Boards need watchdogs not lapdogs

WE HAVE not seen the end of the Enron affair. The spectacular downfall of one of America's biggest companies has made big waves, with global ripple effects. The auditors have taken much flak, but I hope we will also learn more about the role played by the board.

Independent directors are supposed to keep an eye on the management and, if necessary, fire the chief executive or take other appropriate action. They are on audit committees and are entitled to demand whatever information they want. It should not be hard to spot signs of serious trouble.

This is by no means the first time the board of a public company appears to have failed shareholders. In many of the major corporate disasters of recent years, the companies' problems were not made known to non-executive directors until shortly before, and sometimes after, the event. Bad news was concealed from them and they were too timid, too complacent or too dominated by self-interest to ask the right questions.

I do not know exactly what went on at Enron. I do know, however, that something similar has happened in Britain. Executives usually get the blame when things go wrong, but non-executives must share responsibility. The law is quite clear on this. It is not enough to say that they did not know what was going on. They should have done their best to find out.

Non-executives sometimes have personal, business or consultancy relationships with the companies on whose boards they serve. It can easily create a conflict of interest. Shareholders should therefore be told of any such arrangements. Many people also have multiple directorships, which can lead to confusion. There is a true story of a chap, now dead, who served on 14 boards. He once turned up late at one of them and held forth at great length before discovering that he was at the wrong meeting.

A recent survey by Top Pay Research, a remuneration consultancy, found that the average number of directorships is six in FTSE companies. Some people may well handle so many different assignments, but in all too many cases non-executives do not have sufficient time to make an effective contribution. It is difficult to do so if one is only devoting a day a month to the job.

Many investors feel reassured by the presence of illustrious names, often the main reason they have been appointed. They can be very good, but if they have too many commitments they may be simply going through the motions.

Some City institutions believe that most non-executive directors are useless. This seems too harsh, but if they feel that someone is not up to the task they have the clout to demand his or her resignation.

I also consider it essential that directors should be chosen after a careful search by headhunters, rather than by the old boy network. Chairmen should not be allowed to pack their boards with compliant chums.

Non-executives have an obligation to the company, not to any individual, and should be reminded they are accountable to shareholders.

They must be able to stand up to management and blow the whistle if they are worried about the way the firm is run. They are watchdogs, not lapdogs.