Out-Law News 4 min. read

'Regulatory tsunami' driving 'fear of failure' culture in British business

Businesses in Britain are more reluctant to take the risks necessary to succeed in a global marketplace because they have a fear of failure, a prominent UK businesswoman has said.

Johanna Waterous CBE, who sits on the boards of a number of UK businesses, including as a senior independent director at Rexam and RSA Insurance and as a non-executive director at Wm Morrison, said the fear of failure stems from the strict regulatory landscape in which they operate, which she said is having a direct impact on business decision making.

"The regulatory tsunami across corporate Britain means that listed company boards  are afraid to fail," Waterous said in a lecture that is part of the Horizon series run by Pinsent Masons, the law firm behind Out-Law.com. "It feels like traps are being set. I genuinely worry that the environment of doing business in the UK is all about 'don't make a mistake' and that does not reward calculated risk taking or the bold decisions which are necessary to succeed."

In her talk, Waterous said that the true strength of a company's board is not known until times of trouble. Boards can ensure they accord to the UK's corporate governance code, stress test their strategy, understand and adopt best practices, engage in succession planning and embrace diversity, but little can prepare them for when a crisis hits, she said.

Waterous said: "Corporate crises take many forms. They are never the one you have been planning for. They never happen when you expect.. Dealing with the expected is easy. You do not earn respect from sitting on board when it is business as usual."

Boards must earn trust from consumers before a crisis hits, because businesses cannot earn that trust during a crisis period, she said. This is particularly true in the social media age, which forces boards to make statements and take decisions in a matter of hours rather than days as was  the case when they had only to worry about reports on TV and in newspapers.

"The majority of consumers don't trust big corporations," Waterous said. "You get trust because you act with integrity, say what you are going to do and do what you said you’d do consistently, over time. What you say and do in a crisis is cashing in cookies of trust that you may have baked earlier. People will say anything on social media. And other people believe it! How you control the narrative in a crisis is hard. You can't wait for a crisis. If you are not building trust and understanding  your reputation,  individually and  corporately during business as usual, then you are ill equipped to communicate credibly in times of trouble."

Waterous said that board members must take time to get to know their investors before a crisis hits. "The CEO and CFO see the top investors, but most of the board don’t have direct line of sight. Don't leave it to a crisis to get to know your investors," Waterous said. " To have big institutional investors backing you behind the scenes is incredibly powerful. Investors will talk to one another. Understanding that dynamic is very important."

Waterous said the hardest decision any board makes is whether and when to back the chief executive. She said that the decision will ultimately come down to "a judgment call" by the board on whether the person is the right person to secure the success of the business in the medium to longer term.

"Chaos loves a vacuum," she said. "When you are leaderless  competitors turn  up the dial, your top talent can be more easily poached, regulators "get nervous". In addition, "the genius talent is never just waiting outside to take over" from departing CEOs. "Talent in an emergency is hard to find and expensive", she said.

"A gap in leadership is sometimes the most dangerous condition” Wateorus said. "To pull the trigger on your CEO or chairman is by far the most difficult decision you will ever take. There are no rules in the corporate governance code on how to do it. It is  a judgment call."

Two of the main challenges of a board is to avoid "group think" and anchoring on previous decisions, Waterous said. Diversity of perspective and objective, independent challenge are critical to avoid these traps.

However, Waterous said that she did not agree that quotas on the number of women or minority groups on boards was the best way to achieve that diversity.

Waterous said: "I believe in diversity of experience, expertise and perspectives. I also believe in diversity of risk appetite – that is really valuable on a board. How do you open up  the board to challenge previous decisions which may have got you into trouble in the first place? You need diversity. Men, women, pandas, I don't really care. What counts  is diversity of perspectives."

Corporate law expert Martin Webster of Pinsent Masons, the law firm behind Out-Law.com, said: "When the financial crisis hit one of the UK government's responses was to get Sir David Walker who is now chair of Barclays to do a report into corporate governance failings at financial institutions. One of things he came out very clearly about was that this idea of diversity had gone too far and that we needed bankers on boards. Certainly the regulators have gone down that route as well – as a non-executive director for a financial institution you get quizzed quite closely about what you know about the business and the sector."

"My fear is that there is the risk you're going to lose that broader diversity if you go too far down that line. So I don’t think it is always fair to criticise boards and individual non-executives where they have never worked in that sector before. Of course people need to be recruited on the basis of what they are going to bring to a business but that needs to be seen in a wider light and so I'm very much in favour of diversity but in that very general sense," he said.

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