Few thought to question the group's "management incentive scheme", which let managers keep the profits or lose the losses from the hotels they ran in return for an up-front annual fee. The group also boosted reported profits by treating repairs as upgrades, so avoiding recording them as costs, but they’d been doing these sort of things for years, and profits went from strength to strength, so why worry?
The executive directors paid themselves salary increases and bonuses based on these inflated results without bothering to tell the other directors. Nobody worried. They trusted Bairstow completely.
Later, that was a concern. Entrepreneurs can dislike people who challenge them or question their insights and hunches. And they have a tendency to cut corners, ride roughshod over propriety and break rules. So they need other directors who are able, independent and strong enough to point out their shortcomings and insist that they are addressed - something Bairstow lacked.
These are not my words, but from the 10-year Department of Trade and Industry investigation into Queens Moat Houses plc’s dramatic collapse in 1993.
Assets had been massively overstated and the losses were at the time the second largest ever reported by a UK company. Bairstow dominated the business. His fellow executives blindly followed; their jobs depended on it. The non-executives were feeble too.
So what could be done to prevent this happening again? The answer was to build in better checks and balances. Separate executive and non-executive roles, beef up non-executive powers, spell out what they’re supposed to be doing and make them more accountable. That, broadly speaking, is what the various reports now gathered together in The UK Corporate Governance Code aimed to do.
Executive directors manage the company on a day-to-day basis. Non-executives are supposed to ensure they do their job properly. They are the people that shareholders rely on to get the strategy right and make the best use of resources, to pay according to company performance and make sure standards of conduct are followed. If the strategy is off key (Morrison, Tesco), if speculative deals aren’t explained (Sports Direct), or if the growth demanded can only be achieved unethically in some cultures (allegations at BAE, Rolls-Royce and GlaxoSmithKline), non-executives are as much to blame as the chief executive for letting things get out of hand.
It’s not easy. Executive directors are full-time employees. They run the show and hold all the aces. Non-executives work part-time, paid fees for maybe 20 days a year. They’re supposed to hold executives to account, yet they depend on them to tell them what’s really going on in the company. So there’s a natural division.
A fine balance is needed, for as Queens Moat illustrated, a united board risks complacency, particularly when there’s a dominant chief executive. Executives have to take risks to get the sort of results demanded of them; but risks can become excesses. Non-executives who fail to challenge management aren’t doing their job properly.
But go too far and over-diligence can harden into a 'them and us' mentality. Research by PARC (The Performance And Reward Centre) suggests that executives can close ranks, become defensive and limit what they say; non-executives wonder what’s being hidden so probe more deeply. Short-term issues come to dominate; over-zealous non-executives concentrate on internal corporate governance: executives resent their interference and dismiss their advice too readily. The cycle that sets in with a divided board hampers company performance.
All this takes place behind closed doors, so what can indicate to shareholders - who are supposed to hold them to account - how well non-executives are are functioning?
It seems that 'high-impact' non-executives put in 40 days a year, twice the norm. The extra time is spent seeing for themselves the company’s strong and weak points by visiting clients and company sites. This insight makes them more credible to executives. Non-executives are then more willing to support executives through tough periods and when resources need shifting to new areas. They spend longer discussing strategy; and they take time to follow up to see how it’s working out, knowing that this helps them to understand performance better.
And that’s where they make a difference. Non-executives can find themselves agonising over pay structures. High impact non-executives stay focused on what makes long-term performance. They know what success will look like and the linkage to pay that follows. This, and in keeping executives on track, is where they prove their true worth.
