AAfter a number of serious failures of governance (that is, how they are managed at the highest level), companies in Britain and elsewhere are under pressure from governments, regulators, central banks and auditors to improve their performance. Governments, regulators, central banks and auditors have all been in the frame, but when it comes to the crunch, it is the board of directors who are responsible for the performance of their companies. The financial crisis stimulated a debate about the role and purpose of the company and a heightened scrutiny of the conduct of directors.
BThe knock-on effect of this scrutiny has been to make the governance of companies in general an issue of intense public interest. Company boards have been subject to intense public and regulatory criticism for failing to prevent corporate collapse, excessive executive remuneration, and lack of diversity among board members. As a result, boards must become more transparent, more professional and more representative of the broader public if they are to regain public trust.
COften, board business is devolved to committees in order to cope with the workload, which may be more manageable, but it can lead to a risk that not all directors take part in solving major problems. If key decisions are made in committees, the board as a whole is less involved in fully addressing issues, and part-time non-executive directors may feel sidelined from crucial corporate decisions.
DA radical solution, which may work for some very large companies whose businesses are extensive and complex, is the two-tier board. A supervisory board consisting entirely of non-executive directors oversees the management board, which is made up of the chief executive and other full-time executive directors. This structure, common in Germany and the Netherlands, provides a clear separation between day-to-day management and long-term strategic oversight.
EOne of the main criticisms of boards and their directors is that they do not focus sufficiently on longer-term sustainability, but instead concentrate too much on short-term financial performance. This short-termism is often encouraged by shareholders who want rapid returns on their investments. Directors must develop a broader horizon and take into account the interests of a wider range of stakeholders, including employees, customers, suppliers and the wider community.
FCompensation for chief executives has become a combat zone where pitched battles between investors, boards and the public are fought out. In many companies, chief executives receive packages that bear little relation to corporate performance. Shareholders need to use their voting muscle in the area of pay to ensure that executive rewards reflect genuine, long-term value creation rather than market distortions.
GThe financial crisis stimulated a debate about the role and purpose of the company and a heightened scrutiny of the conduct of directors. Boards of companies in all sectors will need to widen their horizons and recognise that they have a broader responsibility than simply maximizing immediate financial returns for shareholders. Fundamental reforms across company strategy, governance structures, and remuneration policies are vital to rebuilding trust in corporate leadership.
Reading Passage 3 has seven paragraphs, A–G. Choose the correct heading for each paragraph from the list of headings below. Choose the correct number, i–viii.
List of Headings:
i Disputes over financial arrangements regarding senior managers
ii The impact on companies of being subjected to close examination
iii The possible need for fundamental change in every area of business
iv Many external bodies being held responsible for problems
v The falling number of board members with broad enough experience
vi A risk that not all directors take part in solving major problems
vii Boards not looking far enough ahead
viii A proposal to change the way the board operates
Do the following statements agree with the claims of the writer in Reading Passage 3? Choose YES, NO, or NOT GIVEN.
34. Close scrutiny of the behaviour of boards has increased since the economic downturn.
35. Banks have been mismanaged to a greater extent than other businesses.
36. Board meetings normally continue for as long as necessary to debate matters in full.
37. Using a committee structure would ensure that board members are fully informed about significant issues.
Complete the sentences below. Choose ONE WORD ONLY from the passage for each answer.
• Before 2008, non-executive directors were at a disadvantage because of their lack of .
• Boards tend to place too much emphasis on considerations that are only .
• The author takes the view that should do more to alter the amount of compensation that chief executives receive.