The Aftermath of Enron: A Corporate Governance Action Plan

Profession:Herbert Smith
 
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As the ripples from the Enron collapse spread ever wider,

what should UK listed companies be doing now in response to the corporate

governance issues that have been raised? The reviews being undertaken by

legislators and regulators in the UK, Europe and the US will eventually no

doubt give rise to regulatory changes covering corporate governance,

accounts and auditors. However, directors of listed companies should not

just be waiting for these changes, they should be considering now what

practical steps can be taken to improve corporate governance in order to

implement best practice and reduce risk. This briefing looks at the key

corporate governance issues that have arisen out of the collapse of Enron

and sets out the range of matters that we think boards should be

reviewing.

The composition of the Board and Non-Executive

Directors

The Combined Code makes it clear that the board should have a good

balance of executive and non-executive directors. The role of

non-executive director in particular has come under fierce scrutiny as a

result of the collapse of Enron. Much has been written about the role and

responsibilities that non-executives should take on and how their role and

independence can be enhanced. Whether this results in a consensus for

change remains to be seen - there have been many contradictory proposals

(ranging from giving much more responsibility to non-executives to

abolishing the non-executive altogether). What boards can and should do

at this stage is review the basics of the company's board structure:

Is the balance and division of responsibility at board level clear

and appropriate?

Is the balance between non-executives and executives right?

Does the board have a sufficient number of fully independent

non-executive directors? The focus is shifting from the technical

concept of independence to the need for non-executives to also be truly

independent in the sense of a willingness to make contrary views known

and to stand up to management.

Are the skills and experience of the non-executive directors right

for the company's business?

Has a senior independent non-executive director been nominated and

is that person a strong force within the board who takes a lead on

issues of concern to the non-executive directors?

Are the right matters reserved to the whole board having regard to

the company's business and size?

Terms of Appointment of Non-executive

Directors

The standard terms of appointment for non-executive directors should be

reviewed:

Do these comply with accepted best practice, for example in relation

to having a fixed term of appointment, and do they properly set out the

duties of the director?

Has the board agreed with each non-executive director how much time

he or she should be devoting to the company's affairs? Is the board

satisfied that the time is set at a sufficient level and how does it

monitor this?

Remuneration of non-executive

directors

The remuneration of non-executive directors is another topic in the

spotlight. Some argue that if non-executive directors are expected to take

on more responsibility and importance, they should be paid a lot more.

Others argue that in order to be truly independent non-executives must not

be reliant on any particular level of remuneration from a company.

Companies should not just increase the remuneration of the

non-executive directors without considering what additional contribution

needs to be made by them in order to justify that increase. Instead, the

board should review the...

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