Measuring Board Effectiveness – Corporate Governance and How To Stay Out Of Jail
Today we take a brief look at the issues of how and why measuring Board effectiveness is so important.
Stay out of jail?
There is no doubt that we live in an increasingly litigious age and that directors and managers of companies are coming under ever increasing pressure to be accountable for their decisions. In a recent Sky News report Corporate Manslaughter cases are up by 40% in the last three years. There is unfortunately very little data to suggest if this has also been reflected in equivalent cases around corporate nonfeasance, misfeasance and malfeasance. One indicator may perhaps be the increasing insurance premiums and expected salaries required of Non-Executive Directors.
Directors of companies are more exposed than ever to the consequences of getting it wrong, well beyond any financial implications of failure. In simple terms if you cannot prove that collective decisions taken by the board were well argued, broadly analysed and risk quantified then each individual on the board is culpable and can individually bear the consequences of any retaliatory mechanisms, including loss of freedom.
The quality and transparency of Corporate Governance is the prime method by which the courts judge a company in cases involving corporate failure.
What is Corporate Governance?
Corporate Governance attempts to define the systems, processes and moral integrity required to manage a company. It is the domain of the board of the company. The board members are required to act as trustees for all stakeholders in the company (shareholders, customers, employees, suppliers and potentially anyone touched by the company’s business).
The public focus on Corporate Governance has, to a certain extent, waxed and waned with economic vicissitude. Over the last 20 years there have been numerous high profile investigations and associated reports, from the famous Cadbury report of 1992 following the Polly Peck and Coloroll collapses to the latest Walker report of 2009 following the massive financial meltdown of 2007/8. History is littered with the examples of systemic corporate failure affecting those far beyond the company’s immediate base. To name just a few in our lifetime that many will remember;
- Bhopal disaster
- Global banking meltdown
- Deepwater Horizon
At one time Corporate Governance was considered entirely the province of very large businesses, due to their complexity and potentially devastating consequences of failure. It is important to remember that since the Walker report the same principles of Corporate Governance apply to all companies large and small. Basically if you are fully signed up 288a director of a registered company, no matter how small, you are just as liable for the consequences of your actions as a director in Equitable Life.
Even after the litany of investigations and reports from eminent committees over the last 20 years, the act of signing up t0 Corporate Governance guidelines is still voluntary. The underlying principle being that the act of self regulation matched by the transparent requirement to “comply or explain” is sufficient. This was at the heart of the Cadbury report of 1992 and remains in place to this very day.
Why is it so difficult?
The board of the company needs to steer a transparent and (usually) profitable path between the sometimes intractable needs of all stakeholders. In some companies this is easier than in others. For example, small businesses tend to be less complex and with fewer differences of opinion about the “right” thing to do, however although the consequences of failure may be infinitely less far-reaching than those of larger companies, they still bring significant personal loss and trauma to all involved.
Since the fall out from the Equitable Life fiasco, the recent focus on the role of Non Executive directors and their failings has in some instances created truly adversarial environments that do very little to enhance the quality of decision making and guidance expected of those involved. At it’s worst it can result in extremely conservative decision making that can actually damage the business.
Perhaps the most important recommendation from the most recent investigation after the bank collapse of 2009, the Walker report of 2010, was that deficiencies in board practice are predominantly of behavior rather than of system or process. It’s as much about the way that the board interacts, supports, analyses and challenges each other as about any system or process.
It’s difficult because it’s all about the people and the politics!!
Ten years ago in 2003 Derek Higgs published his report on Corporate Governance in which he recommended best practice behaviours for directors of boards. It’s surely a travesty that such a critically important area of board effectiveness, due perhaps to the voluntary nature of the process, has to be re-iterated and recommended a decade later. The art of developing and monitoring excellent behaviour is applied throughout business, so why is it so difficult for the board members?
What can boards do about it?
Since the financial collapse of 2008 there is ever increasing pressure towards active Corporate Governance, whicn in turn means that there is more pressure to demonstrate that boards are abiding by the code. The declaration of Director responsibilities and increasing quality of Board minutes and actions do appear to be improving matters. The checks and balances for the sytemic, risk and committe are becoming more naturally embedded. However, the issue of demonstrating and measuring best practice behaviour is still relatively barren ground.
Behaviour can only be measured by the effect it has on those people who experience it. There is only one way to measure behaviour, either collective or individual, and that is to ask the people who are affected by it. There is only one tool that can do this effectively and that is 360° Feedback.
Over the years we have created a simple and effective three step approach specifically for Boards wishing to review and develop best practice behaviours.
Step 1 – Review of collective Board behaviour.
Using a standard Corporate Governance framework, individual directors give feedback on the collective performance of the board, defined against an amalgam of generic best practice behaviours as defined by Cadbury, Greenbury, Higgs and Walker. This is followed by a two hour review session with the board to define the areas for potential development.
Quick, comprehensive, impersonal and effective as an entry review process because it’s all about the board not any individual directors.
Step 2 – Review of individual Directors
Once the Board members are comfortable with the approach and quality of outcome, then the same process, using a slightly different competence framework focused on individual contribution, can be applied to all Board members. Each director is marked by every other director, and each member receives a personal debrief and individual development plan that they may or may not wish to share with the board.
Detailed review enables individual directors to gain insight into the areas where they could make significantly more impact for both their own and the board benefit. It’s where the real differences will take place
Step 3 – 3 month and 6 month “micro” review
To ensure that the behavioural changes have been embedded into the culture a very short review mechanism is introduced to check the board and/or individual development is on track against the specific behaviours that they have committed to develop.
Transparency and auditability. Extremely efficient because it focuses only on the important.
What are your experiences of working with boards? How do the behaviours of fellow directors affect your boards ability to perform? Are there underlying tensions between the Execs and Non Execs that are preventing your board from working at its best?
If you would like to discuss any aspect of this article further we would love to hear from you.