The Governor’s Year in Review (2018)
Governance has been up front and centre in 2018 with high profile failures such as Carillion continuing to appear in the headlines months after the news first broke. Even as this blog is penned (well typed!), there is on going criminal proceedings being taken against former Nissan Chairman Carlos Ghosn who has been accused of misusing funds and hiding income. Then there is the pending overhaul of the big four accountancy firms as a result of Carillion, the questions regarding governance at major charities such as Oxfam and the British Red Cross related to issues of sexual misconduct. Executive pay has been another high profile issue this year – the pay of the vice chancellor at a university was compared against that of the Prime Minister and was found to be considerably more, and the remuneration of WPP boss Sir Martin Sorrell was again highlighted but following accusations of personal misconduct he resigned.
My annual summary of blogs from the year is becoming one of my favourites as it a great way to reflect on the major changes and events that have taken place during the year as well as providing me with learning for the year ahead.
One of the most notable updates in governance this year was the publication of the 2018 UK Corporate Governance Code by the Financial Reporting Council. The most significant overhaul of the last few revisions, the Code has a new focus on the workforce and their contribution to corporate governance within organisations. Issues at Sports Direct during 2016 – 17 opened the debate about the value of having workers on boards and just this month, Capita have announced their intention to appoint workers to their board becoming the first company in decades to do so. Other key revisions to the Code include a focus on changing the culture with which boards operate, a renewed focus on succession and diversity and a move to address concerns regarding executive remuneration. Guidance for Large Private Companies has also been published in the form of the Wates Corporate Governance Principles.
At the governance forum it has also been an exciting year. We are currently developing our governance assessment process and governance review methodology to create a cross sector governance framework and are joining forces with partners such as ICSA and RSM UK. ACGP of which I am a founding member also created a partnership with ICSA meaning that you are able to gain Professional Subscriber Membership at a discounted rate widening your access to the latest updates and resources in corporate governance. Many of you are members of ACGP and can access this membership by getting in touch. I was also made a Fellow of ICSA and received an honorary doctorate from Birmingham City University. All of this is helping us to develop networks and products that are helping to improve governance practice across sectors and across the world!
This month’s blog is a summary of the blogs from the last eleven months which are filled with top tips for practice and up to date narrative about the world of governance. I hope that you enjoy reflecting on what has happened as you plan for what is ahead!
Staying Connected to your Role on the Board
January’s blog highlighted one of the EBM Connect Sessions where graduates of the Effective Board Member Programmes shared their experiences of graduating from the Programme to gaining a board appointment. Topics discussed included routes to appointment, board composition, board behaviour and induction – all things to consider when gaining a board appointment.
There continue to be many routes to appointments and participants shared their experiences – one was approached by a CEO directly at their EBM Graduation, another was signposted by EBM as they had the skills a board were looking for and the third panel member began their journey as an observer.
The blog was rounded off with a focus on understanding why you want to become a board member. We encourage you to always consider the why when applying for a board role to ensure you can wholeheartedly contribute to the work of the organisation.
Failing Governance Impacting Our World
This blog looked at the emerging Carillion story and how failures in the boardroom have ramifications for wider society.
I looked at the role each party played in the collapse when trying to determine if there was one party that was to blame. The CEO and executive Directors blamed late payments from clients in the Middle East. The external auditors asserted that they carried out their work “appropriately and responsibly” yet a profit warning was issued only a few months later. How well were the internal auditors paying attention to the internal financial controls and what was the quality of board reporting and scrutiny from the board? The pensions regulator is responsible for the scrutiny and oversight of pension funds. Could they have done more? Did the Financial Reporting Council exercise their direct statutory powers in relation to audit regulation and were the government irresponsible in assigning the number of contracts they did to the firm?
Unfortunately, Carillion is not the first and most certainly won’t be the last high profile corporate failure but before we look to point the finger when thinking about Carillion and other corporate failures, let’s ensure that we undertake our role within the governance architecture to the best of our ability always considering the ethical, commercial and moral impact of our choices.
