The recurrence of major business scandals contributed to or caused by a failure of governance suggests that establishing and maintaining effective boards remains a challenging issue for businesses and organisations. The collapse of Enron (2001) and Lehman Brothers (2008) are oft cited examples, as are the collapse of Northern Rock plc, the near collapse of HBOS, RBS, and the Co-op Bank and, more recently the VW’s vehicle emissions scandal which may cost VW in excess of US$50 billion to resolve. Finally, the recent various FIFA scandals also provide clear reminders that governance failures can contribute to massive losses for shareholders and stakeholders, and give rise to fundamental questions on the license to operate and the validity of the business model. A weak or dysfunctional board poses a significant threat to the ongoing success of a business and no business is likely to succeed or thrive for any length of time without an effective board.
Sound corporate governance, the systems and processes by which a business is managed, controlled and led, is critical to achieving and maintaining success, commercial or otherwise.
Corporate governance is concerned with although not limited to:
- business values and culture
- business strategy
- risk management, internal controls and their oversight
- board training and evaluation
- effective leadership including effective delegation and accountability
- director selection, appointment and succession planning
- changes in control and adequate protection for shareholders
- separation of key executive powers
- scenario planning and disaster recovery
- communication and engagement with shareholders and stakeholders
- access to and constructive use of the AGM
- auditor relationship, independence and appointment
- consistency of approach, over time and between different jurisdictions
- executive compensation and use of remuneration consultants
The hallmarks of good governance have expanded as the scope of the world's leading governance code has broadened. The checklist provided by the UK Corporate Governance Code (2014) or other codes such as South Africa's King Code 111 of Corporate Governance Principles (2009) are comprehensive and give a useful governance agenda for companies. The leading codes are revised periodically to ensure they remain fit for purpose and reflect developments in the real world, for example the 2014 revision of the UK Corporate Governance Code gave greater prominence to risk management and risk reporting.
The implementation of codes has to be driven by a combination of each company having the resolve to do so, because it makes good business sense, and shareholders performing a stewardship role to hold the company and its directors to account. This is entrenched in the approach of "comply and explain", which reflects that the codes are not a rigid set of rules but principles which should be applied unless the company explains to shareholders the rationale grounds for not doing so.
Given the long list of corporate and organisational failures, investors, analysts and stakeholders understandably seek assurance that boards have the internal processes required to enable them to ensure that the correct matters are reserved for the board and that the board is appropriately engaged to ensure that those matters are addressed at the right time, with the right information, by the right people. One element of this is ensuring that the composition of the board enables it to avoid "groupthink" and to bring informed insights and challenge to all issues before it.
Effective boards are effective for myriad reasons, most of which are of equal weight. The list is lengthy but includes:
- clear division of responsibilities at the head of the company between the running of the board and executive responsibilities for running the company
- a chairman who leads the board and ensures its effectiveness
- non-executive directors on the board constructively challenging and helping to develop strategy and thereafter assessing its execution
- the board and its committees having an appropriate balance of skills, experience, independence and knowledge
- a formal, rigorous and transparent procedure for appointment of new directors
- directors having sufficient time
- directors receiving an appropriate tailored induction and thereafter regular updates to refresh skills and knowledge
- being supplied in a timely manner with information in a form and of a quality which enables them to carry out their duties
- directors submitting for re-election at regular intervals subject to satisfactory performance formal and rigorous annual evaluation of performance
- presenting a fair, balanced and understandable assessment of company's position and prospects
- determining the nature and extent of risks it is willing to take and maintain a sound risk management and internal controls systems
- remuneration that was designed to promote long term success of the company
- satisfactory dialogue with shareholders
Boards can be ineffective because of weak leadership by the Chairman/Chairperson ("Chair"). A high-performing board requires a chair to set the tone of governance at the board and across the organisation. This will include setting the board's agenda and ensuring appropriate time is allocated to strategic issues, allowing a culture of openness, meaningful debate, effective contribution from directors and constructive relationships between executives and non-executives. Importantly the chair must ensure that directors receive accurate, timely and clear information. In many of these activities the chair will be assisted by a competent company secretary.
It is also important that the board include an appropriate combination of executive and non-executive directors, with sufficient independent directors who are selected with due regard to the benefits of diversity in combating the chilling impact of group think. Directors must possess an ability to deal with difficult issues, to get to the heart of matters and to communicate with clarity and without rancor. Effective boards are likely to be directly engaged in what happens within the company, how staff are treated and motivated, and what the customer is experiencing at all company touch points, asking the hard questions, challenging assumptions and orthodoxies, and even expressing strong and dissenting views are all appropriate and welcome elements of board member engagement. Frequently, key decisions on issues such as ethics, sustainability and long term risk are taken inside board committees, which in turn need appropriate remits and governance.