The Aftermath of Enron: A Corporate Governance Action Plan
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
The composition of the Board and Non-Executive
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
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
The standard terms of appointment for non-executive directors should be
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
Remuneration of non-executive
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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