U.S. and U.K. – Two countries separated by common corporate governance practices?

The playwright George Bernard Shaw once noted that England and America are two countries separated by a common language. Are they also separated by common corporate governance practices? What are the key differences between the U.S. and the U.K. in their approaches to corporate governance?  How do these differences impact an independent/Non-Executive Director in their duties?

In this podcast, with Susan Skerritt, Dr Sabine Dembkowski, Founder and Managing Partner of Better Boards, discusses corporate governance practices in the U.S. and U.K.. Susan is Independent Director of Tanger Factory Outlet Centers, Inc. (NYSE:SKT), a Non-Executive Director of I.G. Group, a global derivatives trading company (FTSE250), an Independent Director of Community Bank System Inc., a bank holding company and its banking subsidiary, Community Bank, NA with over $16 billion in assets, and a Non-Executive Director of the Falcon Group a leading inventory management solutions business. Her 35-year financial career included leadership roles with premier banking institutions, most recently, Chairman, CEO, and President of Deutsche Bank Trust Company Americas, Deutsche Bank’s U.S. commercial banking entity with over $50B in assets.

“I’ve been lucky to find boards that want my experience, perspective, and where I think I can add value”

To Susan, the most important thing when looking at board opportunities is whether you see yourself bringing value to the organisation. From there, it’s about whether you think you’ll enjoy it and have the time to do the role justice. She pursues global board opportunities because she’s always operated in and enjoyed the global business world.

Susan also notes that while boards in the U.S. and the U.K. have their differences, there are also many similarities. Both operate on the Anglo-U.S. model, which differs from the German, Continental, and Japanese models. There’s a one-tier board, where most board members are from outside the company, and that fundamental structure is consistent between the U.S. and U.K. jurisdictions.

“The most important differences are the philosophical differences”

For Susan, the most important difference is philosophical.

U.K. corporate governance is principles-based. There is a corporate governance code that’s updated regularly, and it’s applicable to companies with a premium listing on the London Stock Exchange. The code operates on a “comply or explain” basis, and that really recognises that one approach may not be appropriate for all companies. The code encourages companies to choose the governance practices best suited to their circumstances, and enables companies to explain any variation from the code in their annual reports to shareholders.

The U.S. approach is more prescriptive. There is no corporate governance code per se. Rather, publicly listed companies are subject to four areas of law and regulation: state corporate law, federal securities law, Stock Exchange listing rules, and federal and state laws related to specific industries, such as financial services. These laws and rules must be complied with, or a company is subject to legal action or being dropped from the stock exchange.

The second philosophical difference relates to whom the board is ultimately responsible. In the U.K., the duty of Directors is to shareholders, but regarding stakeholders, that combined shareholders and stakeholders’ duty is clearly outlined. In the U.S., shareholders’ interests tend to be the primary concern of Directors. The Business Roundtable and Association of Chief Executive Officers recommended in 2019 that the U.S. shift toward stakeholder focus, but that’s still evolving. Susan would like to see it develop faster, as this is an area where she feels U.K. boards are ahead of U.S. boards and where U.S. boards would benefit from making a sharp change.

“Beside philosophical differences, there are structural differences”

Susan sees several structural differences anyone looking to serve on U.S. and U.K. boards should know. For example, in the U.K., the Chair and CEO are more likely to be separate, with fewer than 10% of FTSE companies having a combined role. In the U.S., over 50% of S&P 500 companies have a combined CEO and Chair role. Susan finds this can lead to conflicts of interest, and prefers the fully separated U.K. model.

Further, the U.S. tends to combine legal counsel with the corporate secretary role. Some three-quarters of American firms do this, while only some 40% of U.K. firms do. Committees are also different. There are three standard committees: audit, nominations, governance, and compensation, or, as it is called in the U.K., remuneration. However, over half of FTSE 100 companies also have ESG committees, while fewer than 15% of the largest U.S. companies have an ESG or sustainability committee.

“There are also differences that impact the Directors themselves”

Susan likes to share numerical differences to help illustrate where the board structures are starkly different. However, there are also key differences beyond operational structures that impact Directors themselves. These anchor on board refreshment, compensation structures, and education for board members.

In terms of board refreshment, in the U.K., term limits for board members are the norm, with typically no more than a total of nine years of service allowed. However, in the U.S., only about 7% of companies have term limits of any kind, as confirmed by the latest Spencer Stuart surveys. Instead, U.S. boards favour age limits, usually enforcing retirement at age 72. To Susan, a better approach than either would be board assessments, rather than rules, to ensure companies aren’t holding onto Directors simply because they haven’t limited out or releasing Directors who still have a great deal of value to offer.

Compensation structures also differ. Susan sees that in the U.S., most public boards compensate members with a combination of cash fees and equity grants, with equity grants often larger than the cash base. In the U.K., monthly cash fees are more common, and fewer than 5% of FTSE companies pay any Directors’ compensation in the form of corporate shareholdings. Susan feels that having Directors granted stock in the company provides a better alignment of interests, so Directors think more like owners.

Finally, Susan notes a difference in how board members are educated and prepared for their roles. In the U.K., the long-established U.K. Institute of Directors and many other training organisations provide standard education and even certificates. In the U.S., there’s a new National Association of Corporate Directors group, but no real comparable training.

“There are a number of differences in the way that boards operate and in the way that they’re structured. But I don’t see significant differences in the behaviours of Directors”

Susan finds it interesting that despite the structural and operational differences in U.S. and U.K. boards, the Directors she serves with behave with a similar focus on their duties of care, loyalty, and working to ensure the long-term health of the company. Ultimately, in both jurisdictions, the most effective Directors are those interested in understanding what is considered best practice and determining whether those practices would be beneficial to their organisations.

The three top takeaways for effective boards from our conversation are:

• If you have global experience that you want to deploy in your board work, consider a board in another jurisdiction. You would bring cultural diversity as someone with experience in another country. That experience is precious if the company operates globally and most of its existing board members are from one country.
• Corporate governance continues to evolve in every country. By having experience in multiple jurisdictions, you bring perspective about what boards in various jurisdictions should be considering.
• Even if you don’t join a board in another jurisdiction, keep updated about how corporate governance is evolving outside your country. There are best practices you observe in other jurisdictions that could be deployed no matter where you serve.


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