"Where was the board?"
This is always one of the first questions asked following a major corporate failure. It happened in the early 1990s and remains the case today, most recently with a series of going concern cases (BHS, Carillion, Thomas Cook) highlighting the critical importance of managing solvency and liquidity risk. Ultimate responsibility for failing to do so lies with the board.
Since the board of directors is collectively responsible for the long-term success of the organisation, it needs to be effective – something that is far from straightforward given its extensive responsibilities.
For example, the board needs to take decisions objectively in the interests of the company and its shareholders while dealing fairly with its stakeholders – employees, customers, suppliers and so on. It must comply with all relevant laws and regulations, act with integrity, hit its performance targets and meet strategic objectives. Being a director today is no easy job.
Organisations should concentrate on two areas to create an effective board. First, their processes: they need to develop an agenda for board meetings that fully reflects what the board is there to do. Second, their people: they need to put together a high-performing team of directors.
In addition, organisations should look to appoint a credible and committed board chair, responsible for leading the board with integrity and for its overall effectiveness. Finally, there should be an evaluation process, providing assurance that the board and the individual directors are performing as required.
The UK’s corporate governance code provides a best-practice framework. Similar governance codes exist in the Caribbean providing guidance and best practice guidelines for companies in the region.
Embedded within the UK code are four fundamental areas of board responsibility:
• Strategic thinking. Positioning the organisation and navigating its strategic risk landscape are probably the most important requirements of a board, especially when markets are changing.
• Establishing policies, values and integrity. Policies are set by the board and need to be updated regularly. They should be underpinned by a positive culture, and strong business ethics and tone from the top.
• Supervising management. Senior managers are tasked with hitting targets in order to achieve objectives. Part of the board’s role is to monitor their delivery against budgets.
• Ensuring accountability. The board is accountable to shareholders and has responsibility for governance. Part of good governance is a performance evaluation of the board and its directors, although many organisations do not do this.
The code applies to companies listed on the London Stock Exchange, but these four areas provide a clear route map for boards of all organisations. This map is especially relevant for executive-only boards. Here, there is a danger that board meetings become too focused on operational details, with insufficient time given to strategic oversight. There is an important maxim here – boards should try wherever possible to "stay out of the weeds."
Assembling the team
For a board to be effective, the directors need to work well together as a professional, high-performing team. Each director should be appointed on merit, with skills and experience that meet the organisation’s requirements. This applies to both executive and non-executive directors. Non-execs contribute by bringing independent challenge and scrutiny to the boardroom. Taken together, executives and non-executives should have an appropriate balance of skills and knowledge of the organisation, together with diverse experiences and ways of thinking to enable them to promote the success of the business.
Organisations should adopt the following four-stage people model:
• Selection. There should be a formal, rigorous and transparent procedure for the appointment of new directors.
• Induction. All directors should receive help and advice when first joining the board. Non-executives need to understand the business and meet its key people as soon as possible. Executives need to understand their legal responsibilities.
• Evaluation. There should be an annual appraisal of the board’s performance, together with any board committees, and that of the individual directors.
• Development and renewal. All directors should regularly refresh their skills and knowledge, while board succession planning should be in place.
Evaluation and appraisal
One of the most significant changes to the UK’s corporate governance code over the last 20 years is the requirement for the board, its committees and the individual directors, to be subject to an annual evaluation and appraisal process. Introduced in 2005, it was anticipated then that board evaluation would mainly be an internal process. But the code was amended in 2010 to require external evaluation of FTSE 350 boards at least once every three years.
Today, the great majority of board chairs consider that the evaluation process is valuable and has resulted in improved board performance. The techniques used normally comprise a combination of self-assessment questionnaires and one-on-one interviews with the chair. Some of the key areas often included in board reviews are set out in the box above.
Board evaluation is an important performance improvement driver. Yet many non-listed organisations never appraise their boards. It’s a missed opportunity: most organisations would benefit from putting in place some form of tailored evaluation process.
Steve Giles is an independent consultant, lecturer and author.