Counting the Cost

I was recently at the inaugural screening of the film ‘Counting the Cost’ , a film written and produced by Duncan Wiggetts for DLA Piper . It portrays the actions of the non-executive directors as they cope with undetected fraudulent conduct of some members of the management team. It’s not a true story, but given that the film is so well written (and acted) it could easily be mistaken for real life. The film looks at the challenges around preventing and detecting fraud and the importance of effective controls.

An esteemed panel were invited to provide their feedback and comments to a mixed audience of some 100 Lawyers, Accountants and Non-execs. Introduced by Graham Durgan of the Non Executive Directors Association (NEDA) and moderated by Duncan Wiggets and Neil Gerrard from DLA Piper, the panel included the likes of Donald Brydon , Chairman of Smiths Group and Royal Mail and Robert Wardle, a former Director of the Serious Fraud Office.

The event provided a lively debate, particularly when the post mortem revealed charges of dishonesty, fraud, conspiracy to defraud, fraudulent trading and bribery against the CFO.

Non-executives today are expected to act with a high degree of independence and have the skills and capability to manage the interests of stakeholders and shareholders alike. This has recently been highlighted in the case of Torex Retail, where Edwin Dayan, former Chief Technology Officer and Christopher Ford, former Finance Director of subsidiary Xn Checkout Limited, were charged by the Serious Fraud Office with conspiracy to defraud, false accounting and misleading an auditor.

These are the challenges we face in an increasingly regulated market requiring greater privilege and disclosure.

Non-execs – pain without the gain?

One of the biggest questions to emerge from the current banking crisis is what were the non executive directors doing while top banking executives were running their companies into the ground. Indeed this has been a question asked after a number of corporate failures in the past 10 years, such as Enron and Worldcom.

Some of the arguments advanced as to why these non execs were so ineffective in preventing what occurred include lack of accountability, insufficient knowledge of the businesses they were directors of, the fact that they were not selected from a wide enough pool of candidates, and the implication that their high levels of remuneration had compromised their independence.

This view on payment levels was expressed forcefully in last Sunday’s Mail on Sunday. And yet, when one takes into account the risks associated with being a director, the time and effort required to do the job in a way that discharges the legal duties of a director as well as satisfies the requirements of external stakeholders, and the knowledge and experience required to carry out the role properly, the question moves towards not whether non-execs are paid too much but are they actually paid enough to ensure that the right calibre of individual undertakes the role.

That is not to say that independence argument does not have merit, because it clearly does, but surely one of the reasons that a non executive is brought on board is for their ability to think and act independently, something that can obviously be established during the selection process. It is also difficult to establish what level of remuneration is excessive, in that £30,000 for some individuals would be a considerable sum whilst for others it would be pocket money.

We at Orchard have always been big fans of non-execs for all companies, and have had our own from the start. Good non-execs add considerable value bringing experience and knowledge to the party as well as providing a vital sanity check for executive directors and managers, and standing up for the interests of outside shareholders. One of the reasons that we have a strong relationship with the Non Executive Directors Association (NEDA) is the desire to promote good corporate governance through a strong non executive presence on company boards.

We all want knowledgeable, experienced, independent, diverse non executive directors in big and small companies who are willing to stand up to and challenge executive managers where necessary. We also expect these non execs to make available the necessary time to undertake their role, and to take full director risk and responsibilities when carrying out their role. We therefore cannot be surprised when they start to demand remuneration that reflects their skills, their time and the risks that they take.

Antony Doggwiler
ajd@orchardgrowth.com