Boards now face having to juggle operational responsibilities with the need for ensuring proper corporate governance across their organisations. And business must be conducted under conditions of far greater scrutiny, while also demonstrating improved transparency and openness.
All this is complicated still further with the ever-growing diversity of large organisations which makes full and proper oversight extremely difficult. But it was the failure of governance procedures in a number of multi-national financial institutions that lead to the banking crisis which in turn led to revisions to the UK Corporate Governance Code in 2010, and again in 2012.
Thankfully, failures on this scale are rare. However, there have been, and continue to be, innumerable examples of where shareholder value has been lost through flawed or poorly executed strategy.
Despite the challenges they face and the array of legal responsibilities that come with the role, many new directors are given precious little opportunity to learn about their roles before joining a board, leaving them slightly at sea, not least when it comes to contributing to debates. The uncertainty this generates for members is far from ideal.
It can quickly propel a board towards the perils of ‘group think’ where outcomes of discussions may be determined by one or two strong personalities, and decisions, as a consequence, may be insufficiently thought through. What’s more, unlike other jobs and careers, it must be remembered that there is not much scope to “learn on the job” as a director. Liability and accountability exist on Day One.
As a starting point, therefore, we recommend that all new directors are provided with an induction to enable them to build an understanding of the nature of the company, its purpose and the markets in which it operates.
Training is another important consideration in order to give directors a full appreciation of the complexity of their role and the legal and regulatory requirements inherent within it, particularly if they have no experience of sitting on a board before.
Questions for new directors to ask when they first join a board:
As a guide, an induction pack, presentations from key managers, discussions with the Chairman/company secretary, meetings with other directors, reports from external analysts and site visits should give a balanced and real-life overview.
• Can I see the Articles of Association? The company’s ‘mini-constitution’ which regulates the internal affairs of the company – director powers, classes of shares, decision-making by shareholders etc.
• What is the company’s purpose? For most successful companies making money is the consequence of success rather than its ultimate purpose. What is that purpose, and why does this company fulfil it?
• What is the nature of the company’s business model and strategic objectives which will enable it to achieve its purpose? Businesses need a viable roadmap that makes practical sense. If it’s unintelligible, it needs further investigation.
• Are there recent issues that have absorbed the board’s time now, or are expected and in future? There may be a reluctance to discuss sensitise issues, but they should be fully appreciated before any newcomer sets foot through the door.
• How will I fit in, and what is my role in this respect? The Chairman should be able to advise about the balance of the board, how issues are dealt with in/outside the boardroom, and perhaps a bit about fellow directors. Every board has a different style – there is no one way to run a successful board.
• What matters are reserved for the board? Some major issues may need shareholder approval. Other matters may be delegated to management or committees
• How are we spending our money? The annual report and accounts for the last three years (or longer) will offer a clear understanding of trends in the company’s revenues, costs, profit margins, assets, liabilities etc. Most importantly, they will also indicate if there any danger of the company running out of cash.
• What’s the company’s attitude to risk? All directors need to understand company’s risk management strategy, appetite, and tolerance. They should also be individually indemnified against legal risks (ie. with Directors and Officers Insurance).
• What are the key drivers of business success or failure? Directors should be aware of details of large contracts, customer relations, staff satisfaction, major suppliers, major shareholders and shareholder relations policy.