A study of corporate directing - 25 years on

The research by Annie Pye, Professor of Leadership Studies at the University of Exeter Business School, is based on a series of interviews, which first took place in 1988, with directors who lead some of the UK’s largest listed companies, including Lloyds Banking Group, Marks & Spencer, and Prudential. Described by Sir Adrian Cadbury as “ground-breaking”, the research spans a period of significant change for British business, predating the first code of governance practice for UK companies, through to the present global economic crisis.

Over the period studied each major corporate scandal has led to increased regulation; and each cycle of boom and bust has been succeeded by wider, deeper and longer-lasting recessions, Professor Pye says.  “Ever more regulation shows an increasing trust in a system of rules rather than in the people who run companies. If this pattern persists then perhaps the next step is global regulation which my research shows is neither feasible nor desirable.

“In other areas very little has changed – the number of women on boards remains pitifully low and the relationship between Chief Executive and Chairman remains crucial and defines the effectiveness, or otherwise, of boards.”

Key findings from the research:

• Remuneration for senior executives has increased dramatically. In 1987 the average annual salary for a Chief Executive of a UK listed company was £150,000. By 2009 this had risen to £4 million, which one interviewee described as the result of “painting by numbers”. The link between executive pay and performance remains opaque and throws into question the need and use of performance management systems for ‘incentivising’ executives.  While some directors voiced concern about these dramatic increases, they also admitted that it was unlikely to change. Indeed, like most herd-behaviour, it will be slow and hard to change not least because it’s in no one’s interest to change.   

• Judgement is a highly valued attribute amongst board members and given the dynamic complexity of running UK companies today, directors require a strong moral compass to guide their decision making. With the inevitable limits to knowledge and the recent reminder from the Financial Reporting Council that a board “should not necessarily be a comfortable place”, corporate directing is challenging for both individual executives and non-executive directors, as well as for the board collectively.

• The relationship between the Chairman and Chief Executive remains crucial to board culture and conduct, powerfully influencing the extent to which each director can play their part most effectively. While the aim of an effective board is be more than the sum of its parts, this is rarely possible if the Chairman and Chief Executive share a dysfunctional relationship.

• Exemplary amongst this sample population are skilful, influential and motivated people who tend to be good listeners as well as Socratic questioners. They share a huge passion for the companies for which they work and enjoyment of the job.

• The number of female directors remains pitifully low, increasing from 5 percent in 1999 to approximately 12.5 percent of FTSE 100 boards in 2010, despite regulatory reviews and other efforts to increase their presence.

• The number of non-UK nationals on boards has increased steadily, growing from 23 percent in 1999 to approximately 32 percent of contemporary FTSE 100 boards in 2009. Board members also now tend to come predominantly from the private sector – very few have worked in academia or the public sector.

• Boards are generally smaller than they used to be, particularly in banks, and have greater numbers of non-executive directors.  While this brings a broader perspective to board decision making, on occasions it also may lead effectively to two-tier board structures.

• While corporate governance regulation during the 1990s aimed to facilitate openness and transparency, regulation remains a necessary but insufficient cause of effective performance, and also appears increasingly to have a counter-effect of pushing some behaviour backstage, potentially becoming more opaque.

Download a synopsis report of the study (PDF)