Boardroom pay should be linked to performance

One of the world’s top recruitment firms has highlighted the importance of improving corporate governance and strengthening links between boardroom pay and performance.

Korn/Ferry International view that UK boards should be encouraged to follow the lead of many US companies and review their directors’ performance on a regular basis.

Mina Gouran, European head of Board Services for Korn/Ferry said: “The value of reviewing the board is becoming apparent in the US. With increasing demand for accountability in the UK, boards should be following the US example and introducing more formal evaluations. In addition to reviewing the board’s performance as a whole, individual directors’ performance evaluations should also be encouraged.

“Increasingly, new board members will be called upon to take a more critical and independent stance than their predecessors, to better manage the complexities and challenges emerging in listed companies. A willingness to challenge management is increasingly an important quality for board members. Our survey showed that 87 per cent of respondents saw this as the most important attribute for their board members.”

The research, carried out among Fortune-listed US companies, showed that four out of ten respondents said their entire board’s performance was evaluated on a regular basis with 63 per cent believing the process to be effective.

CEOs of Fortune-listed companies are wielding less power than previously and other board members are having a greater say in the determination of committee leadership and composition. Five years ago, Korn/Ferry’s study showed that 57 per cent of respondents said the CEO chose committee chairs and members. This year, only 37 per cent indicated that the CEO continues to wield the same authority with by one third now passing this responsibility to a corporate governance committee and three out of ten opting to do so with the full board.

Three quarters of respondents’ boards now had written guidelines on corporate governance, up from 69 per cent in 2000 and almost two-thirds now have a formal corporate governance committee overseeing board operations.

But the Korn/Ferry research indicates that boards’ ability to handle management succession may be weakening. Only one third of non-executive directors think boards generally handle this responsibility well, compared to 42 per cent in 2000. One in four believe the CEO is “too dominating”. (SP)