The tgf Governance Code – Part 2

Last month I outlined the first 4 Principles of the tgf Governance Code which are the Code components of the Resources section of our tried and tested tgf governance methodology. If you haven’t had the chance to read last month’s blog, you can read more about the first 4 Principles here: https://www.karlgeorge.com/the-tgf-governance-code-part-1/

 

This month, we’ll take a look at the next 4 Principles which form the Competency section of the Code and which is another of the 3 Compliance Drivers of the tgf Governance Methodology.

 

The 4 Principles of the Competency section of the tgf Governance Code are:

 

PRINCIPLE 5

The board should be diverse, balanced and suited to the needs of the organisation in its composition. Board and committee membership should be balanced taking into account knowledge, skills, experience, diversity, size and independence.

 

PRINCIPLE 6

The board should conduct themselves appropriately, avoiding conflicts of interest and adhering to a code of conduct. They should uphold ethically high standards of integrity and probity at all times, always acting in the best interests of the organisation.

 

PRINCIPLE 7

The board should have clear processes for appointment, induction and training in place for board members. These processes should be robust, formal, rigorous and transparent and take succession planning into account. Board members should be appointed objectively on merit.

 

PRINCIPLE 8

The board should have effective processes for evaluation of itself as a whole, individual board members and its committees. The board should implement and oversee robust processes for the evaluation of its own effectiveness and performance and that of each board member. Evaluation should take place at regular intervals, including periodic external support.

 

 

Codes of governance are intended to help organisations demonstrate their compliance with a set of principles that undergird good governance practices. These practices include but are not limited to the board complying with their duties as directors, probity, conduct, risk management, internal controls, leadership, effectiveness and engagement with stakeholders with provisions that direct organisations on how they should apply and explain these principles.

 

For example, the UK Corporate Governance Code which is the code on which many others internationally are modelled is split into 5 sections which can be remembered using the mnemonic BDEAR which covers these areas:

 

B – Board leadership and company purpose

D – Division of responsibilities

E – Composition, successions and evaluation

A – Audit, risk and internal control

R – Remuneration

 

There are eighteen principles within these 5 sections of the UK Corporate Governance Code. All of these principles, plus the principles of the other ten codes that were referenced when creating the tgf Code are included, demonstrating its applicability across all sectors and internationally.

 

So, to the Competency Principles of the tgf Governance Code which are:

 

PRINCIPLE 5

The board should be diverse, balanced and suited to the needs of the organisation in its composition.

 

In relation to diversity, the 2017 Charity Governance Code states that: “The board’s approach to diversity supports its effectiveness, leadership and decision-making.” Diversity is crucial across a number areas including skill, socioeconomic background, age, gender, ethnicity etc. this helps to bring depth to the boardroom and contributes to decision-making that is more robust. It also helps to create challenge which again promotes more effective decision-making processes.

 

When considering skills, the board members in every organisation should have the skills required to direct the work of the organisation, including specialist knowledge of the technical aspects of the sector. Alongside this, there are a number of what I call essential skills that should be reflected on boards across all sectors which are: governance, strategy, risk, finance, HR, legal and increasingly important now are skills in digital technologies and social media. Principle Eleven (a) of the Oman Code of Corporate Governance for Public Listed Companies states that: “The company shall adopt a transparent method in preparing the nomination policy targeting directors of high competence and calibre.” Making sure that the right skills are reflected in the membership of your board helps to create balance and ensures competency when these skills are applied in the boardroom.

 

Finally, with behaviours such as independence, transparency and openness being at the heart of good governance, balance must also take into account the number of executives versus the number of non-executives that are appointed to the board. The UK Corporate Governance Code refers to this as: “an appropriate combination…”

 

PRINCIPLE 6

The board should conduct themselves appropriately, avoiding conflicts of interest and adhering to a code of conduct.

 

There have been many instances in the media where high profile figures have been called into question regarding their approach to probity. For example, politicians have lost their jobs as a result of not strictly adhering to clear principles of good governance and not declaring interests. In the private sector, we have witnessed directors being party to decisions where there are clear conflicts where they should not have been part of the process.

 

Boards in all sectors have a duty to be independent and not to allow their personal interests to impact their decision-making in the boardroom. There should also be a culture of openness and transparency. Board Members are expected to behave appropriately in the boardroom, also ensuring there is a comfortable yet challenging environment.

 

The Department for Education (DfE) Governance Handbook states that: “In order to make credible decisions that are in the best interest of pupils it is essential that the board has an effective approach to conflicts of interest. All boards should prevent conflicts of interest from affecting their decisions by removing them or managing them as appropriate. For example, it is unlikely that the conflict of interest that would arise from a close family relationship existing between someone on the board and a senior executive leader could be managed fully, and hence in most circumstances this situation would be best avoided altogether. The Charity Commission offers guidance on managing potential conflicts of interest.”

