Sharing this article with you that was distilled from research Strictly Boardroom undertook.
In the light of recent company failures in Northern Ireland, Eileen Mullan examines the state of corporate governance there.
Although it has been criticised in the recent past, Northern Ireland is not alone when it comes to governance failures. There have been significant failures in leadership throughout the UK and Europe. However, mistakes have been made. In order to get a sense of the state of governance in Northern Ireland, Strictly Boardroom consulted with 60 leading board chairs, chief executives and board members across the public, private, voluntary and community sectors. The purpose of the consultation was, first, to identify governance challenges faced by these organisations, and second, to gauge their opinion on how to maintain good practice and avoid failures of governance. The many drivers of failure identified by our work ranged from the insufficient skills of the board, micromanagement, a lack of defined roles, complacency, arrogance, risk aversion, poor relationships and communication. Governance has been a hot topic for many years – there have been many conferences, events, articles and books dedicated to what good governance should be. However, when you analyse the drivers for failure, it is obvious that many are still getting it wrong. Boards should be professional, committed and dedicated to the work of the organisation. Too many times I have come across apathetic boards that simply do not know what they are supposed to be doing. Board membership brings with it tremendous personal and legal responsibilities. There is a clear lack of investment in governance: to compound the issue, it is the executives that are sent on governance training, while boards skirt their responsibility. The evidence presented by our study shows the ease with which those consulted recognised the array of potential pitfalls and problems they experienced. It serves to reiterate the breadth and depth of individual and collective responsibility, and the importance of nurturing a culture of good governance. This overview gives a flavour of the findings and offers suggested actions that will provide a platform for positive governance engagement.
The mention of governance stirs many emotions – occasionally
great joy, but more often ranging from suppressed excitement to reluctant acquiescence. Running through all of these is the sense of achievement in getting it right, and the worry of getting it wrong. Good governance was considered by all as being essential in ensuring that an organisation: is accountable and fit for purpose; is outward and forward looking; and robust in its operations. It was also characterised as being ‘an important matter for the good reputation and performance of a company’s leadership’. There were, however, a variety of opinions on what constituted ‘good governance’. Those who took part in the consultation noted that the bureaucracy associated with compliance and promotion of best practice could potentially stifle dynamism. The common theme of good governance that emerged was that it is based on effective leadership supported by a sound relationship, based on trust and mutual respect, between the executive and the board. How do you know if your governance is good? Most people consulted felt that they knew when this was the case it, but surprisingly few engage in formal regular governance or board effectiveness reviews. Many, however, did include governance as part of their periodic strategic review, and in most instances this is relatively light touch. There was evidence of internal resistance to board effectiveness reviews by both executives and boards, and in some cases it has required an external driver – such as quality accreditation or a qualified audit – to stimulate action.
Getting the best
Getting the best from a board is highly dependent on the nature of the organisation and the experience of those around the table. A highly-professional organisation with public appointees expects a well-performing board, whereas the smaller scale voluntary or community group often has to build its own board capacity. In every case, however, there remain some critical factors that determine effectiveness, most notably the state of relationships and trust around the table and in particular, between the chair, chief executive and the executive team. The role of the chair is of paramount importance in creating an environment conducive to open, assertive and confident participation, running meetings efficiently, and dealing with any tension that arises. Positive board development involves regular observation and analysis of board effectiveness. It is a constant learning process in a dynamic environment, requiring timely action to nip problems in the bud. Understanding roles and responsibilities is another pre requisite, not merely amongst board members, but also throughout the organisation. In this way the board can secure appropriate recognition and deference from the executive team.
Enhancing board performance is rarely considered an issue until it becomes a necessity – that is, when there is a breakdown. Currently most development support revolves around matters of compliance, with a focus on legal and financial issues. There is much less demanded, and offered, on performance. This is especially true in regard to building and maintaining effectiveness – including focusing on relationships and communication issues that require sensitive attention and external intervention. Why? ‘If it isn’t broken; don’t fix it’ – the mantra of many on the road to catastrophe, where neglect has let the rot set in. While there is an understandable reluctance from boards to undergo regular maintenance, especially in the form of dry training sessions and tick-box exercises, there does appear to be some appetite for more engaging development support from people with experience, including those who have lived through governance failures. One finding that was disappointing, but not surprising, was that contributors identified an obvious reluctance to address poor performance, especially from the chair. Boards do not undertake robust independent board effectiveness reviews, they tend to be more a self congratulatory process undertaken in the confines of the boardroom with no input from executives and stakeholders. Or worse, nothing is done at all. Why is this the case? Are they afraid of what they might find – or is it a case of putting their heads in the sand and hoping no one will notice? You would never consider not carrying out a financial audit to test processes, procedures and give assurance to the board and wider stakeholders. However, no one considers that the board should also be tested and assurances sought on behalf of stakeholders that the board is fit for purpose. I am no longer surprised when approached by chief executives or chairs, who say ‘I have a problem with my board’. Often a small amount of investigation reveals the reality of the situation: a clear lack of open and honest dialogue within the board, and between the board and executive. It would appear that board members and executives are still not grasping the idea that the challenge function is not an issue of personal criticism. Bad board behaviour is not checked, poor performing board members and chairs are not removed – the culture appears to be one of ‘why do anything – they only have a year left’. A completely inappropriate response; a year is a long time for an organisation to have poor leadership and ineffectiveness at the top. All of this comes back to the board composition, what criteria are used and how people are appointed. Rarely do attitude, behaviour, commitment and the question of challenge come into the equation when seeking new board members – but these are all critical elements that should be sought when building a brilliant board. Great boards begin with great board members. What is now clear is that:
- governance tends to become an issue only when a problem arises and boardroom effectiveness is often tested in situations of stress and adversity – there is a need for support in prevention rather than cure;
- there is a lack of continual investment in development of capacity for effectiveness and prevention of governance failure, yet there is widespread recognition of the need to evolve in a dynamic and increasingly complex and challenging environment;
- training for non-executive directors/board members needs to be on-going and look at behaviours, attitudes, commitments and the challenge role;
- independent board effectiveness reviews should become a mandatory requirement for all boards regardless of sectors – self assessment is not good enough;
- poor board performance needs to be addressed. Annual appraisals of members and chairs need to be undertaken. Chairs need to stand up to the responsibility and address poor performance. Chairs must also be appraised and be open to constructive criticism on their own performance
The current economic climate, combined with the increasingly complex demands on directors’ time, not to mention some high profile failures, is making it increasingly difficult to get people to take up voluntary and paid positions on boards. Greater attention will be required on the issues of succession if rapid, seamless integration of new board members can be expected. There remains a lack of investment in governance and with budgets under additional pressure it is less likely to be a priority – until, of course, a problem arises. Continual change presents a constant challenge. It is widely accepted that there is a need to constantly review governance arrangements to ensure they are ‘fit for purpose’; particularly in difficult economic circumstances where there is a demand to do more with less. It is also widely acknowledged that, more than ever, boards must be prepared to adapt and take difficult decisions before it is too late, requiring an appropriate utilisation of risk framework linked to robust management reporting.
Organisations can have the best governance framework and processes going, but if they have the wrong people, poor communication and poor leadership then the organisation will drift towards failure. Investing in governance is a must; it is time to embrace governance, not hide from it.
[Published in ICSA Corporate Secretary 2012]