, risk and reputational issues and develop a strong relationship with the non-executive directors.

If there is a misalignment with the CEO, a GC’s relationship with the Chair assumes elevated importance. As shown by the Post Office, there can be many reasons for that: a CEO’s desire to present an overly positive picture to the board, an insufficient understanding of legal issues, or even doubts about the quality of the legal advice itself. These situations are rare but, ultimately, a GC needs to satisfy his or her professional duty to the company (or the wider public interest) and needs to be prepared to escalate to the Chair even if that serves to weaken the working relationship with the CEO.

Life becomes more complicated if the Chair fails to engage or takes a different view about the best approach to a material issue. In the Post Office scandal, the Chair and CEO infamously kept the GC outside the room as the board considered key legal issues associated with the Horizon system. There can be many good reasons for a difference of opinion, and in a respectful and well-functioning relationship it is likely that a satisfactory understanding will be reached. However, if this does not happen and there is no other way of resolving matters, a GC is left with few options: escalate to the wider board, shrug his or her shoulders and accept the difference of opinion, or, in extremis, resign.

None of these options are likely to be attractive, and they may represent a poor outcome from a corporate governance perspective. As things stand, the UK Corporate Governance Code provides little assistance.

How can the SID Help?

An experienced SID can play an influential role in managing such situations. The SID has a special position, relative to the Chair, and can act as a sounding board and intermediary between the key players. Independence, discretion, and emotional intelligence are fundamental, but these are traits expected of a good SID.

A SID can act as an important sense check, or safety valve, for difficult legal and governance issues, bringing another perspective and, possibly, acting as a discreet counterpoint to the Chair. Of course, any independent non-executive director can do that, but it is a task that naturally complements the SID’s existing responsibilities. It might be argued that this is all implied or obvious but, if so, it is strange that it was not a feature of the evidence in the Post Office Inquiry. There were opportunities for McCausland to support the GC, but this does not seem to have been viewed as part of the role.

Similarly, very few FTSE 100 corporate governance disclosures refer to any expectation that the SID might act in this way. Some, like Diageo and Pearson, talk about the need for the SID to uphold the ‘highest standards of integrity’ and there is a slightly wider recognition about the general governance aspects of the role. However, most follow the FRC’s narrow framework and focus on matters such as acting as a sounding board for the Chair, evaluation, succession or acting as an intermediary for other directors and shareholders.

Coca Cola EP appears to be the only FTSE 100 company that envisages that the SID, ‘will act as an interface for the independent non-executive directors (INEDs) between the INEDs and […] members of senior management.’ It is not surprising that most companies follow the FRC formulation. It is a safe approach and one that has been relatively stable. Moreover, it could be argued that making the SID’s role wider might dilute the Chair’s power or create overlapping accountabilities and this might be counterproductive.

However, perhaps now is the right moment for all stakeholders to reflect on whether the role of the SID needs to be re-assessed given that it can play such an influential role in the governance and culture of a board.

In doing that, it would be worth revisiting the Hampel Report (1998). This report recommended that there should be a senior independent director, regardless of whether the Chair/CEO was combined, explaining, ‘We see a need for a vigorously independent director.’ The Hampel report took an intentionally generalist approach and stated that, ‘There can, in particular, be occasions when there is a need to convey concerns to the board other than through the Chairman or CEO.’ This was not limited to shareholder concerns.

It was the later Higgs Review that focused the role more closely on shareholders and, arguably, diminished an important safeguard with that change of emphasis.

Conclusion

A recurring theme from the Post Office Inquiry was that the board and senior executives pursued an overly legalistic approach; that there was insufficient consideration of the bigger picture. The same could be said about the role of the SID today. It has become narrowly drawn and, arguably, misses the bigger picture.

The SID can play a crucial governance role at the board, including as an interface with the GC and other senior executives. The most effective SIDs do this already, but it is not part of their defined responsibilities. As UK corporate governance standards are considered after the Post Office scandal, it would be a good moment to re-assess that scope.

It is for others to say whether wider and more explicit responsibility for governance matters would have made any difference at the Post Office, but logic suggests that it would certainly have helped.

Chris Haynes is a lawyer and the founder and consultant of CMH Consulting Limited. He worked as General Counsel at International Airlines Group from 2011-22.