Ethics and Governance

Ethics

The Institute’s new guide, a five step approach to considering organisational culture,  serves as a useful starting point for a board, or those in executive or senior management positions. By Níall Fitzgerald The Business Roundtable is a group of influential CEOs from America’s leading companies, and it recently renewed its “statement of purpose”. Having spent 22 years following a shareholder-first philosophy, the group has adapted to societal expectations for better business behaviour by expanding its fundamental commitment to deliver value to other stakeholders including customers, employees, suppliers and communities. It is hard to imagine how this commitment will be honoured without changes to organisational culture by the 181 CEOs who pledged to lead their companies for the benefit of all stakeholders. Closer to home, the UK Corporate Governance Code was revised by the Financial Reporting Council (FRC) in 2018. Its original source from 1992, The Financial Aspects of Corporate Governance (otherwise known as The Cadbury Report), outlined the importance of a principled corporate governance code “for the confidence which needs to exist between business and all those who have a stake in its success”. The only stakeholders mentioned in that version, and successive ones, were institutional investors and shareholders. Twenty-six years later, the Code not only refers to “a wide range of stakeholders” but also formalises the board’s role in aligning an organisation’s culture with its purpose (vision), values and strategy (mission). Reflecting this trend, investors and business analysts are ramping up their cultural assessments of organisations. A study conducted in 2015 by global culture organisation, Walking the Talk, with Stamford Associates in the UK, revealed that 94% of investment managers based mainly in the United States (US) and UK include culture as an important consideration in their investment decisions. In January 2019, State Street Capital, one of the world’s largest asset managers, wrote to the chairs of more than 1,100 organisations in the S&P 500, FTSE 350 and similar organisations in France, Germany, Australia and Japan, calling on them to review their culture and explain its alignment with their strategy. Investors are voting with their feet, which was evidenced by the dramatic fall in Barclays’ share price in 2017 following CEO Jes Staley’s attempt to identify an internal confidential whistleblower, which went against the organisation’s espoused values and culture. Institutional investors are also taking a more active role in driving change by making their expectations clear – not just around the rate of returns, but also on the organisational culture they wish to align with. The Japanese Government Pension Investment Fund (GPIF), one of the largest pension funds in the world, implements an environmental, social and governance (ESG) investment decision-making methodology. This methodology considers factors such as the quality of a company’s culture as well as management, risk profile and other characteristics. They are not alone, with many other institutional investors following a similar approach. In producing Chartered Accountants Ireland’s Concise Guide for Directors: A Five-Step Approach to Considering Organisational Culture, we identified a consensus that organisational culture plays an increasingly important role in influencing behaviours in an organisation. Given the importance of organisational culture, several questions were raised during the production process. Four of the most common are outlined below: 1. Who is responsible for organisational culture? The board has overall responsibility for ensuring that an organisation’s vision, mission and values are aligned with the culture of the organisation. In the same way the board is responsible for approving the strategy of the organisation, it is also responsible for agreeing on what the target culture of the organisation (i.e. the culture the organisation should aspire to) should be. Each member of the board, executive or non-executive, has a responsibility to lead by example and promote the target culture; this involves ensuring that adequate time is allowed on the board agenda for discussions on organisational culture. 2. Who influences organisational culture? It depends. This is where the phrases “the tone at the top” and the “echo from the bottom” comes into play. Unlike strategy, culture is an organic and fluid ecosystem, and while a target culture will be agreed by the board, the process of shaping and realising it is gradual. It involves leadership from the top of the organisation (top-down) and engagement from the bottom of the organisation (bottom-up). Who has the greater influence in shaping organisational culture will differ from one organisation to the next. For example, it may be the director(s) in a small owner-managed family business, the CEO in a multinational, the founder in a not-for-profit organisation or the legacy staff in a government department. It isn’t just internal people or politics that influences the target culture. It will be influenced by many other internal and external factors including, but not limited to, regulatory landscape; political environment; social norms; trade union participation; the history of the organisation; leadership capability within the organisation; level of ambition of people to lead change; common values shared across the organisation; and both internal and external drivers of change (e.g. digitalisation). The organisation’s culture ultimately influences and shapes the interactions with all stakeholders. 