Spotlight

Steering your board onward to 2018

Dec 01, 2017
Níall Fitzgerald discusses the ethics and governance issues that arose for boards during 2017, and what resolutions can help in 2018.

Corporate Governance is not actually a big thing – it is a lot of little things. The ability to identify relevant issues and give them the right amount of attention before having to move on to the next is a requisite in governance. Every now and then, a big issue comes along and attempts to knock the wind out of your sails. Like a good captain of a boat, your knowledge of the sea and how to work with the elements is as important as your ability to handle your own boat when it comes to dealing with those big issues. While you, as part of a board, should have control of what goes on inside your organisation, you are unlikely to have similar control over the elements or anyone outside of your organisation. 

Uncertainty

The uncertainty resulting from political absenteeism in Northern Ireland, Brexit, US fiscal policy proposals, and the myriad of less-profiled but very present issues affecting Irish organisations were raised as concerns to Chartered Accountants Ireland in 2017. 
Challenges to businesses come in different waves and, ideally, their impact needs to be considered before they happen. It is not always possible to see the big waves coming but dealing effectively with the smaller ones can help us prepare for the larger ones. Boards and management teams that respond well to uncertainty will have:
  • A good understanding of their risk appetite and what risks they are prepared to take (know your vessel and what force it can withstand);
  • Familiarity with maintaining a risk register and designing strategy to respond to and manage risk (the manoeuvres);
  • A robust system that enables flow of information from ground up and vice versa. This includes management information, communication and financial planning systems (the rigging which will largely determine your ability to manoeuvre); and
  • Robust and effective internal controls that facilitate the efficient flow of information while also safeguarding the integrity of the vessel (hull, RADAR, hydraulics and nautical knots).
We don’t wait until a storm forms at sea to prepare the boat so, likewise, the board should not wait until a crisis before addressing the above and obtaining a good understanding of the organisations capabilities. 

Board effectiveness

Board effectiveness has been a hot topic, so it’s unsurprising that it featured prominently in 2017. While a number of challenges were presented, some of the more common issues related to understanding the role of the board, an individual’s own role as part of a board, board structure and problems relating to discussion or conduct at board and subcommittee meetings.

In terms of understanding the role of the board or an individual on the board, the increasing volume of board paper contents, complexity or technical nature of matters for decision being brought to the table, and an increasing prevalence or expectation of foregone conclusions were the main problems. These issues have caused conflict, bitterness and mistrust and, in some cases, have resulted in an inability to progress effectively on other unrelated agenda items.

When it came to solving these issues, members understood their role on the board within context of their own responsibilities and fiduciary duties but there was a knowledge gap in understanding where the line between management and governance fell. 

The following gives a flavour of some of the quick wins identified during discussion of these issues:
  • Board protocols should be enhanced by setting a more defined time-frame for receipt of papers, e.g. a tiered deadline when papers above a certain size are to be delivered to the Board and clear wording of any protocol for exceptions; 
  • Board retention and delegation clauses in the terms of reference should be clarified and communicated;
  • For boards that do not have established sub-committee structure, the Chair should be empowered to establish a specific task force that will address the more technically complex issues in advance of the meeting;
  • Consideration for the need of external expert advice is given before management presents a complex problem to the Board. 
The process of continuous improvement is necessary when it comes to optimising board effectiveness, and it’s important all members are bought into the process. Don’t wait for your organisation to enter choppy waters, take action before issues arise within the Board. You need a full and committed crew on board. Debate is healthy but nobody wants a mutiny.

Conformance vs performance

To quote Albert Einstein, “A ship is always safe at shore but that is not what it’s built for”. One issue that arises in conversation with members is the common occurrence of too much Board time being spent addressing conformance at the expense of addressing the performance of the organisation. To ensure that sufficient time is afforded to performance (including strategy, improving return and productivity, as well as employee and customer satisfaction), the following featured prominently as simple suggestions:

  • Favour reporting by exception
    Boards should report compliance updates with a focus on instances of non-compliance while also including what corrective action was taken or recommended. This facilitates a discussion more focused on conformance issues that warrant greater attention while also ensuring that there is sufficient time remaining on the agenda to discuss performance and strategy-related matters.
  • Mandatory strategy day 
    Whether it’s a half day or a whole weekend, it is important for any board, regardless of organisation size, to give this important strategy development exercise sufficient attention.
  • Make it matter 
    While this includes typical advice such as having the right mix of skills around the table, ensuring important matters are given sufficient time on the agenda, etc, ‘make it matter suggests going further than a board might normally. This includes devising suitable key performance indicators (KPI’s), outside of boilerplate profit and productivity measurements, that provides board with specific performance related information; performing post-mortem reports of recent projects, whether they were deemed successful or not to identify lessons learnt; and devising a performance led agenda that endorses an “outside in” risk assessment, i.e. what are the threats facing the business based on what is happening in the market and trends in other industries and how would the organisation respond. 

Reputation

Possibly the most important risk to be managed in an organisation is its reputation. Reputation and trust with all stakeholders is essential for running a successful organisation. To avoid the wind being knocked out of your sails, consider the following actions when it comes to protecting the reputation of the organisation.
  • Make sure ethics and organisational culture is a standing item on the agenda. There is so much happening in the current climate in relation to protection of the public interest (e.g. White collar crime and anti-bribery legislation), employee welfare and intolerable work practices that organisations need to assess their own culture to ensure it is a good fit in modern society. It is the Board’s responsibility to keep this in check and set the right tone at the top.
  • The Board should ensure there is a clear and well-communicated speak up policy in the organisation. Encouraging staff to speak up about wrongdoing they encounter in the organisation without fear of reprisal is a powerful and effective detection control and the right thing to do.
  • Make ethics real. Don’t wait for something to happen before taking the time figure out the organisation’s ethics. Like risk appetite, the Board should know their red lines and have a good understanding of what they consider to be unethical conduct. 

Conclusion

The above insights are a flavour of matters discussed at Chartered Accountants Ireland events, focus groups, briefings, queries and discussions regarding ethics and governance and key board concerns in 2017, and many of the themes were similar: uncertainty and how organisations can create their own certainty by preparing for and respond to it; implementation of a process of continuous improvement is a healthy solution for increasing board effectiveness; a high focus on conformance issues during Board meetings is important but performance decisions shouldn’t suffer as a result; and reputation means a lot to an organisation but requires good character to earn it and deserves attention to protect it. These key takeaways should sail along into 2018 for all organisational boards.

Sail safe!