No board would want to admit that it isn’t effective. And even those which are often remain in denial and fail to confront the issues that are impeding them. The world of business is moving away from the era when boards can shy away and disguise or hide their shortcomings though.
The Financial Reporting Council (FRC) announced, earlier this year, that it is following up its commitment in 2017 to ensuring the UK upheld its reputation for high standards of corporate governance with a new Corporate Governance Code of Conduct that it describes as “fit for the future”.
This code places emphasis on businesses building trust by forging strong relationships with key stakeholders and calls for companies to establish a corporate culture that is aligned with the company purpose and business strategy and which also promotes integrity and values diversity. To ensure that the boards have the right mix of skills and experience, “constructive challenge” and to promote diversity, the new code emphasises the need to refresh boards and undertake succession planning. It states they should consider the length of term that chairs remain in post beyond nine years.
Of course, there will be those organisations which would point out that they are not governed by the code but the FRC’s intention is to set out best practice and it is the mark of an effective board to reflect this in its activity.
The code should also serve as a wake-up call for those boards which recognise they should be performing more effectively. There have been enough examples of what can happen when boards aren’t fit for purpose with one of the most spectacular being Lehman Brothers. After its collapse, it came to light that the board didn’t have expertise in the financial instruments that were at the root of its problems (credit default swaps). Indeed, only two members had experience in the financial services industry.
Meanwhile, Sir Tom McKillop, former chairman of the Royal Bank of Scotland, admitted at a meeting of Treasury Select Committee in 2009 that he had no qualifications in banking and didn’t understand some of the financial products he needed to improve. It would be nice to think that such instances were consigned to noughties’ history but, more recently in 2014, Mark Thompson, director general of the BBC, acknowledged that the failure of a £100m IT project was due to a lack of technical expertise on the board. Since then, boardroom members have been called into question in several high-profile cases including Carillion’s collapse, Tesco’s accounting scandal and Volkswagen’s global emissions deception.
Rialto is undertaking a great deal of work with clients in this arena on an ongoing basis and in our experience there can be various obstacles to boardroom effectiveness. There are boardrooms where the dominant position of individual members is left unchallenged by the others which can lead to group-think. It can also mean upcoming challenges or indeed opportunities are missed because of a lack of blue-sky thinking. Disorganisation and poor time-management can also play a big factor of poor performing boards: we’ve witnessed boards slavishly chain themselves to standing items on the agenda and squeeze really major decisions involving multi-million pound budgets into the last few minutes. Similarly, insufficient time is often left to long-term strategic decision-making.
Often, poor performing boards know that they need to improve their ways, they just don’t know how to do it and fail to put in place some fundamental structures that will help keep them on course. For instance, many boards under-use their terms of reference (ToR) as a tool to keep on track. This should clearly define their purpose and goals and how they will be achieved and should be agreed by everyone. They should use the ToR to help clearly define roles and responsibilities. A common problem, for instance, is a blurring of roles between the chairman and CEO. The ToR also helps assign responsibilities to the executive committee. In both cases, this leads to a far more efficient use of the board’s talents and resources.
It isn’t enough to simply put the ToR in place and verbally commit to it though. The board needs to appoint a third party who is both respected and trusted – such as the company secretary – to review and monitor board performance and behaviour in relation to the ToR. This reduces the risk of dominant board members, individual relationships, poor communication and general disorganisation impeding effectiveness. When implemented correctly and adhered to, the ToR should also ensure the board acts as a collegiate body.
Although it sounds like stating the obvious to say the choice of chairman is crucial, sadly, this role is sometimes assigned to the wrong individual. There is a fine line between a strong and decisive chairman and an overpowering one. They must also be realistic and in touch with the overarching company mission and what happens on a day-to-day basis.
As a consultancy brought in to help improve board effectiveness, one of the most useful exercises is to perform a gap analysis by exploring what “future perfect” looks like and what are the behaviours and changes required of the board to achieve this? It can be a difficult, if not, painful process but one that brings great clarity in terms of priorities and actions. It will also expose any skills gaps or missing knowledge and expertise in the make-up of the board, which is crucial to adhere to the FRC’s new code of conduct.
While a board can bring in an external consultancy, they must still own the processes that will lead to effectiveness. Similarly, they must become self-sufficient when it comes to monitoring and reviewing what they have done.
A board’s primary responsibility is to direct an organisation’s long-term strategy, hold the senior management team accountable and deliver shareholder value. Inherent in these duties is preventing anything that could harm the company. There is no doubt that, if left unaddressed, barriers to effectiveness can be one of the most corrosive forces to an organisation, and all the more difficult to detect as it they come from within.
Richard Chiumento and Jan Floyd-Douglass