3. What are the best organisational culture traits to have? There is no one-size-fits-all. What works for one organisation may not work for another in a different stage of development or in a different sector. The objective is to determine common cultural traits that can be embedded across the entire organisation, while recognising and accepting that sub-cultures also exist. For example, larger organisations may have subcultures in different geographies or in various departments or business units. To be effective, cultural traits should be realistic and counterbalanced. Promoting a culture of collaboration and collective responsibility, for example, should be balanced with ensuring that people are individually accountable for their contributions and actions. It is also important to acknowledge that organisational culture is dynamic; it is constantly changing in response to internal and external influences. Culture risks exist, like any other risk, and organisations will need to manage accordingly. Mitigation measures include ongoing communication and reinforcement of the organisation’s core values and behaviours, combined with risk-based culture audits or reviews. Internal controls with early warning systems are useful for alerting management to behavioural changes that can negatively impact culture – for example, where a production line debriefing identifies that downtime is being recovered by taking shortcuts to stay on schedule. 4. Where do I start when considering organisational culture? The five-step approach to considering organisational culture is presented in Figure 1. This approach serves as a useful starting point for a board, or those in executive or senior management positions, to consider organisational culture. It is designed to work in tandem with the vast reservoir of tools and methodologies for assessing, defining and shaping organisational culture. The steps can be summarised as follows: Assess current culture: every journey has a starting point and it is important to understand the current culture of the organisation before agreeing the path forward. Evaluate effectiveness: determine what works well with the current culture, and what doesn’t. Are there opportunities for quick, positive change for better business behaviour? And what will require more effort? Define/refine target culture: what influences the organisation’s target culture? And does it clearly align with the business purpose (vision) and values? Identify gaps: identify, prioritise, risk-rate and cost the gaps between the target culture and the current culture in order to inform the organisation’s cultural change programme; and Close gaps: prepare the change programme to shape the organisation’s culture. Throughout the journey, it is important to communicate the changes, evaluate whether the implemented changes are having the desired effect, and reinforce the reasons for change and how they align with the organisation’s vision, mission and values. Organisations are investing more in getting their culture right. The various roles that Chartered Accountants play within organisations involve a level of influence in assessing, defining and shaping organisational culture. While this influence may not seem obvious at first, it becomes more apparent when you consider that many Chartered Accountants hold positions that provide a strategic, overarching view of what is happening in their business unit or across their organisation. By applying their analytical and reporting skills, Chartered Accountants can use their access to information and insights, as well as their opportunities to observe behaviours across the organisation, to significantly support the development of a healthy culture. Whatever role you play within an organisation, consider how you can positively influence and shape a healthy organisational culture.   The Concise Guide for Directors: A Five-Step Approach to Considering Organisational Culture is available to download from Chartered Accountants Ireland’s Governance Resource Centre. Níall Fitzgerald ACA is Head of Ethics and Governance at Chartered Accountants Ireland.

Oct 01, 2019
Ethics

Francis McGeough reports on a study of governance practices in fifty of the largest charities in Ireland which reviewed the information contained in their annual reports.   The importance of good governance in charities was highlighted by shortcomings in two well-known charities last year (Rehab and the Central Remedial Clinic). Bad publicity from these events had a serious impact on the fundraising efforts of all charities with many reporting a substantial drop in donations. Donors to charities need to be assured that their funds are being used appropriately and the requirement for increased accountability highlights the importance of governance practices in charities. Charities must not only apply the highest standards but must also be seen to be behaving appropriately.   A key task of the recently established Charities Regulatory Authority (CRA) is to increase public trust in the charitable sector. The legal framework under the Charities Act 2009 gives the CRA legal tools to do this. However, the essence of good governance lies in the culture of an organisation rather than following the letter of the law.  Governance The word governance originates from the Latin word meaning to steer or to give direction. While, there is no all-embracing definition of governance, there is agreement that governance involves taking responsibility for managing the organisation, balancing the needs of stakeholders, ensuring accountability to stakeholders, and ensuring that the organisation achieves its objectives. Therefore, the Board should have a strategic focus; with a focus on organisational performance, and a clear division of responsibilities between the board and managers.   Charities have a valued status in society due to their good deeds. Consequently, charities are likely to be held to a higher set of standards. Thus, when things go wrong, they are particularly susceptible to public disillusionment. Therefore, charitable organisations must ensure that they maintain their reputation. Good governance practices can help in this process by underpinning public confidence in the charity, and reduce the likelihood of scandal.  