Board room re-shuffle at Stagecoach worries corporate governance watchers

30th August 2012

The puffs of muted outrage were predictably swift. Hot on the heels of their losing the joint venture West Coast rail franchise to FirstGroup, a board room re-shuffle at Stagecoach had corporate governance watchers eyebrows twitching.

For the second time, long serving founder and Chief Executive Sir Brian Souter has announced his intention to step back from day to day management of the UK's largest transport group (by market cap.) and hand over the reins to current Finance Director, Martin Griffiths, except Sir Brian has infuriated some by elevating himself to be part-time Chairman.

The Corporate Governance Code revised and reissued in 2010 is quite clear; "the chairman should on appointment meet… independence criteria. A chief executive should not go on to be chairman of the same company".

The Code however, based on the accepted UK precedent of ‘principles' rather than ‘rules' based governance practice, makes it clear that where companies transgress this tenet of best practice, they should consult and explain their actions. The Code thereby acknowledges that a one size fits all approach is not necessarily appropriate, and exceptions may be commercially sensible and in the interests of the company and its shareholders. Stagecoach has followed both the letter and the spirit of this approach by apparently consulting its major investors and explaining its rationale. Retaining the undoubted industry expertise of Sir Brian in the important leadership role of Chairman makes sense as founder, significant shareholder and long serving Chief Executive.

The decision to elevate a CEO to Chairman made by other companies in recent times such as M&S, may be justified, but it reveals inherent flaws in the Corporate Governance Code that are problematic for shareholders who are called upon to hold companies to account when ‘breaches' to the Code are announced.

The Code makes clear the Board must identify the key roles of Chairman, Deputy Chairman and Senior Independent Non-Executive Director (SID), without clarifying their purpose. Historically, the SID was there to reflect the views of shareholders, and act as an investor interlocutor, meanwhile the ill-defined role of Deputy Chairman has increasingly been regarded as there to provide independent ballast between a potential or actual Executive Chairman and the Chief Executive, essentially diluting the concentration of executive authority at the top.

The biggest flaw in our view is the subtle change enacted between the original Cadbury Code and the latest version which states, somewhat cryptically, that although the Chairman should pass the independence test on appointment, thereafter this test is ‘not appropriate. Why should this be? The Code seems to assume that leadership of the Board, under Cadbury a rigorous test of independent minded leadership, is not sustainable hence the unhappy fudge of the current situation where a Chair is deemed to be neither executive nor non-executive over the full term of any incumbency.

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