Seventh Report - The Role of Non-Executive Directors in Government

Non-executive board members were brought in in their current form in 2010 to “make Government operate in a more business-like manner”. However, it is unclear whether the corporate governance of Whitehall still sits at the centre of their purpose and activities. The role of non-executive board members and lead non-executive board members are broadly defined in the Corporate Governance Code for Central Government Departments and the accompanying guidance note. However, our evidence suggests that, in practice, how boards and NEDs are used is highly dependent on the relevant Secretary of State and often NEDs wield significantly more responsibilities within their department outside the board than is publicly documented or defined. This is problematic, as it hinders the transparency, consistency, and accountability of their positions. We welcome efforts by the Government Lead Non-Executive to promote consistency through the provision of centralised guidance and coordination. However, the Corporate Governance Code is insufficient and there should be more public accountability and clarity on the work of NEDs and their purpose.

The Corporate Governance Code is not fit-for-purpose as the main guidance document for NEDs, given it does not encompass all of their work in Government. It should be updated or replaced by the end of the calendar year to set out the key roles and tasks that a Government NED should undertake within the department, as well as any limitations to that. The new document should cover typical activities of NEDs both on and outside the departmental board setting.

We recommend that each Government department make public the terms of reference for their departmental boards, including the individual roles and responsibilities of each non-executive board member. These should be published on GOV.UK and updated annually, or sooner if there are changes in board membership.

The Government’s commitment to review the appropriate role for NEDs and departmental boards, as part of the broader Governance and Accountability Review being led by the Rt. Hon. Lord Maude of Horsham, is welcome. However, the Committee is disappointed that it is now over five months overdue.

The Rt. Hon. Lord Maude of Horsham should take into consideration the conclusions and recommendations of this inquiry into his final report for the Review of Governance and Accountability. The Government should prioritise publishing the findings of the Review within two weeks of it being delivered to provide public reassurance on the roles of NEDs and how they should be performed. (Paragraph 22) Expertise and experience

The Corporate Governance Code says NEDs will be “experts from outside Government”. However, we have highlighted examples in this Report of individuals that appear to have been recruited to NED roles from within Government or through personal connections. This includes examples of NED roles being a stage in 34 The Role of Non-Executive Directors in Government the careers of some Special Advisers or Ministers, and certain NEDs moving across to new departments with their Secretaries of State after machinery of government changes. Whilst this may relate to a relatively small minority of individuals, we remain concerned by the impact this may have on the ability for NEDs to provide effective challenge to Ministers and departmental boards, and the perception of such appointments on the public’s confidence in NEDs. We strongly believe that there should be a clear separation between the role of political or personal advisers and that of objective non-executive board members. If NEDs do not bring to departments genuine experience from senior positions in large and complex organisations outside Government and can offer independent challenge to departments, we are unclear of their purpose at all.

Furthermore, the Committee considers that the power of NEDs, currently included in the Corporate Governance Code, to be able to recommend to the Prime Minister, Secretary of State, and Cabinet Secretary that the Permanent Secretary be removed from their post if they are deemed to be an obstacle to delivery, is only appropriate if NEDs are independent sources of advice.

The Committee recommends that the Corporate Governance Code is updated to reinstate the “independence” of non-executive board members, which was removed from the 2011 and 2017 editions of the Code. The updated Code should outline the expectation that Secretaries of State should avoid appointing individuals with clear political or personal connections, including former or current Special Advisers, serving Members of Parliament or Peers, to NED roles. In the event that any are appointed, there should be a clear justification for doing so in the governance statements of departments’ annual report and accounts.

The Corporate Governance Code for Central Government Departments states that non-executive board members will be primarily from the commercial private sector and the Committee recognises the value individuals with this experience can bring to departmental boards. However, written evidence from Government departments suggests that skills and experience across a range of sectors are deemed valuable, depending on the needs of the department. Therefore, we do not feel that commercial experience should take such priority, particularly if there is a risk this could limit the diversity of applicants.