Complexity of governance in charities  In publicly quoted companies, the Board represents shareholders and they hold the management to account for their performance (measured by profits and share price). However, for charities, there are a number of complications: Firstly, there may be many stakeholders with conflicting views on how the organisation should be run; secondly, there may be no agreed measure of performance and stakeholders may have different views on what is good performance which increases the difficulty for the board in holding the managers to account; thirdly, many charities rely on the goodwill of their volunteers and managers who may become resentful if their actions are constantly questioned by the Board.    Therefore, charities must find the right balance between trust and control. Too much control can lead to distrust and poor relations with the board. On the other hand, too much trust can lead to complacency and potentially bad behaviour. Survey The annual reports of fifty of the largest charities in Ireland were reviewed to determine the level of disclosure of the key elements of governance. The charities were identified from the Boardmatch Ireland listing of the hundred largest charities in Ireland. The annual reports were downloaded from the charities’ websites in October 2014. Therefore, it would be expected that the latest reports would be for 2013; however, 30% of the charities had annual reports relating to 2012 or earlier (Table 1). While there may have been a delay in uploading the accounts onto the websites, it is surprising -- given the importance of the website as a communications tool -- that the websites did not have the latest annual reports.    In relation to the disclosure of the key elements of governance, Table 2 sets out twelve elements of governance are derived from governance codes such as Boardmatch Ireland and the UK’s Charity Commission’s Statement of Recommended Practice (SORP) and shows the number of organisations which reported each element in its annual report.    Most of organisations examined provided the names of the board members in their annual report (forty three organisations representing 86% of the sample).     In relation to the elements that could be used as proxies to determine the effectiveness of the board, the level of reporting by the organisations examined is mixed (the percentage of organisations disclosing these details is outlined in brackets following the element). Board effectiveness can be measured through the recruitment process for board members (26%) biographical details of the board members (6%); length of time on the board (6%); the existence of induction processes (16%); the number of board meetings (24%); and the existence of sub-committees (52%). Therefore, readers of the annual reports would have difficulty in assessing board effectiveness in managing the organisation.    Notwithstanding the recent controversy about pay levels for managers in some charities, only fourteen organisations (28%) disclose the pay levels for their senior managers.    In relation to resource management, the level of disclosure is again quite low, with 44% of organisations identifying their key risks and outlining how they manage these. In addition, only 20% of the organisations outline what their policy in relation to reserves is.   In relation to the disclosure of non-financial information, a majority (58%) disclose some information. The study does not attempt to evaluate the quantity or quality of the non-financial information disclosed but simply examines the existence of non-financial information.    The final element examined is whether a statement of compliance with a governance code is made. The research finds that just 22% of organisations disclose such a statement. This may be due to the relative newness of a governance code and as such, it is expected that this will improve in the future.   Table 2 shows that only three of the twelve elements are disclosed by more than half the organisations. Overall, this suggests that the level of disclosure is limited and this is further emphasised by Table 3 which outlines the range of elements disclosed by the organisations examined. Table 3 shows that thirty of the organisations (60%) disclosed three or less of the twelve elements. While, only four organisations (8%) disclose ten or more elements. Conclusion The research suggests that there is considerable room for improvement. In relation to the dates of the annual reports, it is a matter of concern that fifteen organisations did not have their latest accounts available on their websites. The research suggests that organisations are publishing a very limited amount of information. Thirty organisations (60%) disclose three elements or less, while four organisations (8%) close nine or more elements. Furthermore, only three elements are disclosed by more than half of the organisations.    In overall terms, it would be difficult for the readers of the annual reports to be able to assess the effectiveness of the board. Furthermore, given the recent controversies about remuneration levels in two Irish charities, it is somewhat surprising to see that only 28% of the organisations surveyed disclosed remuneration details of their senior managers.    The annual report provides a window into what is deemed important by the organisation and is also an opportunity for the organisation to account to its stakeholders for its stewardship. If that is the case, the evidence presented here would suggest that Irish charities place limited emphasis on presenting information on governance and performance. In today’s environment, this is a missed opportunity. However, this does not imply that there is a problem with governance standards in Irish charities but it does suggest that charities must review the information provided because they should not only apply the highest standards but must be seen to do so. In this regards, there is much room for improvement.    Francis McGeough PhD lectures in Accounting and Finance at the Institute of Technology, Blanchardstown. This article is a shortened version of a paper to be presented at the British Accounting and Finance Association annual conference in Manchester in March 2015.  

