There are a number of key features of our system of governance which need to be remembered:
- The principle of collective responsibility, delivered normally through a unitary board
- Clearly defined accountability throughout the organisation
- The separation of the roles of Chair (usually non-executive) and Chief Executive
- The concept of independent Non-Executives, normally capable of forming a majority
- The independent nature of the Company Secretary
- The concept of constructive challenge between Directors
- Transparency (where possible) in decision-making
- Timely declaration of Directors’ interests and avoidance of conflicts
- The concept of ownership of an organisation, in the form of members or shareholders/investors
- The concept of stakeholders, being loosely defined as any person or organisation with an interest (positive or negative)
- The concept of the community and environment, in which the organisation has an effect or impact
- Regular Board evaluation is an intrinsic part of board health
- The regulatory system (for listed companies) relies on the principle of “comply or explain”
There are also a number of themes that are current at any time, which shape the debate around corporate governance and point towards future evolutions of the subject. At the moment, these include:
- The gap in the interests of stakeholders and shareholders is closing all the time, because the actions of boards (especially in the era of globalisation) are relevant to all and not just investors
- The concept of “value” is shifting beyond monetary returns on investment towards concepts such as legacy, climate change and sustainable choice
- Corporate Social Responsibility (CSR) is dying, inclusive capitalism is growing
- Re-distribution of wealth is a concept that will not go away
- Composition of boards needs to reflect current thinking on gender and diversity
- A formula for the optimum board in terms of composition, behaviour and culture continues to be an impossible goal, so think chemistry and ethical strength
- The old boy network has been hunted down by, among others, shareholder activists and yet not really successfully replaced with anything else
- One key attribute of successful corporations is effective risk management – too many organisations are very poor at this
In this country, the torch of corporate governance is kept burning by the Financial Reporting Council (FRC), who produce the UK Corporate Governance Code. Whilst this is designed to regulate the companies listed on the main market, many of its key features have been adopted (and adapted) by other sectors. This means that smaller public companies often adopt its principles as best practice and much of the public sector has very similar guidance in use by its regulators. It is worth a read therefore, regardless of the nature of your organisation.
It talks about “entrepreneurial leadership within a framework of prudent and effective controls which enables risk to be assessed and managed”, and goes on to develop some attributes for effectiveness including:
An effective board develops and promotes its collective vision of the company’s purpose, its culture, its values and the behaviours it wishes to promote in conducting its business. In particular it:
- provides direction for management;
- demonstrates ethical leadership, displaying – and promoting throughout the company –behaviours consistent with the culture and values it has defined for the organisation;
- creates a performance culture that drives value creation without exposing the company to excessive risk of value destruction;
- makes well‐informed and high‐quality decisions based on a clear line of sight into the business;
- is accountable, particularly to those that provide the company’s capital; and
- thinks carefully about its governance arrangements and embraces evaluation of their effectiveness
It goes on to state that “an effective board should not necessarily be a comfortable place. Challenge, as well as teamwork, is an essential feature.” It also reminds us that any tendency towards “group think” should be broken down. All of this is the essence of a board and reminds everyone what it is there for – the point of a board.
So what does all this mean for your Board? It is easy to react by saying that this has little to do with your own circumstances, that you are a different kind of organisation, and that much of this is not really relevant. If you were a client of ours however, we would challenge this. One of the essential features of UK corporate governance is that it represents a distillation of all the experiences of our most successful companies. It also provides a framework for operation that removes much of the emotion from a particular decision. We see this constantly in areas such as succession planning and in decisions on remuneration.
The late Sir Derek Higgs produced a defining report in 2003 on non-executive responsibilities and in this he made a comment that the primary coverage for non-executives (in their scrutiny of executive management), were the areas of “People, performance, strategy and risk”. All too frequently we see boards diverge from this common sense approach, instead focusing excessively on operational rather than strategic matters, becoming remote from their workforces and thus not understanding what is being done in the board’s name, or falling into the trap of concentrating on a single issue to the detriment of other considerations. It is also our experience that boards can often forget that a critical output is the exercise of collective leadership, especially beyond the confines of the boardroom. Dissenting voices can be enormously destructive and can rapidly undermine a hard won decision around the boardroom table.
A final point is that we often see boards where membership comes automatically with a particular role, a “board level appointment”. In most cases this is unavoidable but this does not mean that individuals should not be reminded that joining a board is a major responsibility. An effective board member has a view on all topics, behaves in a non-parochial way, debates dispassionately and never indulges in factionalism – and that is just the beginning of effective board level contribution!