Welcome to the third part of our blog series based on The Chartered Governance Institute UK & Ireland podcast Kerry Round took part in recently.
A concern that crops up when companies have been through the IPO process often revolves around boards and current roles. Hypothetically thinking, what would happen if you already have an executive Chair, CEO and CFO that you intend on keeping? Could it cause problems following your IPO?
Kerry addresses the concern.
‘I think it's great news if you have a CEO and a CFO; the executive directors are generally responsible for the management of a company, for the day-to-day responsibilities and for implementing the decisions of the board. Executive directors are company employees and, as such, have a contract of employment. By nature, they're not independent.
Going back to our hypothetical scenario above, the role that will need some careful thought and handling is that of the chair. The Code tells us that ‘the chair should be independent on appointment’ and a non-executive director, not an employee of the company. So, the first issue with retaining an executive chair is that it will trigger a statement of non-compliance in the annual report and accounts. Yes, the Code is voluntary and works on a 'comply or explain' basis, but to get your shareholders to agree, you'll have to draft a persuasive explanation as to why an executive chair works on your board.
Proxy advisors have something to say about the chair's independence. Glass Lewis stated in their 'In-Depth Report: Independent Chair' that ‘shareholders are better served when an independent chair leads the board’. This role, they believe, is better able to oversee the company's executives and set a pro-shareholder agenda without the management conflicts that can exist when a CEO or other executive serves in this role. They say, ‘this, in turn, leads to a more proactive and effective board of directors.’
The ISS also have an opinion on the subject. They've stated that whilst some strongly feel that an independent Chair is essential, others believe that an appropriately empowered lead director can provide sufficient independent leadership. In 2021, ISS UK and Ireland voting guidance stated (for all companies with a premium listing) that an assessment of the independence of the company chair is done on appointment.
So, if your board does have an executive chair (and if I put aside my opinion that an independent chair is in a better position to oversee the management of the board and company governance), then the first thing I'd do is to make sure the role of the chair is clearly defined and includes separation of duties from their executive responsibilities. I'd want a transparent policy that deals with conflicts of interest and ensures they're handled appropriately. And, I'd be keen to see whether there's significant gravitas on the board to challenge the decision-making of an executive chair should any conflicts of interest arise. One thing's for sure, the conversation around whether a company chair should be independent or not won't go away in a hurry!’
About Kerry Round and Round Governance Services
With 15 years of experience as a governance practitioner in listed, quoted and large private organisational structures under her belt, Kerry recognised a better way of doing things. She established Round Governance Services to make governance more accessible and easier to understand. She also wants to move the role of governance into the 21st century and create a business that supports flexible and agile working. Here's their company purpose: ‘as a socially-minded business, our purpose is to practise good governance for ourselves, our clients who trust and depend on us, and the communities who rely on us all. Our tailored and proactive approach to work is fundamental in achieving this.’
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Kerry discusses this subject in more detail in the latest episode of the Engage Governance podcast ‘Understanding IPO governance'.