Not so long ago the board was all too often an abstract entity, with little connection with what was taking place on the ground floor. Then along came the credit crunch and those that had been badly governed were exposed for their weaknesses – bringing a need for greater transparency.
These days boards are much more effective in taking a hands-on stance. Mark Ridley, CEO of Savills UK, says: “In a professional services business, staff are the asset and nurturing the team needs a lot more communication than other businesses. We need to protect and nurture staff, so now we take a very different approach.”
Since the financial crisis the changing role of boards has also encompassed greater focus on risk management and dealing with increased public and shareholder scrutiny of executive remuneration and calls for more diversity in board composition, particularly with respect to gender.
A board directs a company and plays a key role in its governance. It is also legally responsible for the behaviour and performance of the organisation. It assumes direct responsibility for defining its business purpose, strategy, risk appetite and corporate values, and for monitoring execution.
But as well as holding executive teams to account for financial performance, boards must ensure sustainability and corporate responsibility. Jonny Gifford, research adviser at The Chartered Institute of Personnel and Development, pinpoints the role of boards in this context as asking the right questions of the executive and being sure that convincing answers are given.
The executive should demonstrate to the board that there is appropriate risk assessment, robust management and monitoring and a suitable organisational culture. Gifford says: “The board needs a clear view of the organisation’s purpose and the legitimacy of its operations, having a major role in formulating this in the first place.”
Think strategically
He suggests that board members need a good understanding of the stakeholders, a long-term, sustainable business model and an appreciation of the organisation’s ethical values.
Savills’ Ridley adds: “People with responsibility need to be business leaders in their own right, to lead from the front and to fully understand their own business to know where they can go and what they can offer back to business. They have to think strategically and forward plan and communicate this down to everybody or people can lose confidence.”
He emphasises that the board itself must be united – even if there is debate within the boardroom. This is crucial if people are to remain loyal to a business.
Mark Stupples, chief operating officer at Jones Lang LaSalle, believes the role of the board in any company is to set the strategic agenda and provide oversight to its operation. He says: “That role has not changed since the credit crunch, although the issues they tackle in carrying it out will be affected by trading conditions.”
Balance is key
Dr Roger Barker, head of corporate governance at the Institute of Directors and author of The Effective Board, thinks balance is key. He says: “There needs to be a balance between the range of skills and experiences of directors and in terms of independence and objectivity – directors with a particular role in the company, such as senior managers or shareholders, should be balanced by non-executive board members without prior connections to the company.”
An effective chair is also crucial. Since a chairman is responsible for running the board, not the company as a whole, Barker says: “The skills set of a good chairman is not necessarily the same as that of a good CEO. A great CEO may not necessarily make a good chairman. An effective chairman will seek to facilitate the contribution of all the board members at board meetings to ensure that the potential of the board to make good decisions is realised. The role is less one of ‘leader’ in the traditional sense as that of a respected ‘first among equals’. The role requires exceptional personal skills, such as tact, diplomacy and gravitas, as well as pure business knowledge.”
Listen to board members
It is crucial that the chairman listens to members. Ridley says: “You can have your own view but mustn’t be a dictator. You need to understand different views but still make a decision.”
You can’t run a board totally by consensus, says Ridley, who describes chairing as a balance of “love and steel”, but you need to explain rationale to dissenting members. He says: “It is about listening and communicating and then, once you have made a decision, sticking with it. You’ll turn the board off if you change tack. They need to see you fulfil a strategy. The challenges of chairing are ensuring a conclusion and giving clear definitions of roles.”
The process of assembling a board requires a set of specifics. Stupples says it is imperative to include a range of specialities and perspectives, yet they must be able to formulate a clear, shared vision and purpose.
“Like any team, chemistry is important as board members need to be able to work together to solve complex issues,” he says. “It is also important to be decisive. This means having the ability to decide on a strategy and stand by it over the long term. This is essential to engender business confidence.”
Ridley adds: “The board has to be where the best example is set; it has to be hard-working. Individuals have to be hands-on but need to be able to delegate. They must be highly trustworthy and excellent decision-makers. Their role is to have a commonality of vision to take the business forward with skills including excellent communication, clarity of thought, empathy with staff and clients, loyalty and trust.”
The UK Corporate Governance Code
The UK Corporate Governance Code has made several changes since 2008. A first has been to recommend the annual election of directors by shareholders.
There is also a new provision that requires firms to disclose their board’s diversity policies and their progress in implementing them.
The code also recommends that FTSE 350 companies undertake an externally facilitated board evaluation at least every three years.
Finally, a new provision recommends that boards place the external audit out for tender every 10 years.
Statutory duties of directors
Dr Roger Barker, head of corporate governance at the Institute of Directors and author of The Effective Board
“The duties of directors are defined in law, in section 172 of the Companies Act 2006.
“A key duty is to promote the success of the company in the interests of all the shareholders. However, while doing so, the director should also take into account the impact of decisions on employees, suppliers and the environment, along with their effect on the company’s reputation in the longer term.
“Directors also have a duty to avoid conflicts of interest that may affect their ability to promote the success of the company and to make decisions in an independent manner.
“They are also subject to a range of other regulatory requirements and liabilities which are defined in other legislation, such as relating to health and safety, anti-competitive behaviour, bribery and financial reporting. In such a legally complex environment, proper training and ongoing professional development are key requirements.”
