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Nearly two decades since the creation of the first Corporate Governance Code, board accountability has evolved to place much greater emphasis on empowering directors to create the right culture and behaviours to navigate new social and environmental challenges. Even five years ago, corporate governance was quite retrospective – boards more interested in looking back over their financial performance than worrying over the impact of; the environmental agenda, cyber security and disruptive technologies. Article by Alison Gill, CEO – Bvalco
These days, if you go to a board meeting the breadth and depth of the issues being discussed has increased. There is much greater emphasis on the long-term sustainable success of the company and ways to make the organisation more entrepreneurial, to stay ahead of disruptive threats and improve the customer and employee experience. All of which is being discussed in a way that isn’t just about generating value for shareholders, but also contributing to wider society. In part, this is due to revisions that have been made to the Corporate Governance Code, which aims to promote transparency and integrity in business. Operated by the Financial Reporting Council, it sets the standard for corporate governance in the UK and was strengthened after Sir David Walker’s review of the 2008 financial crisis, to encourage boards to raise their game even further. Since then, the code puts much greater emphasis on the culture driving the behaviour and ethics of the organisation, requiring boards to be externally reviewed every three years, or explain their reasons for not wanting to do this.
While in 2018, the code was again revised to encourage boards to consider ethnic and social diversity when choosing their members, reject pay packages when company performance has been falsely buoyed, monitor and assess culture, put as much emphasis on contributing to wider society as delivering results for shareholders and gather views from the workforce, which could include having employee representation on the board. There were also measures to require executives to hold onto bonus paid as shares for at least five years, to increase their commitment to the long-term success of the company, and a new recommendation that chairman step down after nine years to reduce the risk of them become biased or complacent. The result is that ‘people issues’ – such as managing people with integrity, the gulf between what top executives and average workers earn and how representative the board is of the organisation’s customers and employees – are now being given special attention.
“Board directors have to operate in a state of constant paradox – they have to work hard to ensure the organisation is being well run, but not to actually run it”
Given few of these topics would have even been considered in the boardroom until recent years, this is a huge shift within the corporate governance agenda.
Another huge shift is the emphasis now being placed on how things are being done, instead of just looking at what is being done. For example, the PPI mis-selling crisis, which has cost UK banks billions of pounds in claims, happened because of the way employees were incentivised to increase sales. This is considered totally unethical today but previously went unchallenged by boards, because there wasn’t enough attention being paid to the values driving the culture of the organisation. Boards were looking at the extra product revenue being generated, instead of questioning how the sales were being conducted. Although the Corporate Governance Code has been repeatedly tightened in response to financial misconduct, which can result in corporate governance being seen as a means of stopping bad or unethical behaviour, the real purpose of corporate governance is to ensure organisations are being really well run. To this end, board directors have to operate in a state of constant paradox – they have to work hard to ensure the organisation is being well run, but not to actually run it. They need to stay close enough to the business to oversee what’s being done, and how it’s being done, but maintain enough independence to challenge, question and apply controlled judgement where needed.
When creating strategies, the individual directors have to find a way to work effectively together as a cohesive group, but not become so close-knit that they fall into the psychological phenomenon known as ‘groupthink,’ where group members withhold dissenting opinions and gravitate towards popular decisions and consensus, and other negative group dynamics such as; hubris and coalitions. Essential to overcoming these human tendencies – especially in light of constantly changing environmental, social and governance (ESG) issues – is having an effective chair and creating a safe and open boardroom culture, where the board is made up of diverse individuals who can voice their concerns and challenge decisions. Unfortunately, even though diverse boards think better, have more diverse workplaces, are more representative of the customers they serve and are more profitable, less than a third of FTSE 100 board positions are held by women and the majority of FTSE 100 board rooms still have no ethnic diversity at all. A major reason for this is that people within these demographics are not being given the opportunity to learn what a board role involves, or acquire boardroom experience – as a non-executive director for another organisation – before putting themselves forward for an executive role at their own organisation. For this to change, executives sitting below board level, need to be developed to understand the workings of the board so they know what to expect and can be encouraged to gain relevant experience. Only by broadening the pool of people who understand what it means to be a good board director will the pool of candidates become broad enough to change the current situation, where you effectively have to know someone on the board to be considered for the board.
The skill-set HR directors have around values, reward, equality, diversity, inclusion, behaviour, wellbeing and culture are becoming increasingly important. This means HR directors, in particular should seek out opportunities to sit on boards in their own right, or the boards of other organisations as a non-executive director (NED), to provide valuable input on how to create the happy, healthy workplaces critical to organisational success. Another big focus for corporate governance is incorporating ethical behaviour across the business. Fifteen years ago, it was considered ‘normal’ for workers to die on big construction projects, but improvements to health and safety have been driven by a change in values, which means that even a single death is now considered totally unacceptable. Similar shifts are happening in the fashion industry, where there is a new emphasis on ethical supply chains and not using child labour, and the oil industry, where environmental considerations can no longer be ignored. With a company’s moral compass now a significant part of its corporate governance, boards need to establish the company’s purpose, values and strategy, and satisfy themselves that these and the company’s culture are aligned. All directors must act with integrity, lead by example and promote the desired culture. Performance should also be measured against these values, while prudent and effective controls must be put in place to assess and manage risk, including the reputational risk of not acting in accordance with those values.
This means that although it’s tempting for organisations to view their board as being governed by charters and mandates, a board is a social entity whose decisions are as much influenced by the informal culture and beliefs at play. For example, directors’ beliefs in increasingly pertinent issues such as equality and fairness, business agility and carbon footprints, are as much influenced by their personal views and personal appetite to look at the bigger picture, as any formal targets in place.
Although it’s tempting for organisations to view their board as being governed by formal charters and mandates, a board is a social entity whose decisions are as much influenced by the informal culture and beliefs at play. It’s no longer enough for board reviews to look at ‘hard’ corporate governance structures, such as its role, process and the strategies in place. Instead, it’s also necessary to look at the ‘soft’ structure, such as the extent to which spoken or unspoken beliefs are influencing decision-making, the way values are shaping the boards decisions and judgments, and how the culture of the board and behaviour of directors is shaping the culture and cohesion of the board and impacting on how it gets things done. Only by looking at all these elements can the board ensure its approach to corporate governance is creating a board that’s fit for the future.