Aspiring and current board members need to be conscious of their fiduciary duties in regard to corporate governance and need to be served by a system of good corporate governance based on the holistic approach. In summary, board members need the skills and tools to build an open, ethical business in touch with the needs of all the key stakeholders.
The most recent Act governing UK companies sets out the legal obligations of directors in regard to their fiduciary duties and their need to exercise due skill and care in fulfilling those duties. The seven elements of the General Duties of Directors are summarized below.
Directors have a duty to:
Additionally, in January 2015, the UK’s Financial Reporting Council (FRC) remarked that “The governance of individual companies depends crucially on culture” and “Boards have responsibility for shaping culture, both within the boardroom and across the organization as a whole and that requires constant vigilance”. So both the authorities and the general public are looking to boards to promote a culture of honesty and integrity.
In simple terms, in relation to the executive management, the Board’s role is to:
It is important to distinguish direction from management. The directors, and no-one else, have the ultimate responsibility for the Company to its stakeholders and their role is to ensure that management does its job properly and that they don’t get involved in doing the management job themselves.
Clearly the Board will only be able to carry out its role properly if the Board is effectively managed.
The first step in achieving effective management of a Board of Directors is proper preparation for the meetings. A last-minute rush to prepare board papers results in directors receiving board packs with inadequate time to prepare for the meeting. The key to good organization is usually the Company Secretary.
A good Company Secretary will ensure that the Agenda is agreed with the Chairman well in advance of the meeting. He or she will chase the key executives to deliver their reports in good time for assembly into a Board Pack. Thus, the Finance Director will have the accounts completed in good time, with full explanations of variations from budget etc. The directors responsible for Marketing and Sales will have their reports ready and the directors responsible for Production and Operations similarly.
All important aspects of Human Resources will be covered, with Health and Safety reporting fully complied with and no loose ends to be tied up, and if IT is represented at board level, a similar update will be expected. If the Board sub-committees, such as Audit, Remuneration, Nominations and Risk have to submit reports, they will ensure that they have held their preparatory meetings in good time before the Board meeting to be able to report accordingly.
All this is the responsibility of the Company Secretary. Poor performance here will have a disastrous knock-on effect on the performance of the Board.
The quid pro quo of an efficient delivery of Board papers to the Board members is that the directors must give them their proper attention. Clearly, the depth of knowledge in a particular area of the business lies with the executives concerned. However, the Directors are duty bound to ensure that they have as good an understanding of the matters involved as is necessary for them to be able to carry out their fiduciary obligations and duties of care and skill. Hence they must own up to any lack of understanding and they must express their views clearly and without fear or favor. The days of reading the Board papers on the journey to the meeting have long since gone.
The conduct of Directors is now a matter of public scrutiny in the event of a business getting into trouble.
The most important element in effective management of meetings is almost certainly the Chairman. His or her performance can ensure productive, enjoyable meetings or guarantee dysfunctional gatherings which can endanger a company’s future.
The Chairman has to ensure that the Agenda is appropriate and covers all the important items of the moment. The meeting itself should not be concerned with briefing directors. Rather, key supporting information must be made available to directors in advance of the meeting to enable decisions to be made at the meeting itself, and for policy discussions to be productive.
Responsibility for keeping to these rules lies with the chairman.
One of the most reliable ways to destroy effectiveness in meetings is to allow Directors to depart from the Agenda. If an issue is raised which is sufficiently serious to warrant making time to discuss it, the catch-all item “Any Other Business” is the place, at the end of the meeting.
Similarly, it is important to keep to the planned timetable. Meetings which are allowed to drag on well past their planned timings lose the attention of members and sometimes their physical presence too. The chairman’s role here is critical; to keep control of progress through the Agenda while ensuring that genuinely useful contributions are not stifled.
To make an effective contribution, directors should arrive at meetings fully briefed. They should try to raise matters of concern before the meeting so that as much relevant information as possible can be aired before the meetings to prevent lengthy presentations and explanations of information during the meeting itself. They should exercise self-control in their interventions to avoid monopolizing discussions and requiring the chairman to cut them off in order to give other directors an opportunity to contribute. At the same time, they must remember their fiduciary duty and duty of care and skill to express their strongly felt concerns and not allow themselves to be bullied into silent acquiescence.
Something to be watched is a tendency of meetings to focus on “Matters Arising” when considering Minutes of the Last Meeting”. This item often addresses actions denoted in the minutes and attempts to find out whether the persons tasked with carrying out the actions have in fact done so. Clearly, the Board Meeting is not the place for this investigation as the actions should have been checked out before the meeting – indeed at the point when they were supposed to have been completed. This falls into the Company Secretary’s area of responsibility, and a well organized company will have processes in place to track such actions and responsibilities for executing them. The Board should only be considering the results of the actions, if appropriate.
It should not be assumed that Directors’ involvement with a company is limited to the time spent around the eight to twelve meetings they may be scheduled to attend during the average year. A conscientious Director will keep him/herself briefed about the company and the markets in which it is operating.
