Genius will be releasing a series of Board Effectiveness articles, drawing on our own experiences as Board evaluators, of what impacts different Boards and what aspects of governance and people cause Boards to deliver more effectively as the leadership team of a business.
For the first phase, we shall use the 11 C’s Governance Model created by Jeremy Cross as a framework to discuss the many myriad of influences on the team and their ability to work effectively.
This week is the second part of a many week series of addressing some of the key elements of Board Effectiveness – starting with these 11 C factors. Further factors will be addressed thereafter.
Part One of Three
In our previous week’s article series, Genius addressed “Board Structure” and its influence on Board effectiveness and the introduction of the 12th C to the 11 C’s model below.
This week, Genius is addressing the three “Board Demographics” topics of Capacity, Capability and Connected.
To keep reading easy, only one of the three will be addressed each day.
Board Demographics addresses, within the physical people appointed to the Board, their collective demographic ability to deliver Board effectiveness.
Capacity addresses the various capacities of the Directors:
Do the Directors have the required know-how? This might be ensuring that a Director on the Board has deep knowledge about the industry, or someone who is engaged for their knowledge of a different industry, or someone who has an experience of which the business can leverage, or simply be the voice of common sense, which often does not prevail.
It is important that there is diversity of the know-how and that not too many Directors have the direct deep industry knowledge, leaving other areas lacking and risk the prevalence of groupthink while not being mindful of blind spots and the influence of biases.
The UK Corporate Governance Code, 2018 (Code) requires specific knowledge for certain Committees.
– Provision 24 states that for an Audit Committee, at least one member to have “recent and relevant financial experience.”
– Provision 32 states that the Remuneration chair, before appointment as chair of the Remuneration Committee, should have “served on a remuneration committee for at least 12 months”.
The Code, in Principle H, defines that “non-executive Directors should have sufficient time to meet their board responsibilities”.
Therefore, Directors need to have the time to dedicate effectively to the needs of the role, be able to step up for a project, be available if the business needs the Board’s greater involvement, due to a stage in their evolution, dealing with difficult issues or in the face of risk or worse still, a specific or wider crisis.
In Clause 76 of the FRC’s Guidance on Board Effectiveness (Guidance), it states – ”It is vital that non-executive directors have sufficient time available to discharge their responsibilities effectively”. It continues to note time in the business, with stakeholders, shareholders and refreshing their knowledge.
Time would encompass:-
– Preparing for meetings
– Attending Board and relevant Committee meetings
– Engaging with the business, the Chairman or other Directors between meetings
– Thinking about the business between meetings, raising alerts for risks and opportunities
– Delivering the detailed work of the committees they serve
– Delivering on their Chairman, Committee Chairman and Senior Independent Director (SID) or Vice/Deputy Chairman role
– Ongoing relevant training and continuous personal development.
The time involvement for a Chairman of the Board is higher than that of a Committee Chairman, which in turn is more than expected of a NED without a Chairman or defined role.
Provision 15 states that “full-time executive directors should not take on more than one non-executive directorship in a FTSE 100 company or other significant appointment”.
3. Fiduciary Duty
Do the Directors understand their role and legal responsibilities? i.e. to deliver under Section 171 to 177 of the Companies Act 2006, do they understand fully their obligations under the Code, or under the Seven Principles of Public Life or the expectations of industry regulators.
New reporting requirements under Section 172 – “Duty to Promote the Success of the Company” – encompassed in the Companies (Miscellaneous Reporting) Regulations 2018, require that the Strategic Report in the Annual Report for many companies beyond the FTSE 350.
Below is the text of Section 172, to be noted is the wide definition of stakeholder groups included.
Directors have the right to adequate training on the business, the law and the role, quality induction and ongoing briefings and development will ensure that the NEDs are always up to speed for the needs of that Board. In addition, the Code provides that Directors have unrestricted access to professional services as needed.
4. Capacity at Time of Increased Demand
In current times of higher and increasing risks to businesses due to the fast pace of information flow, decision-making requirements, greater focus on purpose, and particularly right at the moment where the world is challenged by COVID-19, Boards need to consider the following capacities too:
i. Much higher than normal additional time availability demanded of Directors in a time of extreme global crisis for a given Board’s needs
ii. The ability of Directors to balance their other roles particularly if they have an executive role which will be excessively demanding during a crisis, particularly global crises where demands will clash; and the ability to balance plural portfolios of non-executives where at a time like this all the roles are going to be demanding the extra time
iii. Accessibility to the business physically in terms of being able to visit the various sites appropriate to their interest and Committee focus
iv. Visibility within the business; it is important for the business in varying ways to see and gain value from the non-executives. The Chairman is typically more visible due to a closer role with the CEO, but that should not be the only Board non-executive that is visible
v. Engagement with the business between Board and Committee meetings; which is about considering the business at all times and therefore being alert to issues of importance to the business that can be shared. It is the non-executives who have the luxury of “horizon scanning” which the executives have precious little time to consider. Therefore, it is important to value the NEDs being “on the bridge” looking out for risks and equally opportunities.
Directors should be:
i. Proactive in considering the sustainable future of the business; how does their knowledge of their focus capability, the industry, the market and the business come together giving clarity on issues that will support or harm the sustainable growth journey or purpose of the business
ii. Share information and knowledge they have, or have determined, with the Board and the management, such that the right person is able to take actions or simply be mindful thereof
iii. Fit and proper – this has a specific meaning under certain regulations but in the context of board effectiveness, the Directors should have the right overall fit to that Board’s needs and should be a person of good standing. An example of unfit would be to have a qualified doctor on a digital financial services technology company without any other complementary skills. An example of proper would be to not have a person who is breaking the law and is in and out of jail.
Board Demographics also described by Jeremy Cross in his 11 C’s Governance Model as Professional or Social Capital. In this article, we have specifically looked at “Capacity” of the Directors on the Board which narrows the discussion to the physical capabilities of each Director and that of the collective Board.