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The mechanics of robust corporate governance

Friday 22, November 2024

Whilst attending the recent IOD Open House event, I had the pleasure of attending a seminar hosted by Morrow Sodali on Corporate Governance. The discussion by, and between, the panellists was energised and topical with a thought provoking opening question:

‘What is good Corporate Governance?’

Amongst the wide-ranging discussion, panellists reflected on the ongoing importance of the UK Governance Code. As part of its most recent review in April 2016 the original definition in 1992 by the Cadbury Committee was reiterated that:

“Corporate governance is the system by which companies are directed and controlled. Boards of directors are responsible for the governance of their companies … The responsibilities of the board include setting the company’s strategic aims, providing the leadership to put them into effect, supervising the management of the business and reporting to shareholders on their stewardship…”

Whilst specifically applicable to companies listed in the UK, its use underpins robust corporate governance across all companies. Even fast growing new startups need to have a semblance of corporate structure, leadership, oversight and evidence as they continue on their successful path. This becomes particularly important if external funding is sought to further grow the business and to meet regulatory oversight requirements.

Increasingly prevalent is the focus that a company can receive as a result of external publicity. Take as examples the public disclosure that board meetings focussed on personal remuneration at Carillion or the centralisation of blame on senior individuals at Facebook/Cambridge Analytica, resulting from whistle-blower allegations.

So what is good corporate governance?

Clearly, if the Cadbury Committee definition is followed, it incorporates strategy, leadership, supervision and reporting by all board members. The contribution of each individual valued by their diverse expertise and experience, should be brought together to produce a collective message that provides a clear business focus understood and supported by shareholders, employees, clients and third parties.

The application of diversity within a board can significantly strengthen a business, hence the focus on creating diversity, whether through legislation as in some countries, setting quotas or through businesses recognising the benefit and applying it.

Diversity of expertise and experience is irrelevant if board members have no opportunity to share it. Experienced directors will be only too aware that discussion is the substance of a strong and effective board that underpins strategic decision making, which is key to driving a successful business. Discussion by a diverse group of disparate board members enables the leadership of a business to consider multiple options then showcase a consistent message both internally and externally.

Formally recording discussions significantly aids the fourth principle of reporting. Without it, board decisions, discussions, challenge and strategy is not documented or progressed. Having clear board minutes reflecting decisions is a key record, especially when the future direction of the business may rely on previous decisions. And how often do discussions progress from one meeting to the next, through their evolution, starting to build the strategic direction of the business. With minutes to refer back to each time attendees, and especially those who may have been absent at previous meetings, can refer back and ensure that previous decisions can be progressed rather than re-debated.

It also means that, if a strategic decision is made and subsequently found to be the wrong decision, for whatever reason, the evidence is on record of the discussion, the background on the decision made, the reasoning and any dissenters from the outcome. As a board director, it is incumbent on each member to contribute to discussions and decisions, accepting the consensus decision and being part of delivering on the collective decision. Equally, it is the differing views of board members based on their diverse experience and expertise that makes a collective decision so valuable.

Practical application - the mechanics of robust corporate governance

So what does this mean in practice? Directors are required to bring their expertise, experience and leadership skills to all aspects of their role including the discussions held at board meetings in order to make them personally effective and the business successful.

Building a robust framework that supports and underpins the business without creating administrative burden on individual directors is an ideal that all companies should strive for. An effective board support structure will enable directors to rise above the formality and administrative burden of board membership and thus focus on their four primary areas of responsibility: strategy, leadership, supervision and reporting.

There are a few notable practical applications that an effective board support model can implement and can be highly beneficial:

minuting discussions to reflect the key considerations, both those that were identified as key drivers, as well as those that were discussed then side-lined. Having this documented ensures that subsequent discussions don’t go over old ground, particularly those that were deemed irrelevant to the topic, unless additional updated information is provided
documenting decisions clearly so that discussion can progress rather than stall in repetition. How often do board meetings rehash the same topic because the decision wasn’t clearly defined and documented, thus disabling the ability to move on to implementation
evidencing reasons for the decision, including noting any concerns. Thus, if at a future date, a noted concern becomes more relevant or inapplicable, the decision can be reconsidered with any new information
minuting director dissent will ensure that future review will support any directors’ subsequent contention that they disagreed with a collective decision, whatever their subsequent actions may be
identifying actions with specific deliverables, timelines and owners. This has the two-fold benefit of both documenting the application of decisions and also forming part of future agendas to ensure application is tracked.

