House of Lords: Domestic Committees

Earl of Kinnoull Excerpts

Monday 9th May 2016 Lords Chamber

[The Earl of Kinnoull (CB)]

My Lords, it is a great pleasure to follow the noble Baroness, Lady Doocey. It is the sign of a good debate when one’s speaking notes are a morass of changes and notes, because everyone has made some good points already. I, too, congratulate warmly the noble Baroness, Lady Shephard, and her whole committee, on what I found a very clear and brief report that was full of wisdom.

In my 25 years at Hiscox, which is a FTSE 250 company, I spent, inter alia, a decent period as the group company secretary. Hiscox at the time operated in more than 10 countries, with regulated entities in all those countries and with independent non-executive directors, both at the senior board level and on a number of operating levels. I can assure noble Lords that the organigram of the group was at least as complicated as that of our committee structure here in the House. Things similar to that marvellous story about the printing ink probably happened—I have a nasty feeling that I might have been part of that story as well, but that is for another time. On top of that, the senior independent director at the time was also the dean of the Cass Business School, so we were doing things properly. I therefore thought it would be helpful to the House to look at the report with the eyes of FTSE corporate governance. I accept entirely what the noble Baroness, Lady Shephard, said. It is only persuasive authority and we cannot follow corporate governance slavishly, but I thought it would be instructive. I came up with four points.

The first point is to do with evolution, which a number of noble Lords have mentioned. I note that the corporate governance code in Britain started with the Cadbury committee in 1992, and the current corporate governance code, which came into force in September 2014, is the fifth iteration. That just goes to show how we should view this as an iterative step on our own journey to corporate governance over what will be many years.

My second point is to do with the number of independent non-executive directors that the senior committee will have. I feel that two is not enough, for three reasons. First, we will need a balance of skills on this committee; we need to pick carefully, and not all the skills needed will necessarily easily be found in only two people. Secondly—and speaking as someone who is a non-executive when occasionally there are not many other non-executives around—you need to have at least two non-executives along to each meeting. There is a danger that there would be only one because someone could not make it. Thirdly, non-executives take a very long time to train up. At Hiscox we felt that it took about two years for a non-executive to understand the entity, and I dare say that it would take at least that here. Accordingly, our experience bank would be pretty overdrawn if we lost either of the non-executives at any one time. Therefore I recommend that that number is increased to three or four.

My third point concerns board evaluation. This process was coming in as I was the company secretary, and I was initially quite a sceptic. However, I am now a comprehensive convert, and I believe that board evaluation would be extremely valuable on at least the senior committee and a number of the other committees as well. The second main principle of the UK Corporate Governance Code of September 2014 is effectiveness. It says:

“The board should undertake a formal and rigorous annual evaluation of its own performance and that of its committees and individual directors”.

That is a very good way of attempting to deal with known problems or allowing unknown problems to surface. I am not necessarily in favour of a huge, very time-consuming exercise. It is quite possible to do such an evaluation on an internal basis, with each member of a committee spending only an hour or so on it. Obviously the chairman would have to spend more time on it, as would someone whom I call the governance secretary, about which more in a second.

Paragraph 48 of the report worried me. It says:

“We conclude that relationships between members and staff could be improved”.

That is a Gypsy’s warning, and a board evaluation process is one part of trying to deal with that. I strongly urge that a board evaluation process is considered.

My final point concerns the creation of a governance secretary. The governance bit of a company secretary’s work is only part of the role but it is very important. To me, it was the most interesting part. There are a number of things that the governance secretary would have to do. First, for instance, there would need to be an induction programme for every member to find out about the committee, even if it involved only providing some documents. Secondly, there would need to be some sort of search process for replacements on the committee. Thirdly, there is the board evaluation, which I have just mentioned. So such a person would be needed for a number of reasons. He or she would also be needed as a “go to” person. If the chairman had a question about governance, he would need to ask someone for help. The same would go for any of the members of the committees, and indeed for anybody who was interested in the work of the committees from a governance point of view. I think that it is a part-time role—I am sure that it could be folded into the work of the Clerk of the Parliaments’ busy staff—but it would be greatly to the benefit of governance improvement.

All those points notwithstanding, on our iterative road of evolution, I think that the report is truly excellent and I hope that the changes it seeks will be implemented rapidly.