We recommend that the Corporate Governance Code is updated to include a standard set of skills and qualities which are deemed desirable to undertake the role of a departmental NED or Lead NED, rather than express a preference for individuals from specific sectors. This would not preclude further specific expertise being outlined in job advertisements, but would seek to provide more clarity, transparency, and accountability on what skills and experience are relevant for the specific role. (Paragraph 41) Appointments process

The Corporate Governance Code stipulates that non-executive board members should be appointed on merit through a fair and open process. The current Government Lead Non-Executive told the Committee that a small proportion of NEDs currently in post have been directly appointed and, since he took on the The Role of Non-Executive Directors in Government 35 role in March 2022, every post had been advertised on the Cabinet Office public appointments website. However, our evidence suggests that these practices have varied considerably over time and the Committee is concerned by the lack of consistency, accountability, and transparency surrounding how NEDs are recruited. We believe it is completely unsatisfactory that departments are not consistently providing information in the public domain about the process for appointing NEDs, nor abiding by the requirement to justify departures from the Corporate Governance Code in departments’ annual report and accounts. The Committee also recognises the potential impact that departing from a fair and open process may have on the diversity of the candidates and the composition of the board.

The Government Lead Non-Executive should ensure that every department is fully transparent about the recruitment process for its NEDs and that all departures from the Corporate Governance Code are justified in the governance statements of departments’ annual report and accounts. The Government Lead Non-Executive should work with departments and Ministers to encourage and share best practice regarding the appointment of NEDs. Furthermore, to improve the transparency of appointments in the immediate term, the Committee recommends that all departments be required to publish a GOV.UK news story within four weeks of an appointment being made, detailing the recruitment process (including whether the job was publicly advertised), the selection process, and the appointees’ suitability for the role.

The Cabinet Office should confirm in their response to this Report that the list of NEDs by department has been updated on GOV.UK, given this transparency data is now two years out of date. In addition to their names and department, we recommend that this list includes the year that the NEDs were appointed, and that the list is reviewed and updated at least annually.

The Government has indicated that it will implement the Committee on Standards in Public Life’s (CSPL) recommendation that NED appointments should be regulated by the Commissioner for Public Appointments, which we welcome. However, it is disappointing that it appears no progress has been made since the CSPL report was published in 2021.

The Cabinet Office should confirm in its response to this Report the timeline for implementing the CSPL recommendation that NED appointments should be regulated by the Commissioner for Public Appointments. This should apply to all NED appointments in Government departments. We also recommend that the position of Government Lead Non-Executive should be classed as a “significant appointment” under the Governance Code on Public Appointments, which would require a senior independent panel member to be involved in the recruitment to provide an additional level of scrutiny and public assurance.

The Committee notes that the latest Government Lead Non-Executive Report for 2021–22 shows a drop in female representation on departmental boards since 2020– 21, and we are particularly concerned by the absence of any data on black, Asian, and minority ethnic representation this year. We note that the Government has never reported on any characteristics beyond gender and ethnicity. The Government Lead Non-Executive should continue to report on the diversity of NEDs in terms of 36 The Role of Non-Executive Directors in Government gender and ethnicity at a minimum in the Annual Report. We also encourage the Government to consider what other metrics on diversity could be included in this Report.

The consensus from oral witnesses to the inquiry, including the current Government Lead Non-Executive, was that NEDs and boards have a role to play in providing continuity and corporate memory between new Ministers and administrations. While we recognise that the Secretary of State maintains the final decision over the composition of their board, there should nonetheless be a presumption against the automatic removal of all serving non-executive board members upon appointment. An updated Corporate Governance Code should set out the value of NEDs in providing corporate memory and expertise in periods of transition between Ministers and administrations, and the expectation that Ministers should avoid replacing all departmental NEDs on appointment. Moreover, it should clarify that if they do so, departments must set out the reasons justifying their decision in the governance statements of departments’ annual reports.

