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. 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 essential for a business to be successful. The hallmarks of good governance have expanded as the scope of the world's leading governance code has broadened. Codes such as the UK Corporate Governance Code (2016) 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.
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 or 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 challenges to all issues before it.
Many factors contribute to a board being effective. 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 a diverse and appropriate balance of skills, experience, independence and knowledge
● A formal, rigorous and transparent procedure for appointment of new directors
● Directors having sufficient time to fulfil their duties
● 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
● Term limits for members and chair positions
● The 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 and opportunity for engagement with shareholders
● Clear succession plans in place for CEOs and chairs
● Regular reviews for whole board, committees and individual board members
● Formally defined role for board in the case of a crisis
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. Diversity of backgrounds, expertise, gender and race can contribute to this. Directors must possess an ability to deal with difficult issues, to get to the heart of matters and to communicate with clarity and without rancour. 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.