Corporate governance is rarely out of the business headlines. In spite of 25 years of an evolving corporate governance framework for UK listed companies, in the wake of any high profile collapse or breach, the finger of blame inevitably tends to etch out terms such as ‘management failure’, ‘domineering bosses’ or ‘toxic company culture’.
The UK’s FRC has published proposals for a streamlined Combined Code. One of the FRC’s key considerations was to attain an appropriate balance between principles, provisions and guidance, while retaining the Combined Code’s perceived strengths, particularly its ‘comply or explain’ approach.
In the UK, ‘comply or explain’ works satisfactorily as long as it is used responsibly. Among large, listed companies, most comply with provisions fully or ‘explain’ with regard to just one or two provisions. It is important when companies choose to explain that they make clear how they are applying the principle, the reason for the departure and whether it is likely to be temporary or not.
For boards to be effective, both individual and collective engagement – or how well they bring their collective experience and expertise to bear – are vital. That will include how well the board provides both challenge and support to the executive team. Perceptions of independence are important, particularly when it comes to complying with provisions within the Combined Code. However, independence of mind is really critical – board members must have the courage to ask difficult questions in a constructive manner.
Boards must make sure that they not only look good on paper, but that they operate effectively in practice. Disclosures in the annual report, should provide the starting point for effective engagement by leading investors with the board. A continually evolving corporate governance framework, with a strong focus on the stewardship code for investors as well as the national governance code, should assist in clarifying how this objective can be achieved.
This blog is an excerpt of an article “Evolving a corporate governance role that’s fit for purpose” which appears in the Winter 2018 edition of Board Agenda. The full article can be found here.
Whether a business achieves sustainable success for the benefit of its stakeholders and wider society is critically influenced both by the board’s decisions and, also very importantly, by how board members act in the boardroom.
Boardroom behaviour has a crucial impact on corporate culture since how the executive and non-executive directors treat each other reverberates across the organisation.
Four types of board culture
We have identified four different types of board culture based on a 2×2 matrix that considers the degree of support and challenge respectively that exists in the boardroom. Ideally, there will be an ‘engaged’ board with high levels of both, but alas the three other options are also found in practice and in their different ways each will hold the business back from achieving its full potential: the ‘cosy’ board with high support and low challenge; the ‘us and them’ board with low support and high challenge; and, the ‘semi-detached’ board offering neither challenge nor support.
1. The ‘engaged’ board
There will be strong degrees of openness and trust between board members on an ‘engaged’ board with high-quality information made available to the board and its committees in a timely fashion. There will be no issues ‘off agenda’ and challenging situations will be discussed at an early stage of arising with the collective intelligence of the board being brought to bear in determining the best way forward. Board meetings will be well-structured with time allocated for discussion and clear decisions taken after. In addition to dealing with regular board issues, time will be set aside for an annual ‘away day’ to provide an opportunity to review progress towards achieving the longer-term strategy and to consider other issues requiring significant time for reflection and discussion. The board also needs to know when it would be helpful to have external advice to assist in making decisions possibly, for instance, on issues related to cyber security or wider aspects of technology.
Does your approach to risk management and seizing opportunities maximise your chance of being one of the winners or is it more likely that you will end up suffering a potentially existential threat to your business in the coming years? This is the big issue boards must address given the unusually high degree of change and uncertainty currently in the system which many feel is the ‘new normal’.
The current environment shaped by the cumulative impact of technological change, political instability and low levels of trust in business, looks set to create far more significant winners and losers than would occur in more steady state times. Whilst maintaining the core ability to identify, assess and manage risks effectively remain the hardy perennials, agility and resilience comes to the fore at such times. (more…)
Corporate culture has been high on the boardroom agenda in the UK in the past year at least partly due to the FRC’s well-received report on ‘Corporate Culture and the Role of Boards’.