Sep 13, 2019
Ethics

Justin Moran explains why private sector boards need a sharper focus if they are to perform optimally in the best interest of the company. The benefits of effective governance for private sector companies includes more strategic thinking, improved decision making processes, proactive risk management and, ultimately, leveraging investment and capital at more competitive rates. Yet many private sector companies, which are not subject to regulation, operate outside any mandatory governance codes and are typically reliant upon a smaller governance structure to help direct and control the activities of the company. For small- to medium-sized (SME) and large companies, this places a significant burden on the board of directors. The present business environment also means that the board must: Be more proactive in the establishment and monitoring of strategy, including those objectives which underpin growth; Assess how well the organisation is positioned to attract and retain the skills and resources necessary to deliver the strategy; Remain alert to developments in competition and innovation; Be aware of new and emerging trends in the use of technology and data, digital marketing and social media; and Identify and monitor risks as they develop and emerge, including financial, operational and compliance-based risks. Overall, board effectiveness plays a key role in ensuring that companies are adequately positioned to face these challenges and opportunities. Improving board performance and outcomes To enhance board effectiveness and outcomes, private sector companies should start by considering the following elements of an overall governance framework: Aligning the governance structure with the growth of the company: Identifying where the company is positioned within the corporate life-cycle is key to determining its governance needs. However,it is something that is commonly overlooked. It is imperative that companies strike a balance between what has been effective in achieving their success so far, and what strategies can sustain longer-term success. If the governance approach results in too much bureaucracy, organisations will inadvertently create a potential downside risk. Identifying and promoting the intangible asset of culture: One of the significant challenges facing boards is identifying how to strike the right balance when seeking to understand and develop the intangible asset of culture. It is informed by the levels of support and challenge around a boardroom table. It has also been recognised as serving a key role in determining the effectiveness of the board in leading and directing the business and its ability to achieve its full potential. Boards can start by asking: what are the vision, mission and values of the organisation and how well is this articulated? What behaviours are desired and undesired within the organisation? And how is the ‘tone at the top’ set and is it permeating throughout the organisation? When considering these questions, the board should assess the type of culture that is desired and suited to their implementation of governance measures relative to their position in the corporate life cycle. Board composition and structure It is well recognised that not having the correct people with the necessary skills is a huge impediment to development as a board. While its effect on boardroom behaviour and culture should not be underestimated, any private sector enterprise seeking to grow new markets, build wider networks and harness experience based on a proven track record must carefully evaluate whether the board has the necessary skills in place. To develop and build upon the capabilities of the board, a key step is the decision to invite external directors (non-executive directors) onto the board. A more diverse board composition generates a significant impetus towards better governance and is likely to have a significant impact on the culture of boardroom decision-making. In terms of overall structure, the vital relationships that must function efficiently include the chair and the CEO, and the CFO and the audit committee. The implementation of Companies Act 2014, including the requirement for directors of all large companies to establish an audit committee (or disclose otherwise), will further highlight the importance of developing these structures and relationships. Similarly, board dynamics are complex and ever-changing. Board changes can affect relationships; therefore the need for succession planning remains strong. Maintaining the appropriate balance of formal processes It is important that the board implements a combination of both formal and informal processes, which are reflective of the maturity and culture of the organisation. Examples of key formal processes include setting a board agenda that does not focus purely upon short-term objectives. The agenda should be set by the chair and should also be informed by input from non-executive director(s) where required. Risk and opportunity management (ROM) should be embedded within the board agenda to promote engagement and discussion on scenarios that impact upon organisational strategy and objectives. Attention should be paid to the conduct of board meetings to ensure that meetings are adequately chaired, engaging and ultimately adding value to the organisation. It is hugely counterproductive if meetings evolve into ‘talking shops’ without effective decision-making processes. The distribution of the agenda should also allow adequate time for board members to consider the agenda and review the supporting board pack. Doing so will maximise the effectiveness of the meetings. High-quality and up-to-date management information, which helps the board understand and analyse key performance data and indicators, should be used. The development of board-level management information should be agreed with the CEO and/or senior management so that there is a clear understanding of board needs and what existing information and data can actually be provided. This is an important area that is often overlooked and can cause significant tension between the board and