Board directors to face yearly vote

British companies will have to explain to shareholders if they do not put board members up for re-election every year or if boards do not include enough women under new rules published today. Under the boardroom code, from the Financial Reporting Council, shareholders of Britain's 350 largest companies should scrutinise board members annually, instead of the current three-year period. "Provision for annual election of the chairman and other board members should introduce welcome additional encouragement and discipline to both shareholders and board members in seeking to promote the best possible long-term performance in the intensely competitive environment in which so many UK companies now operate," said Sir David Walker, the former City financier who recently conducted a corporate governance review for the financial services sector. Corporate governance was widely criticised during the credit crunch, as board members failed to foresee the trouble ahead, or to push management to find solutions. Well connected City operators can enjoy positions as non-executive directors on up to £60,000 a year while attending a few meetings and offering advice. They often act on several boards as companies seek their experience and contacts. The FRC also recommended that companies should become more diverse, specifically by offering more seats to women. At present, only 10% of directors in Britain's top 100 companies are women, and 25 of the top firms have no women board members at all. "Traditionally, when appointing, individuals are inclined to look in the mirror, and appoint in their image, rather than look through the window and recognise the diversity of the work environment," said Virginia Bottomley, the former Conservative minister and now chairman of Odgers, a leading recruitment firm. "Above all, were there a greater focus on individuals with a talent management background on the board, or even marketing, communications or legal, undoubtedly, more women would be appointed." The need to have previous boardroom experience to get an appointment also affects the number of women eligible, Bottomley said. Board positions are not usually advertised so few women know about any openings, industry leaders say. "Organisations should be more transparent in their recruitment process, to make more women aware of what's available," said Christine Lawrence, chairman of Women in Banking and Finance. "Some organisations want to go for people with experience, they go to headhunters, who already know of, mainly, men, who have the right experience, and unfortunately there are not enough women on headhunters' recruitment lists that they can approach, so it puts women at a disadvantage. Headhunters could do far more in terms of improving their pipeline of women." The proposals were welcomed by investors but opponents included British Airways, Tesco and Sainsbury's, which argued that continuous changes could bring instability. Richard Lambert, director general of the CBI, said: "We remain concerned that annual re-election may pose problems for larger companies. It could promote a focus on short-term results, make boards less stable and discourage robust challenges in the boardroom." He welcomed the fact that companies outside the FTSE 350 will not be required to follow the guidance. "We are glad that companies outside the FTSE 350 index are exempted from the requirements for annual re-election of directors and external evaluation by consultants," Lambert said."Without the exemption, smaller firms would have been hit by disproportionate costs." Regarding the number of women on boards, the CBI said the best and "most sustainable" way to promote diversity was to make sure appointments were made on merit, selecting from a wide talent pool. Companies should go further and make more efforts to spot talent, Bottomley said. "There are plenty of highly qualified women and individuals from ethnic minorities," she said. "The skill is to know the sources of talent pools where such successful individuals are to be found."