The added benefit of having the above in place is that they can generate continued focus on the next steps, delivery of past decisions and building on previous ideas.

Documentation, such as board minutes, doesn’t have to be long detailing the minutiae of every discussion, but it does need to be accurate, have clarity, support future understanding and provide a robust audit trail if ever required.

Supporting the success of a business

Successful businesses have a leadership that identifies and delivers within specific strategic areas. Building that focus by having a strong leadership team able to discuss, agree and discard is key. Having the discussions documented to ensure continued focus on the specifics, supports the ability to focus on delivery. Tracking discussions and actions through matters arising, delivers a framework that continues to keep focus on the opportunities, even when a new topic for discussion or unpredicted crisis arises. Strong boards with clear objectives can continue to deliver through any crisis management, thus ensuring that the business remains successful despite setbacks.

If in the future, the strategic aim is to build, then sell the business, evidence of effective oversight can reflect the strength and substance of a company. Not only is the strategic focus on sale documented, but also the decisions made and actions taken to make the business more successful to become an attractive purchase.

Future owners can then take this strategy to the next step or ensure they don’t replicate what has already been tried. This ensures that, post-acquisition, the direction can continue or be refocussed based on historical paths taken.

In addition, as has been seen by recent publicised cases where board discussions focussed on personal gain, ineffective boards can also be identified by written evidence. By succumbing to administrative discussions only, such as director remuneration, boards are doing their own business a disservice by not taking the opportunity to lead and set the strategy and tone.

For purchasers, the content of board minutes can also flag opportunities to continue a successful direction or rebuild from the top by identifying effective (and ineffective) directors through their documented contribution.

Hence, having strong evidence of strategically thinking board discussions can underpin a business’s desire to exit through a successful sale.

Governance housekeeping

The importance of this governance housekeeping and getting it right should not be underestimated. If it’s effective it provides a robust skeleton for a business. If it runs smoothly and professionally, it enables the board to spend their time on oversight and strategic governance to drive the success of the business.

If it’s done poorly, board members, both collectively and as individuals, spend too much time on administrative matters. This split focus can result in strategic discussion and decision making being delayed or avoided. Administrative delivery is much more tangible and it can be tempting for board members to contribute. But, by limiting the administration and related actions to professional providers, either in-house or external, the real value of a strategic thinking board member can be evidenced and benefited from.

There are advantages of both internal and external board support. Internal can bring company specific knowledge and insight, understanding of the business and its dynamics. However, the resource cost, whether at a senior or support level, should not be ignored, especially for mid-sized companies that are resource light.

External providers of professional board support will bring confidentiality and neutrality, as well an expertise on the formal governance requirements driven by legislation. Board support will be their expertise with best practice learnt through experience of multiple appointments. The cost can also be clearly defined and monitored whilst resourcing, if provided by a company rather than an individual consultant, is not limited by absences. They will also enable all directors, including any who previously may have been responsible for board support, to focus on the board content, rather than board practicalities.

Tangible impacts

There are more tangible and immediate impacts of poor administrative governance. Companies House in the UK, and equivalents in other countries, impose fines for non-compliance with reporting requirements. These include fines for late submission of statutory accounts, which is a Director, as much as a company, deliverable. Persistently late filings or non-conformity with other submission requirements and their deadlines, can impact on a business and its Directors. Certain board minutes should also be maintained with the company’s formal books and records.

A director personally carries the responsibility to file and may be fined or struck off from acting as a Director on other companies. From a business prospective, if one of the boards strategic goals is to float or sell in the future, due diligence on the company’s statutory filings will quickly identify if deadlines have been persistently missed. This can then raise flags as to why, is it purely poor administration or does it indicate audit concerns, financial issues or cash flow problems that have delayed completion of accounts and the knock on to late filing.

So what is good corporate governance? It starts with segregating the administrative aspects of the board from the governance aspects of strategy, oversight, culture and leadership. If board support is delivered by knowledgeable professional company secretaries, it provides a robust foundation that the board can rely on.

Thereafter good corporate governance is each and every board member contributing to and delivering against the four key aspects. Through this they are setting the character and tone of the business from the top. Building a strong ethos and culture that reflects the business that they are leading through example.