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Board Governance: Bonuses, Culture and Diversity

Posted on 26 October 2016

On October 19 the FT reported that a poll they had conducted with members of the FT City Network debating forum (comprised of 60 company bosses and policymakers) showed that "a clear majority spoke in favour of employee representation on boards, undermining the belief that big business is hostile to the idea". It was earlier in the month that Prime Minister Theresa May made proposals for staff representation on boards, stating at the Conservative Party conference “Too often the people who are supposed to hold big business accountable are drawn from the same, narrow social and professional circles as the executive team. Too often the scrutiny they provide is not good enough.

In the latest series of Mishcon Thinks, we take a look at Board Governance and the myriad issues that Boards have to contend with today. In this film, Board Governance: Bonuses, Culture and Diversity, Employment Partner Greg Campbell advocates for broader representation on boards, suggesting that diversity is not just about gender or race but also about ensuring there is room for "people from different parts of the business and people with different skill sets so that [there] is a properly holistic view of where the business sits."

Alongside the question of diversity, Greg also delves into the thorny issues of bonuses and workplace culture – as well as the interface between the two: "You cannot have good culture around bonuses if the board are not leading by example."

Mishcon Thinks
Board Governance: Bonuses, Culture and Diversity

Greg Campbell, you’re a partner in the Employment Department.  Let’s talk post the financial crash in terms of bonuses and the regulatory regime.  How would you describe it now?

Greg Campbell
Partner, Employment, Mishcon de Reya

Well I think one of the things that the regulators decided very quickly after the 2008 crash was that bonuses had played a significant part in leading to the risky behaviours that, in part, caused the crash and so to effect that bonus schemes were changed to make sure that they were paid in stock thus tying the interests of the individual bankers to the bank rather than themselves and also deferred over a period of time so you didn’t have a situation where a short-term risky bet delivered a great return in one year for the banker who could then run away whilst leaving the bank hobbled years into the future.    

How important is it then for Boards to set the tone and, if you like, set the standard in terms of bonuses? 

Greg Campbell
Partner, Employment, Mishcon de Reya

Well, what I think you will find in most organisations, culture is a two-way street, it comes from the top and the bottom.  You cannot have good culture around bonuses if the Board are not leading by example.  I think you will often see that the Chief Exec will inevitably defer their bonus if something significant has happened.  We’ve seen it with RBS over a number of years that the senior executives accept their responsibility.  It then gives them the opportunity to pass that down to the next rung of executives and say ‘We all share in the good times, we all have to share in the bad times’.

How much responsibility then should boards take, not just terms in setting the tone and setting the example for bonuses and remuneration, but also in terms of affecting cultural change?    

Greg Campbell
Partner, Employment, Mishcon de Reya

I think within the financial services sector it’s absolutely critical, it’s one of the things that Regulators particularly focus on; they will test the culture of the bank because they feel it’s a really good measure of risk.  Outside the financial services sector it’s less tightly controlled, I think what we see is there are some Boards that do a very good job and there are other Boards that have a narrower focus, perhaps purely on profitability, and I think what we are seeing at the moment from shareholders and the Government is an attempt to use naming and shaming of those Boards to get them into, what we would see as, better cultural positions.    

Do you think that will actually put the right pressure on Boards, that sort of naming and shaming culture? 

Greg Campbell
Partner, Employment, Mishcon de Reya

It’s an interesting question, we haven’t seen it as yet, it is something that the government very much believes in rather than tight regulation.  Most organisations feel that there is a distinct value to their brand.  If you become the bad face of any particular sector it actually has a hard economic cost.

Are Boards equipped to actually judge the right cultural balance or should it be more the regulatory bodies that make those decisions and choices? 

Greg Campbell
Partner, Employment, Mishcon de Reya

I think it has to be the Board.  I don’t think there is a one size fits all approach.  Every organisation is different, every organisation fits within a different sector and faces onto different clients.  I don’t think you can say this is the way in which an organisation should present itself.  What I think the UK has done successfully is to identify broad principles by which we expect to see people operate but leave the detailed implementation to the people on the ground who best understand the business. 

Is there a conflict though, still and always will be, between making money, between profit, and changing the culture?

Greg Campbell
Partner, Employment, Mishcon de Reya

Definitely.  It’s, that tension is unavoidable and it’s something that just needs to be managed.  I think what you would say of a Board is their job is to recognise the tension, make sure that it is on the table and discussed openly so that the balance is correct because within our capitalist system, without profit you can’t do anything, you have to be a profitable business to stay in business and thus effect the social changes and be a good corporate citizen, so profit is at the heart of what we do. 

Right, so the mix of the Board would be important then in terms of where the emphasis would lie?  Profit, yes to start with, but then disseminating to other, other things. 

Greg Campbell
Partner, Employment, Mishcon de Reya

I think the mix of Board, one of the things that we talk about a lot now is Board diversity, and that’s not just in terms of male and female diversity although that has been a particular focus. Particularly with the Davies Report looking to increase female members on Boards.  When we say diversity what I think we should be talking in a much broader sense, people from all parts of the business, people with different skill sets so that you can get a properly holistic view of where the business sits. 

And is that changing already, with Boards?

Greg Campbell
Partner, Employment, Mishcon de Reya

It’s changing very slowly.  I think one of the major challenges that you would put to the increased number of women on Boards is that they have been disproportionately in non-executive roles.  I think that what we would like to see over the coming years, and it will be years, this is a social change as much as anything else, is women in a broad range of executive roles but also ethnic minorities represented across Boards. 

So in terms of employment, the Board members themselves have to be conscious of the decisions they make when recruiting new members to the Board?

Greg Campbell

Partner, Employment, Mishcon de Reya

Absolutely.  One of the things that a good Board does is that it really tests itself when it is considering who should join the Board and one thing that I think we are all becoming much more aware of is the issue of unconscious bias so the tradition of a Board of white, middle-aged men, with the same background, same schooling, creates a single viewpoint and group think, and that’s very dangerous, and one of the challenges to Boards in their recruitment process is to get past those unconscious biases, which we all have, we all prefer people who are like ourselves. So challenging that and saying what does the business need and then recruiting to that need, not to your instincts which are not safe.

Greg Campbell, thank you.

Greg Campbell

Partner, Employment, Mishcon de Reya

Thank you.

Mishcon de Reya

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