My Lords, in moving Amendment 2 I will speak also to Amendments 6, 8 and 10 in my name. These are all probing amendments that concern the governance of ARIA and its board, so I am dealing with much more mundane matters than we covered in the first group. There are a lot of different aspects in this group so I apologise in advance for taking a little time in my opening remarks.
Amendment 2 is about the size of the ARIA board. It deletes paragraph 2(2)(c), which allows between two and five executive members to be appointed to the board in addition to the chief executive and the chief financial officer. As with the governance arrangements relating to commercial boards, paragraph 2(4) requires there to be a majority of non-executive members. Therefore, the minimum size of the ARIA board will be twice the number of the executive members, plus one. If there are two additional executive members, the total number of executives would be four, the minimum number of non-executive members would be five, with a minimum board size of nine. If, however, the full complement of five additional executive members was appointed, the board would comprise seven executive members, with a minimum of eight non-executive members, making 15 in total. There is, however, no limit to the number of non-executive members and hence no upper limit on the size of the board.
I believe that this design is flawed and could result in an unwieldy and ineffective board. Some years ago, in the wake of the financial crisis, Sir David Walker produced a review of corporate governance in banks and other financial services entities. His report included an annexe, which dealt with optimum board and committee size, based on evidence from a number of sources. Sir David said that the optimum board size was between eight and 12, and that beyond 12 a board was prone to
“passive free riding, dislocation and ‘groupthink’”;
in particular, the likelihood of groupthink increased “exponentially” above 12.
I will quote some of the rationale for this:
“This importance of size is due to the cognitive limit to the number of individuals with whom any one person can maintain stable relationships, this limit is a direct function of relative neocortex size, and this in turn limits group size.”
My own direct experience of a number of boards in different sectors over the years is pretty much in line with the Walker report.
At Second Reading I emphasised the need to avoid groupthink in ARIA, and I hope the Government will look again at their design for ARIA’s board. Many listed companies have only the chief executive and the CFO as board members, which helps limit overall size and keep the board effective. Is it really necessary to have a minimum of any extra executive members? Why not just set an upper limit on the size of the board—at, say, 12—and let the rule on the majority of non-executives drive the remaining appointments?
Amendment 6 is designed to ensure that the culture of ARIA is kept away from the Civil Service and government, about which I also spoke at Second Reading. It states that non-executives cannot be either Ministers of the Crown or employed by a government department and paid out of public expenditure. There is a precedent for a prohibition on Ministers and civil servants in the Bank of England legislation which governs appointments to the Court of the Bank of England. It is now in the Bank of England Act 1998, and I have largely copied that drafting, although I have added a prohibition regarding positions held within the five years preceding the appointment. It is clearly important that the central bank is formally independent of government. In the case of ARIA, formal independence is not the issue; rather, it is very important to be independent of the prevailing mindset in Whitehall. I hope that the Minister will agree with me on that.
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My Amendment 6 would preclude the appointment of the Chief Scientific Adviser as a non-executive and I therefore also support my noble friend Lord Lansley’s Amendment 5, which is in this group. I am also less than clear that the role of the Chief Scientific Adviser, which centres on advice to the Prime Minister and Cabinet on scientific matters, makes it necessary for him to sit on the ARIA board.
Amendment 8 is rather different. It would delete paragraph 7(2)(a) of Schedule 1, which says that ARIA must pay to or in respect of non-executives such pensions and gratuities as the Secretary of State determines. This is in addition to remuneration provided for under paragraph 7(1). This is archaic drafting whose purpose is lost in the mists of time. No one pays the pensions of non-executives nowadays. Certainly, that is true in the private sector and I would be astonished if it were not also true in the public sector. As for gratuities, do we tip non-executives? We certainly do not in the private sector.
My last amendment in this group, Amendment 10, is about the quorum for the ARIA board. Paragraph 10(2) of Schedule 1 has a sensible requirement for a quorum, set at half the number of its members. My amendment 10 merely says that, within that smaller number, the half making up the quorum, there needs to be a majority of non-executive members, which is in line with the overall composition of the ARIA board. The composition set out in paragraph 2 means that a majority of non-executives on the board can be achieved by just one more non-executive member than executive members. That in
turns means that a quorum of one half of the total could be achieved with only one non-executive member present. It is certainly true that commercial boards often transact formal business, such as the declaration of dividends or approval of announcements of transactions after markets have closed, with very small numbers, often just the chairman, the chief executive and CFO. I suspect that there will be very few issues of that nature on which ARIA will need to decide.
My concern is that significant decisions could be made without proper non-executive oversight and agreement. For example, paragraph 17 of Schedule 1 allows for ARIA to enter into partnerships or joint ventures—I have amendments to probe these powers later on. I do not think it would be good governance for the executives to be able to vote on the use of, say, joint venture powers using a quorum which, in extremis, would have a single non-executive member present and clearly could be outvoted. I hope that my noble friend the Minister will agree with me that that would go against the spirit of requiring a majority of non-executive members on the ARIA board. I beg to move.