The number of NEDs per department is variable. We believe there should be common standards underpinning the rationale for the number of NEDs per department in the interests of consistency and good governance. The Government should confirm in response to this Report a consistent policy in order to relate the number of NEDs in a department to its size and remit. This should then be reflected in future iterations of the Corporate Governance Code and accompanying guidance note. (Paragraph 57) Governance and accountability

The Committee is concerned by the variability in board performance, the differing commitment of Secretaries of State in engaging with departmental boards, and examples of non-compliance with the Corporate Governance Code which are not being reported in departments’ annual reports as expected. We believe that the Government Lead Non-Executive should act as a de facto regulator of the NED system, and monitor compliance with the Code.

The Government Lead Non-Executive should provide a report on compliance with the Corporate Governance Code in the Government Lead Non-Executive Annual Report. This would cover all aspects of the Code, such as attendance at board meetings, whether fair and open recruitment practices have been followed, the management of conflicts of interest, and whether board effectiveness evaluations have been carried out. Information should be broken down by department and departments should also justify any departures from the Code in the governance statements of their annual report and accounts. (Paragraph 70) The Role of Non-Executive Directors in Government 37

The effective use of departmental boards requires sufficient ministerial interest and regular scrutiny. Secretaries of State should undertake mandatory training, with the Prime Minister’s sponsorship, on their role chairing quarterly board meetings, how to work with NEDs, and how to run a departmental board effectively. Departments should also list specific actions that they are taking forward as a result of annual board effectiveness evaluations in their annual reports and accounts.

Given that non-executives in Government departments, unlike their private sector equivalents, operate in an advisory capacity only, the Committee does not believe that NEDs should have more formal accountability to Parliament. However, there should be more information in the public domain on their roles and responsibilities in Government in the interests of transparency and good governance. The Government Lead Non-Executive Annual Report and each department’s annual report and accounts are currently the primary route for transparency, with the former providing some, albeit limited, data on the diversity of board members and the frequency of and attendance at meetings. At present, these documents are published too infrequently to provide meaningful transparency.

In chapter two in this Report, we recommend that the Government publishes an updated Corporate Governance Code and terms of reference for each departmental board to provide greater transparency on the individual responsibilities of NEDs. In addition to this, we recommend routine publishing of board minutes on GOV.UK after each quarterly meeting, with a standing agenda item on the work of NEDs in departments. Furthermore, the Government Lead Non-Executive reports should be published routinely within four months of the reporting year ending at the end of March. We therefore expect the report covering 2022–23 to be published by August

We are concerned by the lack of consistency and transparency in how departments manage any real or perceived conflicts of interests. This includes a wide variation in how information is reported in departments’ annual report and accounts and a lack of transparency over non-financial interests.

We recommend that departments’ registers of board members’ interests be published on GOV.UK, as well as included in departments’ annual reports and accounts. These should be published in a consistent format, updated every six months, and include any relevant non-financial and private interests. The Government Lead Non-Executive should monitor departments to ensure that the governance statements of departments’ annual report and accounts provide sufficient clarity on how any real or perceived conflicts of interest are managed.

The Committee acknowledges the arguments against NEDs being formally accountable to Parliament for any departmental or policy-specific matters, given the potential implications for the principle of ministerial responsibility. However, we believe that the Government Lead Non-Executive, as a quasi-regulator and coordinator of the NED cohort, should be subject to parliamentary scrutiny. (Paragraph 76) 38 The Role of Non-Executive Directors in Government

We recommend that future candidates to the role of Government Lead Non-Executive should be subject to a pre-appointment hearing by the Public Administration and Constitutional Affairs Committee. We also recommend that, as has been practice in the past, the Government Lead Non-Executive should appear before the Committee, as and when requested, to discuss the contents of the Government Lead Non- Executive Annual Report and any other matters relating to the overall system of NEDs. (Paragraph 77) The Role of Non-Executive Directors in Government 39