Healthy culture essential for sustainable success
Providing a concise definition of corporate culture, however, seems elusive, not surprising given its all-pervasive nature. For practical purposes, it can be said to address how people behave when no one is looking and ‘this is the way we do things around here’. The expression that ‘culture eats strategy for breakfast’ which rightly highlights its importance is often attributed to Peter Drucker though this is disputed. Which one trumps the other is anyway in some respects irrelevant: for sustainable success the strategy needs to be aligned with the culture and with the people capabilities in the business which in turn will be inextricably linked to the culture. Interestingly, a top-of-the-range and a budget hotel may both be focused on meeting the needs of their customers outstandingly but the way they will do it is likely to be quite different, one with very bespoke services the other through meeting agreed standards, with correspondingly different skills needed in their people. (more…)
Following on from my earlier blog on ‘Leading when only the unpredictable seems predictable’, I promised a health check on how fighting fit your board is with regards to achieving sustainable success in times of uncertainty and change.
This blog looks at issues related to purpose and long-term strategy. Subsequent blogs will address culture and values; risk management and performance measurement; and, boardroom behaviours.
The power of purpose
It might seem paradoxical, but being clear on your purpose, expressing it in an inspiring way and having a well-thought-out, long-term strategy is even more important in times of major change and uncertainty, such as we are currently experiencing, than in steady state times when ‘more of the same’ has a better chance of carrying you through to a satisfactory, even if not outstanding, performance.
Any thoughts that we were moving away from a period of high risk and uncertainty in UK business vanished once it became clear that the snap election had delivered the UK a hung parliament. The existing uncertainty around Brexit and the economy in general has undoubtedly increased.
Furthermore, the current causes of high risk and uncertainty are not only political. Technology is also having a major impact on businesses whether through new entrants’ lean technologically-driven business models; growing online retail sales; opportunities provided by Big Data and artificial intelligence or the threats from cyber attacks. In addition, trust in business has not fully recovered since the financial crisis and with 24/7 communications, including social media, reputational damage following a crisis is likely to be more swift and potentially more severe than in years past. BA will attest to that. (more…)
Business is going through a period of huge change and uncertainty.
As advances in technology remove barriers to entry on a previously unseen scale, business models are disrupted and ‘old’ sources of competitive advantage displaced, many feel that we are still in the fairly early stages of ‘The Fourth Industrial Revolution’.
In addition, global warming is already affecting many businesses, particularly those in the energy, manufacturing and insurance sectors, whilst recent political developments, especially in the UK and USA, have shown a growing distrust of business and its leaders and there is also concern at the economic shift eastwards. And all of this easily and instantaneously brought to the fore with the relentless ‘24/7’ world of social media and other communications channels. (more…)
A modern company needs a modern board—one that mirrors its workforce and customer base. Companies still fall short of this ideal but their stakeholders, including investors, will increasingly expect to see a shift.
Progress towards greater gender diversity on boards is happening but change has been slow. My colleague, Marianne Sandén Ljungberg, is the CEO of Mazars’ operations in Sweden and leads Mazars Group’s thinking on diversity. She acknowledges the power of established, male-dominant board structures but sees their influence being eroded. She sees more women are being appointed to be CEOs which creates the opportunity for more people to assume senior positions at board level. (more…)
Two cheers for the Government’s Green Paper on Corporate Governance Reform published last week. The first is for indicating that ‘we need to support strong businesses that focus on long-term value creation and command public confidence and respect’.The second is for focusing on strengthening the employee, customer and wider stakeholder voice in a relatively broad and open-minded way and moving away from the idea of compulsory employee directors just as it has implicitly accepted that there are no silver bullets when it comes to addressing the vexed issue of executive remuneration.
The missing cheer is because it has not grasped the opportunity to take a thorough look at how changes in corporate governance and investor stewardship could help facilitate a real drive by UK listed companies towards striving for long-term sustainable success which brings benefits to all their stakeholders and wider society. (more…)
We should always be cautious in saying we are living through periods of unprecedented change. At this time of year one is very conscious that in the 20th century there were two world wars but there can be little doubt that historians will look back on 2016 as a year of major political change in the Western World that was not generally foreseen and the full political and economic outcomes of which will not be known for some time yet.
So, what are the implications for boards of listed companies and other significant businesses? (more…)