Friday, 21 November 2014

UK: The 'over-development' of board committees - a view from Martin Taylor

Martin Taylor, an external member of the Financial Policy Committee, delivered a speech yesterday at the Oliver Wyman Institute annual conference: see here (pdf). He used part of his speech to reflect on the governance of banks and, in particular, the role of board committees. He raised some serious concerns about the effectiveness of the board and wider governance framework. To quote directly:

I sense that one of the solutions we have developed to address the thorny problems of corporate governance has turned into a large, looming, silent problem itself. I refer to the over-development of board committees, and – as a consequence – the reduced space for boards as a whole to operate in. (This observation, by the way, goes well beyond the banking sector, though the phenomenon may be most acute there). Now committees are self-evidently a good thing...

These days, of course, boards have committees to cover not only audit but also remuneration, risk, nominations, social responsibility, and in some cases capital allocation and many other matters. The committees are subordinate to the main board – powers are delegated to them. They make the board more efficient in the sense that they allow it to take on a greater workload – indeed it’s hard to imagine how a board today might function without a slew of committees, never mind what the governance rules require. But I believe this efficiency has been bought at a high price in reduced board cohesion. It has got harder – perhaps because some organisations are ungovernably large – for boards to see any sort of big picture. Unable to encompass the blurred outlines of a sometimes ugly reality, individuals take refuge in trivial detail.

Two powerful effects seem to be in play – entirely understandable, quite subtle, and in the end perverse. First, a director who is not on the remuneration committee or the audit committee thanks her lucky stars and removes these crucial topics from her personal list of concerns. Second, the committees themselves take on a fundamentally technical aspect, where the members, drawing heavily on consulting advice and inter-firm comparisons, tend to behave more as experts, and less as broadly responsible directors. In the end the committees usurp the power of the board – after all, they perform three quarters of the board’s role – but they do not really behave like boards.

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