In this blog we looked at some of the definitions of good and poor governance given by interviewees in my series of Governor Interviews (all of which can be viewed on the tgfYouTube Channel).
Some of these definitions are:
Portfolio NED, Former Director General BBC, Former Chair of The FootballAssociation
Bad – “Something has gone disastrously wrong and you knew nothing about it…”
Good– “Something has gone seriously wrong but you knew about it…”
Portfolio NED, Former Director of the Bank of England
Bad– “The arrangements of the board have a detrimental effect on the company or organisation that the board is managing…”
Good– “The board behaves as a team…”
Former Trader at UBS /global Synthetic Equities
Bad – “Institutions with cultures that lead ultimately to failure…”
Good– “The leadership understand the purpose of the organisation and area able to lead its people to deliver that purpose…”
Former Managing Director Jaguar
Bad– “Generally reflects stakeholders or a company or individuals that don’t really understand what governance is or how to apply it to their company…”
Good– “A company, individual or stakeholders that actually get the balance right between the applying and complying with the rules and regulations with the commercial imperatives that they have with the passion and the people and sometimes different objectives of the stakeholders…”
Put simply there are three key principles to apply in understanding what good governance is:
- Governance is not an option!
- Governance is not a function!
- Governance is more than compliance!
When Diversity isn’t Enough
Lead Diversity in the Boardroom Ambassador and tgfGovernance Manager Liz Muir was the guest writer on this blog. In relation to diversity, these questions were posed as a challenge to bring together the concepts of competence, diversity and the future boardroom in order to take steps forward to bring about real change.
The first question and maybe the most telling would be: does it even matter to you that your board is not diverse for if this issue does not resonate with you, change is unlikely to take place.
Other questions to reflect on are:
- How diverse is your board?
- What steps will you take in the next 6 – 12 months to improve diversity on your board?
- Is there a structured training and development schedule for your future leaders?
- Have you considered the reach of the places where you currently advertise board member vacancies to encourage candidates from wider backgrounds with different experience to apply?
- Who within your organisation can be targeted for pipeline development?
- When did you last undertake an evaluation of skills on your board?
- Have you considered co-option as a way to introduce diversity on your board?
- Are you training your current and potential future board members?
The Appraisal Process
Most codes of governance allude to the need for regular appraisal of the board; it’s committees and members. However, it can sometimes be a challenge for organisations to keep on top of their appraisal cycle, let alone engage board members, some of whom are volunteers and many of whom work at the top of their field in the processes!
As a minimum, the following should take place as part of your BER:
- Basic skills audit;
- Whole board appraisal;
- Committee appraisal;
- Chair appraisal (in camera);
- Board observation;
- Review against governance code;
- Desktop review of documentation.
High Performing Boards
Business professor Jeffery Sonnenfeld defines high performing boards in his article ‘What Makes Great Boards’ as: “strong, high-functioning workgroups whose members trust and challenge one another and engage directly with senior managers on critical issues facing the organisation.”
A high performing board has clear guidelines for its operation and is clear about its own governance framework. Since its members understand that they are the highest decision-making authority in the organisation, they ensure that they get that right. A high performing board is collegiate, trusting of the executive and has NEDs who bring added value through expertise in specific skills. The members work collaboratively, though not necessarily as a traditional team, and the result is a diverse, balanced yet robust, competent board recruited and inducted appropriately. A high performing board is able to lead the organisation to make the right decisions at the right time and its members are great ambassadors and reflectors of the many stakeholders. They assess on a continuous basis, based on a culture of excellence and best practice, their individual performance, that of the board and the teams that are accountable to them.
So, my question to you is: are you a high performing board?
How To… Master Corporate Reporting
Annual reports are an easy way to inform your stakeholders of your performance and achievements over the last year. Often including a summary of financial information from your statutory accounts, historically, many annual reports are figure heavy with one or two summaries or photographs included. The narrative in your statutory accounts should inform the structure and content of your annual report and as such, it is important to get the narrative elements of your statutory accounts right from the offset.
