In Your Face

The Implications of the Higgs and Smith Reports

The publication of the Higgs and Smith reports, in response to the major corporate failures of 2001/2002, will add to the responsibilities of both executive and non-executive directors of companies; in relation to corporate governance issues.

A number of the key points include, but are not limited to, the following:

 The audit committee should consist of at least three people, all being independent non-executive directors.

 Fifty percent of the Board will have to be independent non-executives.

 At least one member of the audit committee should have relevant financial/audit experience. It is further desirable that this member have a professional qualification, from one of the professional accounting bodies.

 The key role of the audit committee is to monitor the effectiveness of the company’s internal audit function and to review the company’s internal financial control and risk management system.

 Another key role of the audit committee is to monitor the integrity of the financial statements and significant financial judgements.

 A senior independent non-executive should accompany the executives to the AGM.

 Non compliance with the proposals will need to be explained in the annual report.

 Companies which do not have an internal audit function should consider the need for one annually.

It is currently unlikely that companies that are not listed in London will be obliged to follow these proposals. However, it can be assumed that as a matter of best practice these principles of good corporate governance will be implemented by ethical international companies (be they listed in London or not).

I am a firm believer in the maxim “it is better to be a leader than a follower”; and as such would recommend to any company wishing to enhance its reputation, and by definition brand value, that the recommendations of these reports be implemented sooner rather than later.

It is likely that the demand for non-executive directors will dramatically increase; as companies come to realise that the current “old boys’ network,” of friends serving on each others boards, simply does not fit with the requirements of the proposals.

However, being able to find suitably qualified, truly independent directors; willing to take on the responsibilities envisaged will be a challenge.