The key to succession
Companies should have a clear plan in place when recruiting board members, says Susan Thomas
Marks & Spencer's chief, Sir Stuart Rose faced down renewed criticism of his executive chairman role at the company's AGM in July this year.
When Sir Stuart was appointed in 2004, he said he would leave in 2007. Having no internal successors for the chief executive role, M&S decided to promote him rather than risk an external candidate to allow more time to find and coach his successor.
Sir Stuart took on the executive chairman role, adding the position of chairman to his then role of chief executive, for a three-year term in 2008, sparking a clash with shareholders and much media comment.
Although he is seen as the retailer's saviour, appointing Sir Stuart to the double role of 'executive chairman' amounted to a slap in the face of the Financial Reporting Council and its 'Combined code on corporate governance' which applies to UK listed companies.
The code aims to achieve 'prudent and effective controls' at the head of companies. Among its principles are open and rigorous procedures for the appointment of company directors and the strict separation between the role of chairman and chief executive, combined nonetheless by M&S into one 'executive chairman' role.
Despite seeing off shareholder concerns in 2008, criticism resurged when the Local Authority Pension Fund Forum (LAPFF), an investor thought to own in the region of two to five per cent of M&S, proposed a special motion to split the role of executive chairman by 2010, a year earlier than Sir Stuart has indicated he will retire. The motion stated: 'A poorly governed company introduces a greater degree of uncertainty to its business model.'
As the BBC's business editor Robert Peston put it: 'To coin that awful cliché, this isn't just any mess, it's a very special and very characteristic M&S corporate-governance mess.'
In the event, the special motion was backed by 40 per cent of the company's shareholders; a significant protest vote, but not enough for the motion to be passed.
Splitting the roles
Executive directors manage the day-to-day operational running of the business, while non-executive directors play a strategic role which includes scrutinising the performance of the executive management team. Company chairmen, who are ultimately responsible for a board's overall effectiveness, should maintain a balance between the two elements of the board, while also enabling power to be balanced between chairman and chief executive '“ rather than heavily concentrated in one individual.
The LAPFF argued that M&S's decision to allow Sir Stuart to take the combined role of chief executive and chairman results in a significant governance risk. M&S sought to deflect the criticism, assuring shareholders that it agreed on eventually splitting the roles and only disagreed on the timetable for doing so. It also pointed to other measures it had taken as 'balancing controls to mitigate the concerns that such a structure might otherwise engender'.
Penalties
The consequences of such a flagrant breach of the code are minimal '“ there is no financial penalty. The code simply requires listed companies either to comply or to explain why they have decided not to in the company's financial reports. M&S has therefore acted within the letter, if not the spirit, of the code. Shareholder backlash and adverse PR consequences, however, could be more significant than a financial penalty if a new chairman is not appointed before controversy breaks out again.
Critics argue that the code's 'comply or explain' regime is designed to allow for emergency short-term situations where time is needed before an appointment can be made. It is unclear how long M&S's explanation that it needs to retain the same leadership and time to source a new CEO will wash: its shareholders may have expected the board to have planned better for Sir Stuart's succession, a problem which it appears remains unresolved.
SMEs
The code applies only to UK listed companies, and many unlisted businesses do combine the chairman and chief executive roles. Nonetheless, the principles of the code translate to the smaller business, many of which are increasingly opting to appoint non-executive chairmen to bring expertise and guidance to the board. And introducing such a role from an early stage is sensible for businesses hoping or preparing for listing.