The handy checklist included in this blog gave some guidance about what to include in the governance section of the annual report:
- Introductory statement
- Board activity
- Risk and controls
- Succession and talent development
- Board oversight and monitoring
- Board member details
- Succession and induction
- Board Activities
- Board Effectiveness Review
- Role of the board
- Committee report
Why Effectiveness is Important in the Boardroom
The word effective is defined by Webster’s Dictionary as: “producing a decided, decisive, or desired effect.”
But why does this matter? If we go back to the dictionary definition of the word effectiveness, we can examine how and why this principle is necessary for boards to be successful. You must be and have the following three Ds to be effective in the boardroom:
Decided– If we want to understand what it means to be effective, then we must decide what it is we want from the role.
Decisive– Boards must be collectively decisive with individual board members able to effectively contribute to this process.
Desire– You must be able to identify and put into action the skills that make you a suitable candidate for a board in whichever sector you serve and there must be some level of interest in and passion for the sector in which the organisation operates.
A New Code – The New Dawn for Workers and Diversity
In this blog, I talked about the new UK Corporate Governance Code.
Instead of 18 main principles, 12 supporting principles and 55 provisions, we now have no supporting principles and 14 fewer provisions equalling 41 in total. In the words of the FRC, the 2018 Code is shorter and sharper with a renewed focus on the Principles and high quality reporting on the provisions.
The main changes include:
Workforce and stakeholders: There is a new Provision to enable greater board engagement with the workforce to understand their views.
Culture: Boards are asked to create a culture which aligns company values with strategy and to assess how they preserve value over the long-term.
Succession and 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. Boards should consider the length of term that chairs remain in post beyond nine years.
Remuneration: To address public concern over executive remuneration, the new Code emphasises that remuneration committees should take into account workforce remuneration and related policies when setting director remuneration.
Structuring your Board Agenda
Have you ever been in a meeting and an item arose that in your mind should have only needed to be mentioned but a fifteen minute discussion ensued?
Or, has as occasion passed where you knew a matter warranted a robust discussion but was mentioned only as a fleeting comment? The root of both of these examples can often be found in how the agenda has been structured.
We suggest that all agendas should include outcomes and our interpretation of some of the common classifications of what these outcomes mean are detailed below. It is recognised that organisations usually adopt and interpret the use of these headings in their own way.
Items for noting can be taken as read and don’t require decision, action or discussion.
Approval could be required for a document, a report, or a project proposal for example.
Usually the decision item has evolved from a number of options which may find themselves now in the form of a recommendation that requires a decision.
These items do not really form part of the agenda but provide contextual or other useful information for board members to consider in their own time.
Items for discussion are presented in order to provide the opportunity for the board to consider reports and information provided to them.
Technology – the Future Boardroom
I wrote this article (titled utilising Technology in their publication) for ICSA – The Governance Institute exploring the future of technology in the boardroom.
We live in a world where technology is developing at lightning speed. The result is exciting opportunities and massive disruption, creating big challenges for boards in organisations of every size and from every sector. I want to explore whether we are fully capitalising on the benefits of the latest digital developments in the boardroom, or are board members being left behind in the fourth industrial revolution, resulting in their organisations being vulnerable to attack and missing out on valuable opportunities to rise to new heights of performance?
Pace of Change
In order to have productive discussions at board level there needs to be enough understanding and knowledge of the digital world, but many boards don’t have the necessary expertise.
Technology Threat Risks are Real!
IT and systems– TSB and their new IT system which failed. Its Chief Executive Paul Pester said the evidence it received was ‘instrumental’ in the board’s decision-making.
Social Media– In April 2017, a passenger was forcibly removed from a United Airlines flight ahead of take-off.
Data security – Imagine you were a board member of British Airways: would you understand the wider IT security issues around some 380,000 credit and debit cards potentially compromised as a result of a data breach between August 21 and September 5, 2018?
I hope you enjoyed this summary the full 2018 blogs. All the best for the New Year!
Until next time…