Justin Moran explains why private sector boards need a sharper focus if they are to perform optimally in the best interest of the company.
The benefits of effective governance for private sector companies includes more strategic thinking, improved decision making processes, proactive risk management and, ultimately, leveraging investment and capital at more competitive rates. Yet many private sector companies, which are not subject to regulation, operate outside any mandatory governance codes and are typically reliant upon a smaller governance structure to help direct and control the activities of the company.
For small- to medium-sized (SME) and large companies, this places a significant burden on the board of directors. The present business environment also means that the board must:
- Be more proactive in the establishment and monitoring of strategy, including those objectives which underpin growth;
- Assess how well the organisation is positioned to attract and retain the skills and resources necessary to deliver the strategy;
- Remain alert to developments in competition and innovation;
- Be aware of new and emerging trends in the use of technology and data, digital marketing and social media; and
- Identify and monitor risks as they develop and emerge, including financial, operational and compliance-based risks.
Overall, board effectiveness plays a key role in ensuring that companies are adequately positioned to face these challenges and opportunities.
Improving board performance and outcomes
To enhance board effectiveness and outcomes, private sector companies should start by considering the following elements of an overall governance framework:
Aligning the governance structure with the growth of the company: Identifying where the company is positioned within the corporate life-cycle is key to determining its governance needs. However,it is something that is commonly overlooked. It is imperative that companies strike a balance between what has been effective in achieving their success so far, and what strategies can sustain longer-term success. If the governance approach results in too much bureaucracy, organisations will inadvertently create a potential downside risk.
Identifying and promoting the intangible asset of culture: One of the significant challenges facing boards is identifying how to strike the right balance when seeking to understand and develop the intangible asset of culture. It is informed by the levels of support and challenge around a boardroom table. It has also been recognised as serving a key role in determining the effectiveness of the board in leading and directing the business and its ability to achieve its full potential.
Boards can start by asking: what are the vision, mission and values of the organisation and how well is this articulated? What behaviours are desired and undesired within the organisation? And how is the ‘tone at the top’ set and is it permeating throughout the organisation?
When considering these questions, the board should assess the type of culture that is desired and suited to their implementation of governance measures relative to their position in the corporate life cycle.
Board composition and structure
It is well recognised that not having the correct people with the necessary skills is a huge impediment to development as a board. While its effect on boardroom behaviour and culture should not be underestimated, any private sector enterprise seeking to grow new markets, build wider networks and harness experience based on a proven track record must carefully evaluate whether the board has the necessary skills in place.
To develop and build upon the capabilities of the board, a key step is the decision to invite external directors (non-executive directors) onto the board. A more diverse board composition generates a significant impetus towards better governance and is likely to have a significant impact on the culture of boardroom decision-making.
In terms of overall structure, the vital relationships that must function efficiently include the chair and the CEO, and the CFO and the audit committee. The implementation of Companies Act 2014, including the requirement for directors of all large companies to establish an audit committee (or disclose otherwise), will further highlight the importance of developing these structures and relationships. Similarly, board dynamics are complex and ever-changing. Board changes can affect relationships; therefore the need for succession planning remains strong.
Maintaining the appropriate balance of formal processes
It is important that the board implements a combination of both formal and informal processes, which are reflective of the maturity and culture of the organisation. Examples of key formal processes include setting a board agenda that does not focus purely upon short-term objectives. The agenda should be set by the chair and should also be informed by input from non-executive director(s) where required. Risk and opportunity management (ROM) should be embedded within the board agenda to promote engagement and discussion on scenarios that impact upon organisational strategy and objectives.
Attention should be paid to the conduct of board meetings to ensure that meetings are adequately chaired, engaging and ultimately adding value to the organisation. It is hugely counterproductive if meetings evolve into ‘talking shops’ without effective decision-making processes. The distribution of the agenda should also allow adequate time for board members to consider the agenda and review the supporting board pack. Doing so will maximise the effectiveness of the meetings.
High-quality and up-to-date management information, which helps the board understand and analyse key performance data and indicators, should be used. The development of board-level management information should be agreed with the CEO and/or senior management so that there is a clear understanding of board needs and what existing information and data can actually be provided. This is an important area that is often overlooked and can cause significant tension between the board and management. Such tension may arise from a perceived view of the board of not receiving the full picture. A clear understanding and focus upon performance data can also underpin the board’s role in setting and monitoring CEO and executive-level performance objectives and the approach to remuneration.
The importance of informal processes
Many boards often overlook what may be considered ‘informal processes’ when seeking to improve board effectiveness. It should be remembered that board conduct, decision-making and effectiveness are dependent on a combination of factors including relationships, teamwork and communication. In this context, any investment of time and commitment in building strong relationships among board members will normally lead to improved outputs and performance. Examples may include structured away days, planned visits by non-executive board members to different parts of the business, or making use of time away from the formality of board meetings to get to know each other.
Private sector governance codes
The UK Corporate Governance Code is primarily aimed at listed companies rather than SME or larger unlisted companies. While it is recognised as the leading corporate governance framework, it may not always be suited to organisations that require different considerations to function cohesively.
The NSAI Swift 3000 code provides an alternative governance framework and involves rigorous assessment of the board in areas including appointment, composition, competence, independence, remuneration, information, reporting, accountability and audit.
In making use of any governance code to facilitate benchmarking or the review of governance processes, the board must avoid a ‘tick-the-box’ approach and should carefully consider what may be described as the softer elements, as outlined above.
As companies begin to challenge their existing governance processes and systems, the benefits should become evident. If implemented correctly, improved board effectiveness and outcomes will have positive impacts on the long-term sustainability and growth of the company.
Justin Moran is Director, Governance, Risk & Internal Controls Division, Mazars.
This article was originally published in the June 2016 edition of Accountancy Ireland.