The executives should be constantly looking at opportunities to keep the Directors up to date with key aspects of the company’s health and wellbeing. This should be geared to the corporate goals which the company has agreed, and particularly this should cover the markets in which the company is operating. Regular briefing notes will do more than anything else to enable directors to keep abreast of the company’s progress and help them participate knowledgeably in Board meetings when the company’s trading position is discussed.
Directors themselves should remember that they are responsible 365 days a year to shareholders and other stakeholders. They should be constantly looking to inform themselves and watch for threats to the company’s health and opportunities to advance its interests.
It is not only good practice, but now indeed a regulatory requirement for leading companies that the performance of Directors is regularly monitored. However, there are several aspects to good performance for a board of directors.
In years past it was deemed sensible to sprinkle a Board with members of the “great and good”. Nowadays it is recognized that it is much more important to have a board which is “balanced”. That is, it contains the mix of skills and experience appropriate to achieving the corporate goals adopted in the corporate strategy. This includes not only background but the interpersonal skills needed to ensure that the board functions well. Serious personality clashes between strong-willed Directors contribute to a significantly dysfunctional Board, and the Chairman must take steps to avoid this, or remedy it if it arises.
How big should the Board be? There are many factors contributing to the answer to this question. These include: do the Board members represent the interests of blocks of shareholders? If so, control will be the key factor. Is regional representation, reflecting the company’s global interests, important? If so space will be made for directors representing key geographical areas. Are technical skills vital to the company’s competitive success? If so, these must have a place at the boardroom table.
A danger here is that a dominant shareholding group, a highly influential regional voice or an outstandingly persuasive technical visionary may each bias decisions away from the optimal. This is where the Chairman’s role is vital in keeping the board within the boundaries of the company’s agreed strategy, unless and until the strategy is changed through due process.
Overall, however, the practical effectiveness of the Board must be a deciding factor. The larger the Board, the more difficult it will be for the chairman to manage.
Regulations now require more and more companies to carry out formal appraisals of Directors’ individual performance. These may be conducted by following standard appraisal procedures rather than by employing independent consultants, but they should be taken seriously. Directors who are found wanting must be helped to improve their performance or, if this proves impossible, they must be removed.
Even the Chairman must be subject to review, usually a review conducted by the Senior Independent Director, working with the other Directors. Removal of the Chairman for reasons of inadequate performance will invariably be a delicate matter, and usually comes through outside pressure from unhappy shareholders.
Periodically it will be necessary to bring new Directors on to the Board. Handling this process properly is part of what effective board management is all about.
Clearly, no Director or Chairman can stay on the Board for ever, and it is important, therefore, to have a suitable process in place for succession planning. “Independence” in a Director is, these days, defined by regulatory guidelines. Hence when a Director is approaching the point when his or her tenure is so long that they are no longer deemed to be independent, a recruitment process needs to be in place to prepare for their replacement.
It may be that a company is planning on investing in a relatively new field or unfamiliar geographical market. This may call on new skills or experience and in this case it may be desirable for the Board to be strengthened by recruiting a person with the necessary background.
The selection of a new Director requires all the usual processes including job definition and person specification. No longer is it appropriate simply to recruit a friend of the Chairman.
There is an on-going debate in the business world about the broad issue of gender equality regarding women in the workplace and a more rarefied debate about Board diversity and women in the boardroom. However, arguably, the most important area of diversity in the boardroom is the gender one, since 50% of the world’s population is female and the representation of women in the boardroom, and indeed in business generally, falls very far short of 50%.
Then there is the demographic dimension. A study published in September 2015 by the McKinsey Global Institute proposed that £12 trillion could be added to the world’s GDP by advancing women’s equality. It made the point that women comprise half the world’s population and if their potential in all the regions was improved so that all countries matched the rate of improvement of that of the fastest-improving country in their region, as much as $12 trillion could be added to the annual 2025 GDP. In a “full potential” scenario in which women play an identical role in labour markets to that of men, as much as $28 trillion could be added to global GDP by 2025.
The point here is that women understand women better than men do and women represent the vast majority of customers. Statistics show that women make more than 80% of consumer buying decisions and are responsible for 65% of spending.
So increasing the proportion of women in senior management and on Boards would seem to make logical commercial sense and the political correctness dimension seems an irrelevant distraction.
The author recalls a conversation some years ago with the recently retired permanent secretary of one of the biggest government departments who had recently joined the board of one of the oil majors. “What role do you have in mind for me?” he asked. “Oh, you’ll soon find how you can be most useful” was the reply.
Needless to say, it is very important that new Directors are given a thorough briefing on the company whose Board they have joined and its goals and strategy for achieving them, but also a clear definition of the role they are expected to play.
The author Nigel Kendall is a Chartered Accountant, Corporate Governance Consultant, and the author of several books on financial management and corporate governance. His first book gained him the endorsement of Sir Adrian Cadbury, the father of modern corporate governance. With a wide-ranging career history and over 20 years’ experience as an independent consultant, Nigel works regularly with boards of all-sizes of organizations on corporate governance, good boardroom practice and strategy.Nigel Kendall, Corporate Governance Consultant, Applied Corporate Governance