 

The emphasis in the definition above is mine and has been added to highlight that the approach to conflicts of interest should be “effective” which means there must be processes in place that work and are monitored. The second point to emphasise is that conflicts of interest should be “removed” or “managed”. Where conflicts are material, boards and board members should take the view that the individual with the conflict should resign from the board. Other conflicts should be managed using common practices such as board members abstaining from taking part in certain discussions, not voting on certain matters or being asked to leave the room when items that could cause them to be conflicted are discussed.

 

 

PRINCIPLE 7

The board should have clear processes for appointment, induction and training in place for board members.

 

Before an individual is appointed to the board they should be made aware of the commitment required, what the role will entail, how much time they will be required to spend fulfilling their role. Prior to this, the board should have in place policies and procedures that detail how their recruitment will be undertaken, a process which must be open and transparent.

 

Once appointed, board members should receive a full induction that includes but is not limited to:

 

  • Completion of all relevant paperwork;
  • Meeting with the chair;
  • Meeting with the CEO;
  • Meetings with the executives;
  • Site or office visits;
  • Governance refresher;
  • Sector induction training.

 

They should also have access to key governance documentation including the governing document, terms of reference for the board and committees, profiles of existing board members and the code of conduct.

 

Listing Rule 5610 in the Nasdaq Corporate Governance Requirements states that: “The company must adopt a code of conduct applicable to all directors, officers and employees.” In all sectors, making sure that conduct is appropriate and in line with the Nolan Principles, which have become a universal standard of conduct in the UK, but were specifically developed for those in public office, is closely linked to board effectiveness.

 

Board members will not always have experience in the sector in which they serve on a board. In addition, each person will bring unique skills but may lack knowledge in other areas. To avoid having a board where the only the accountant talks about the finances, or only the solicitor or procurement specialist gets involved in the discussions about contracts or on a board in the healthcare sector, only the retired consultant contributes on patient care issues, there must be training and development in a number of areas.

 

Routes to assessing what training should take place include at induction, as a result of a skills audit, during the appraisal process and when new areas of business arise where there needs to be wide understanding of the topic.

 

 

PRINCIPLE 8

The board should have effective processes for evaluation of itself as a whole, individual board members and its committees.

 

I wrote a blog about all about appraisal in March 2019 that examined some of the challenges and perceptions of that process in relation to board membership. That blog highlighted the importance of appraisal as one part of the board’s evaluation of its own performance. Whilst individual and other facets of board appraisal do take place, one of the common development areas we have found across all sectors is a lack of consistency in how effective and rigorous these processes actually are.

 

For example, a member of my team conducted a board observation and provided independent feedback on the board meeting. The organisation deemed the observation and feedback as all that was required for the annual board evaluation. Other examples include appraisals that are ‘fireside chats’ where an informal conversation is held, or individual appraisal meetings with no clear feedback to the individual, a lack of consistency across individual meetings and no objectives being agreed. Neither of these examples reflects what the tgf Code would constitute as being ‘effective’ and do not reflect good governance practices. Whilst there is a place for informal communication and review, such activity must also be formalised at a frequency that is not too onerous but also does not have vast amounts of time between it where the needs of the organisation have changed or too much time has passed to be able to address underperformance which has in turn affected the overall performance of the board.

 

In their positions as directors and custodians of the organisation, board members need to be held to account for their performance. The board as a whole should appraise itself – including the committees and the board should ensure there are effective processes in place for appraising the chair and the CEO – the latter for whom they have the responsibility to appoint and remove and must therefore be responsible for monitoring their performance.

 

Principle 9 of the King IV: Report on Corporate Governance for Southern Africa states that:“The governing body should ensure that the evaluation of its own performance and that of its committees, its chair and its individual members, support continued improvement in its performance and effectiveness.”

 

There should be a 3-year plan in place that outlines when evaluation of the board will take place across all aspects of its work. Most codes recommend annual appraisal in all areas with supported by a more robust process every 2 to 3 years with the recommendation for external, independent support taking place in that second or third year. The UK Corporate Governance Code states that: “There should be a formal and rigorous annual evaluation of the performance of the board, its committees, the chair and individual directors. The chair should consider having a regular externally facilitated board evaluation.”

 

It is important also for the board to evaluate its own performance collectively (we also recommend anonymously) so that the effectiveness can be adequately commented on and any concerns brought to the fore. Good practice in the area of individual appraisal will include formally recorded objectives that are reviewed periodically and monitored prior to the next appraisal. This will help to ensure that the skills of each board member are maximised and that any challenges can be identified, including with behaviour and other things that may impact the stability of board membership and succession planning.

 

The 4 Principles in the Competency section of the tgf Code relate to the performance, review and evaluation of the board. They also include balance, integrity and training. John Carver said that boards are: “incompetent groups of competent individuals.” As an organisation, you should do all you can to dispel this commonly displayed challenge faced by organisations across all sectors.

 

Next month, we will examine the final 4 Principles of the tgf Code which address the final Performance Driver – Execution.

 

Until next time…