Eamonn Quinn FCA talks to Briefly about the key challenges facing non-executive directors in a fast-changing and uncertain world.
How has legislation impacted the working environment for non-executive directors in Ireland?
In terms of Company Law, the impact is limited in terms of changes to responsibilities, but significant insofar as directors must now attest in a much more public way an acknowledgement of their duties and responsibilities to the Company they serve.
First, it is important to point out that there is no distinction to be drawn between directors of any classification; law does not distinguish between executive, non-executive, independent non-executive directors, shadow or de facto directors.
In the Republic of Ireland, Companies Act 2014 served to codify, for the first time, the fiduciary duties of directors that broadly already existed from common law and equitable principles. Prior to the 2014 Act enactment, it is arguable that the scope of directors’ duties and responsibilities was not clear cut, with directors having to take account of a very fragmented company law framework, their memorandum and articles of association and ever evolving common law. Directors potentially also face obligations and liabilities under other applicable statute such as environmental, equality or tax law.
What the 2014 Act has done is to make it more difficult for directors to rely on relief from liability based on acting honestly and reasonably. Newly appointed directors must acknowledge their duties, responsibilities and obligations in writing when consenting to act and serve as a director. Further, directors of all PLCs and those other private limited or guarantee companies that exceed certain balance sheet and turnover thresholds must sign annually a Directors’ Compliance Statement in the Directors’ Report acknowledging their responsibility and demonstrating that the company has the appropriate arrangements and structures in place and operating to ensure material compliance with its relevant obligations under company and tax law. If the company does not comply, this must be explained.
As the arrangements and structures must be reviewed at least once per year, in practice this put a considerable extra workload on the boards of ‘in scope’ companies which will usually delegate the detailed review to the audit committee to streamline the process and allow for efficient use of overall board time; the board will, or should, scrutinise and challenge the work and recommendations of the audit committee resulting from its detailed review and enquiry. The directors’ report must also include a ‘relevant audit information’ statement confirming that the company directors have disclosed all relevant information to the external auditors and have made themselves aware of relevant audit information. By this statement, directors must take very clear steps to satisfy themselves that they can make such a declaration. If a company becomes insolvent and enters liquidation, a director must be able to demonstrate cooperation with the liquidator as far as could reasonably be expected in relation to the conduct of the winding up.
In the context of clear codification and attestation, it is much more difficult for a director of any classification to put forward a defence of acting honestly and reasonably by citing ignorance of their duties or the affairs of the company. The level of basic knowledge required and expected is now higher and while the courts usually consider the differing levels of experience and background of individual directors, the benchmark of what is expected of all directors has risen.
All directors must ensure that they can reasonably demonstrate how they have met, and are meeting, their ongoing obligations and that, in my experience, is leading to a general increase in compliance workload for all companies – not even considering those companies regulated under the Central Bank Act 1997 for which regulation burden has increased significantly.
It has been reported that more SMEs in Northern Ireland are appointing non-executive directors. Is this a positive move?
Evidence suggests net migration back to Northern Ireland has been the trend for more than 10 years now. Those returning include experts from the province with successful international careers. SMEs would do well to harness the increasing pool of experience available to them for a cost that represents real value for their investment.
Whether the appointment of a non-executive is a good idea, however, depends on the reasons behind the appointment. A significant number of SMEs appoint non-executive directors because of specific expertise in attracting finance or long-term capital into their businesses. The function of the non-executive is to utilise their often extensive contact book to help achieve successful funding rounds or capital raising on behalf of the SME to which they are appointed. While this may be positive for the business, if the scope of expected input is narrow and shallow, the benefit will not be long lasting.
Many SMEs realise the significantly positive benefits that derive from appointing to their board extremely experienced professionals whom they would not be able to afford to employ as full-time executives. They welcome insight and perspective based on the independent and objective view of the non-executive. The right appointment can be a game changer for the SME: to reduce group think, broaden perspective and diversity, engender better performance in the executive management and provide a source of mentoring. As a director with fiduciary responsibility, the good non-executive will be clear and focused on the issues, remaining engaged with the SME despite not being present all the time.
In your experience, what makes for an effective board?
It is often forgotten that a board of directors is a collection of people in the first instance; individually strong willed and opinionated leaders with particular skills and expertise. Individually, those good directors will not be pushed around easily. We find that the boards that work best are those where individual board members have a high degree of trust in one another and a respect for each other’s skill and experience. Directors should not be afraid to challenge one another, nor be particularly afraid of conflict. No one director should be overly dominant (although there are exceptions to this, in situations of crisis management for example). Effective boards are committed to the success of the company and are clear on its strategy, having had the freedom to craft it, being fully accountable for performance and focused on outcomes. Effective boards require an effective chair, someone who listens and facilitates conversation and debate while bringing the board to a place of sensible decision and outcome. The chair’s effectiveness is often seen much in the work he or she does between board meetings – it is a time-consuming role if done properly.
