Corporate scandals demand boardroom shake-up

They are trained for men’s jobs on RAF stations at home and abroad: any sort of job except flying or navigating a plane.” These words about the Women’s Royal Air Force from a 1960 Rank Organisation newsreel sound absurd today but we should not be too smug. Prejudice of many different kinds still exists in the workplace, where most leading organisations are run by people from identical backgrounds.

The statistics are revealing. One in four directors of FTSE 100 companies is a woman and progress has stalled. Fewer than one in 50 directors of such companies comes from ethnic minorities. Diversity — the inclusion of people with varied cultural backgrounds and life experience — is almost absent.

This was something Theresa May, the British prime minister, implied when she described boards as coming from “narrow social and professional circles”. Crowding out alternative voices in this way risks groupthink, inadequate challenge and poor corporate governance, of which this week’s whistleblowing saga at Barclays is the latest example.

In the past few years, scandal has affected many businesses in the FTSE 100, such as BP, BAE Systems, GlaxoSmithKline, HSBC, Tesco and Rolls-Royce, and elsewhere such as Toshiba, Volkswagen and Wells Fargo.

The problem is not country or industry-specific. Boards have failed to spot such dubious practices as environmental neglect, money laundering, sanctions busting, bribery, corruption and false accounting, while executive pay has been stretched to socially offensive levels.

Inadequate scrutiny from boards that take false comfort from familiar faces is behind much of this but the corporate elite resists change.

When Mrs May said: “We’re going to have not just consumers represented on company boards, but workers as well,” she hit a brick wall.

As Richard Lambert, a former editor of the Financial Times and once director-general of the CBI, the British employers’ organisation, wrote: “In public business leaders tend to be reasonably polite about the proposal but in private a number of them are seething. At a time when there are so many issues to be tackled, they say that this feels like a wasteful distraction.”

It was a revealing clue about attitudes to corporate governance which in some quarters is not to be confused with real work — of course, in a responsible business they should be one and the same.

A subsequent British government report expressed concerns that worker directors would lead to greater conflict in board discussion, slower decisions and “the risk of decision-making shifting away from the boardroom and into less formal channels”. It was an insight into the kind of boardroom thinking that seeks any excuse to avoid challenge from those with a different perspective. The message was that “we want to continue with things our way and if you make us have these people on our boards, we will simply have the real discussion behind their backs”.

But it is not just directors who are seething; so too are many workers. Disaffection shows in low levels of trust in business, an epidemic of stress in the workplace, anger at falling real wages in contrast to bosses’ pay and unexpected populist votes.

Britain has a much praised system of corporate governance, often described as world class. It does indeed look fine on paper, but when important oversight bodies such as audit and remuneration committees are formed of like-minded people unlikely to challenge each other’s beliefs, the system falls down.

To live up to that world-class billing, governance in practice needs to match governance in theory and for that to happen it needs to open up to diverse voices.

The corporate elite was far too quick to shout down the idea of worker directors, just as it has been too slow to welcome women and minority groups. In the UK, employees are accepted on to pension trustee boards, where they are often highly commended for their ability to ask the right question and to identify the very heart of a matter. Boards can learn from that and from the limited experience of adding female directors, who have brought a different point of view into the boardroom.

Shareholders have a role to play in encouraging robust challenge on matters such as executive pay. Headhunters can help diversity by looking outside the circle of similar men and women it rotates around the upper echelons of business. But the real responsibility for change lies within the boardroom. There is no need to be so afraid and there is an opportunity for redemption.

In stopping short of requiring mandatory employee representation, the British government left open the door for individual companies to appoint worker directors. Let us hope that more than a few enlightened boards walk through that door and invite male and female employees, as well as people from minority groups and other walks of life, to join them.

That would be a sign that capitalism is serious about reforming itself to operate in the wider interest, and would banish the idea that those outside the charmed circle can never be trusted to fly the aircraft.

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