Boardroom Secrecy ? how far should it go?

Friday, 24th November 2017 14:01 - by Eric Chalker

Xavier Rolet, CEO of the London Stock Exchange, is leaving under circumstances which are being challenged by a major investor.  It appears that he is bound by a non-disclosure agreement not to explain the reasons for his unexpectedly early retirement.  Why should investors be prevented from having this information?

   This is a subject of interest to all serious investors, not just those who are members (which I am not) in London Stock Exchange Group plc.  Here, it is the principal executive director who is leaving, which is one reason why the matter has become prominent, but there are many other situations where shareholders might wonder why a director is departing and want an explanation.  It is natural to suppose there has been some disagreement about a company matter and want to know why.  Is this not information that shareholders should be given, just like any other information potentially affecting the company’s prospects?

Transparency is called for

   The Financial Reporting Council (FRC) will soon be consulting on potential revisions to the Corporate Governance Code.  As one of the FRC’s objectives is “to promote transparency”, the information given to company members when a director leaves should surely be one of the matters to be covered by the Code, but at present it isn’t. 

   The Companies Act makes special provision for dismissal and resignation of company auditors.  In the case of dismissal, this is to ensure that the auditor has certain rights, including the right to make representations to the company’s members.  In the case of resignation, the auditor must tell the company’s members the circumstances, unless the auditor “considers there are no circumstances in connection with his ceasing to hold office that need to be brought to the attention of members or creditors of the company.”  This is a weak requirement, as I have personally experienced (in an unlisted company), because there are circumstances in which an auditor can have its arm twisted to stand down and yet stay silent, but at least it has the legal right to speak up.

   The Act gives similar rights of formal protest to a director who is threatened by a resolution to remove him or her from office, but it places no requirement on a resigning director to explain to the members why.  In reality, though, a director who is leaving office mid-term without an obvious personal reason, such as serious ill-health, will be doing so not because of a members’ resolution but because the other board members have requested or demanded it.  A provision may be built into the company’s articles of association (its rules) for a letter, signed by all the other directors, which effectively acts as a dismissal notice.  In other cases, as I have been made aware, directors may be obliged at the time of first appointment to sign an undated letter of resignation, to be ‘cashed in’ by the chairman whenever he wants.

Shareholders’ right to know

   Of course, a director’s behaviour in the boardroom may be so atrocious that no-one wants to sit at the same table, but short of a mental collapse requiring medical treatment it is difficult to imagine why this should only become evident after appointment and even more likely after time has passed.  Common sense tells us that when board members want to get rid of a member, this is likely to be led by the chairman, probably to remove someone seen as an obstacle to what the chairman or the CEO wants to do.  In the course of managing a business this would hardly be a surprising development, but in a publicly quoted company dissent on an important issue should not simply be brushed away without explanation.

   A main-listed company in which I was, until recently, a long term investor, saw over time the unexplained departure of three directors.  One of these was announced only by RNS at 07.00 on the morning of an AGM set for 10.00 and although the director was present at the AGM, even had a question passed to him by the chief executive, no-one who knew of it mentioned his resignation, he wasn’t thanked for his past service and members were left none-the-wiser.  At a previous AGM, when the chairman was asked why a non-executive director had resigned during the year, members were told nothing could be said because of a confidentiality agreement.   This company is Oxford BioMedica plc, a twenty-year-old company which has yet to make a profit.

   One has to ask oneself why non-disclosure agreements are permitted when an elected director leaves a board.  Normal terms of contract should prevent trade secrets being revealed, but to go further smacks of the ‘compromise agreements’ used to bind whistle blowers to silence, when they are bought off to shield the colleagues they leave behind.  But if one thinks of all the companies which fail, or lose significant value because of wrong policies pursued, or where corrupt practices have been found, it must be in the interest of all investors to be made aware of this.  The practice of not explaining director resignations is itself a wrong policy and potentially corrupt.

   When differing opinions on the conduct of business or the best strategy cause a resignation, forced or otherwise, shareholders should be entitled to know the facts.  There should be no shame in revealing that the company had options, one or more directors was unable to support the choice made and, voluntarily or otherwise, left the board.  Investors rely upon boardroom discussions being vigorous, questioning and challenging.  If directors are cowed for fear of dismissal and reluctant to voice their doubts about the direction being taken, value and opportunities might well be lost. 

   It is fundamental to good corporate governance that non-executive directors (NEDs) must be ready to question and challenge the executives.  History surely shows that we have not had enough of this, so the position of NEDs should be strengthened.  This is something that should be addressed when the Corporate Governance Code is reviewed.

Eric Chalker, UK Shareholders’ Association Policy Co-ordinator & Director, 2012-2016

The Writer's views are their own, not a representation of London South East's. No advice is inferred or given. If you require financial advice, please seek an Independent Financial Adviser.