Monday, 25 February 2019

UK: What is the principal role of the board?

An answer can be found, alongside further reflections on governance including the role of non-executive directors, in a speech delivered by Martin Taylor (an external member of the Financial Policy Committee) earlier this month: see here (pdf). Here is an extract:
At the heart of the private sector board is a contradiction which amounts to a glaring structural weakness.  The directors are supposed both to contribute to the formation of the company’s strategy and to judge those who execute it. As a result, their relation to executive management is at once collaborative and adversarial.  Most of what goes wrong on boards arises from a failure to balance these opposing requirements – often an understandable failure, since they do not sit easily side by side.  Boards have the power of appointing and removing the business leadership, a power which they seem to exercise very frequently, as if afraid it might be taken from them, rather as ramblers zealously hack their way through brambles to preserve Rights of Way.  My own view formed over many decades is that the corporate board should principally play a defensive role; it exists above all to prevent catastrophic outcomes. Good governance, and there is plenty of it, passes largely unnoticed, while a board in the wake of a company failure looks like a collection of idiots. In the financial sector, with which the FPC is principally concerned, it is inescapably clear that most boards in the early part of this century did an absolutely shocking job".

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