Effective boards are clear on their strategy, objectives and risk appetite and relentlessly focus on real key performance indicators and how to affect them positively. In terms of composition, the better boards are those that have a diverse range of opinion and skill, not all deriving from the same sector or skill base. They should have regard to the strategic challenges facing the company today and tomorrow, not yesterday. Boards should value the stupid question (as there usually is no such thing).
The effective board appreciates the value of good governance and has a great understanding of its legal and regulatory responsibilities, respecting them in kind. Communications and information sharing should be free and clear. All of these characteristics can only thrive, however, if the organisation’s culture enables it; poor culture breeds poor leadership and governance, and it is quite a difficult challenge to overcome.
Cyber security is a major concern. How is the issue reflected in the boardroom?
We could not agree more wholeheartedly. In our opinion, cyber risk is a global systemic threat that faces every business – large and small, multinational, large corporate or SME – irrespective of sector. It is prompted by our connected interdependence on electronic data flows. If we stand back and think about it, cyber risk affects our critical infrastructure, financial system, communications and trading platforms to name but a few. We have moved a long way from the Morris worm in 1988 that was created for intellectual fun to the pure, brute force “terrorism” that has seen billions wiped off stock markets, assets lost and CEOs fired.
I cannot speak for how the risk is being handled in every boardroom but time after time, our evaluations reveal that cyber risk has yet to be fully understood by most company boards. They are quick to acknowledge concern for the risk, but too often fail to address it appropriately. There is a tendency to respond with policies and procedures that paint the risk as an IT issue, when what is needed in the first instance is a better understanding of ‘thyself and thine enemy’ – a risk assessment of the company’s critical data and how it truly flows, its deployed systems and vulnerable points. Boards should list the cyber threats that could seriously threaten them. The company will not be able to protect everything to the same degree and an organisation will not be able to prevent a breach, so the board will need to establish a risk appetite and make risk choices in the area – the crucial questions being what are you not protecting and why, and how do your choices marry up to GDPR?
Going back to a point made earlier, boards need diversity of skill in their composition and they need more members who genuinely “get” cyber. Cyber risk is a business risk that requires a cross-functional response plan and the risk requires proper monitoring at board level with quality management information metrics that are appropriately defined. In subsidiary boards, it is not good enough to simply rely on central functions, service level agreements must be good enough to ensure that central functions responsible for providing services are reporting appropriate management information to those responsible for governance and central functions must be responsive to the reasonable requirements of the subsidiary board.
Boards are taking action in this area, but I would observe that a step change is required among some top tables as board preparedness is often not all it might be.
With Brexit on the way, how will (or should) this issue affect the work of non-executive directors across the country?
Brexit is an issue that should affect every board and every board member across the country, not just the non-executives. Based on balance of trade statistics from January 2017, of the €10.84 billion total Irish exports for the month, exports to the UK alone accounted for €1.073 billion (9.9%) of the monthly total. When you dig deeper into the statistics, different industry sectors will be more exposed than others.
A little like cyber risk, boards of Irish companies should be hoping for a reasonable outcome from Brexit but preparing for the worst – a hard Brexit with the UK outside the customs union and WTO trade rules applying. Boards must have this subject high on their risk register and have a response plan ready. How will your sales and your supply chain be affected? What changes are needed, how can they be implemented and when? It is not practically possible to simply replace a significant market overnight and in certain cases, it will not be possible at all. Can the company respond through efficiency savings, or should the operating model be revised to ensure that both UK and EU markets can be serviced? Also, what strategic business opportunities does Brexit potentially present to us?
Non-executives must play a key role in ensuring that these conversations take place, driving the executive to develop their thinking against the background of well-considered research and cultural understanding of both markets. Board membership may need to be revised to ensure that business change, transformation and market development skills are present. Standing still is not an option.
Should more Chartered Accountants consider non-executive directorships, and what’s the first step?
The training, experience and discipline Chartered Accountants gain over their career provides an excellent basis for suitability as a potential non-executive director. The breadth of subject matter a Chartered Accountant covers is significant but often not fully appreciated. It provides a key advantage, an excellent understanding of law and legal principles, ethics, governance, economics, corporate finance and marketing. Others will also gain further experience in insolvency and business reconstruction, not to mention the regular staples of financial and management accounting, tax and audit.
When combined with the discipline quality training brings, a good, experienced Chartered Accountant will bring, inter alia, insightful analysis, keen observation, an eye for detail, risk and control, quality communication skill and organised leadership. A good Chartered Accountant knows how to resolve significant issues in a timely, risk mitigated fashion.
The first step to a good career as a non-executive director is first to demonstrate world class executive leadership at C-Suite level and to become known for being excellent at what you do, whether that is leading a business to significant growth, effecting successful change management and/or business transformation or some other clear and demonstrable achievement that marks you out as an experienced person, from whom any company would benefit from your service and perspective as a non-executive.
Eamonn Quinn FCA is a chairman, professional independent director, audit committee chair, board mentor and governance specialist at Board Matters International.