management. Such tension may arise from a perceived view of the board of not receiving the full picture. A clear understanding and focus upon performance data can also underpin the board’s role in setting and monitoring CEO and executive-level performance objectives and the approach to remuneration. The importance of informal processes Many boards often overlook what may be considered ‘informal processes’ when seeking to improve board effectiveness. It should be remembered that board conduct, decision-making and effectiveness are dependent on a combination of factors including relationships, teamwork and communication. In this context, any investment of time and commitment in building strong relationships among board members will normally lead to improved outputs and performance. Examples may include structured away days, planned visits by non-executive board members to different parts of the business, or making use of time away from the formality of board meetings to get to know each other. Private sector governance codes The UK Corporate Governance Code is primarily aimed at listed companies rather than SME or larger unlisted companies. While it is recognised as the leading corporate governance framework, it may not always be suited to organisations that require different considerations to function cohesively. The NSAI Swift 3000 code provides an alternative governance framework and involves rigorous assessment of the board in areas including appointment, composition, competence, independence, remuneration, information, reporting, accountability and audit. In making use of any governance code to facilitate benchmarking or the review of governance processes, the board must avoid a ‘tick-the-box’ approach and should carefully consider what may be described as the softer elements, as outlined above. Conclusion As companies begin to challenge their existing governance processes and systems, the benefits should become evident. If implemented correctly, improved board effectiveness and outcomes will have positive impacts on the long-term sustainability and growth of the company. Justin Moran is Director, Governance, Risk & Internal Controls Division, Mazars.

Sep 13, 2019
Ethics

Penelope Kenny outlines the ethics and governance issues that will likely be under the spotlight in 2017. As the new year takes off, social media is overflowing with reflections on the past year and learnings for 2017. Thoughts on governance and ethics take the long view and it is so delightfully tempting to make predictions. I propose to look at trends for 2017 based on recent developments, with consideration on where the trends may lead our thinking in 2017. This article addresses corporate governance and the ethics agenda. It attempts to identify trends and issues which professionals are likely to see unfold in 2017. Observations from the business of corporate governance Intense activity from legislators and enforcers continues apace. There have been recent updates to legislation; publications on corporate culture, corporate governance and stewardship; and Government requests for corporate governance reform. Of high impact and concern for individual directors and boards are:   The broadening of directors’ responsibilities; The roles and duties of directors being more thoroughly defined; The inclusion of ethics and culture in more corporate governance conversations; and The conversation between corporation and the State. These observations are based on new Irish legislation codifying directors’ responsibilities and recent reports from the Financial Reporting Council (FRC) in the UK. There is also heightened interest in ethics at the core of corporate governance conversations and this is evidenced in the observations contained in the FRC’s 2016 report entitled Corporate Culture and the Role of Boards, which is discussed further below. Directors are now more specifically accountable than before following the codification of directors’ duties and responsibilities in the Companies Act 2014. The new Code of Practice for the Governance of State Bodies, which was published in August 2016, makes directors specifically responsible for all internal controls: financial, operational, compliance and risk management. Previously, directors specifically reported only on the financial controls and the broader responsibilities were implicit. Corporate culture is also being defined as an area of specific responsibility for directors. Last July, the FRC published Corporate Culture and the Role of Boards and this interesting document comments that strong governance underpins a healthy culture. It also states that boards should demonstrate good practice in the boardroom and promote good governance throughout the business. The report examines some thought-provoking questions: How can the board influence and shape culture? How does the board bring corporate values to life? How can the board build trust with stakeholders? How can boards assess, measure and monitor culture? The report suggests that the tone from the top determines organisational culture and furthermore, boards should assess the culture and determine indicators thereof. The board is therefore responsible for the culture, values and ethical standards in their organisations. This gives directors the very broad responsibility of not only setting the culture and values, but also of measuring and assessing organisational culture. The report requests that investors and other stakeholders engage constructively to build respect and trust, and work with companies to achieve long-term value. Investors therefore need to consider carefully how their behaviour can affect the behaviour of the company and understand how their motivations drive company incentives. As board members, a brighter light is being shone on our broad responsibilities to the organisation and its stakeholders. We are also charged with the ongoing quest for effective measures of corporate culture and the implementation of corporate values throughout the organisation. Corporate and individual ethics In practice, the role of the board in “bringing values to life” is problematic. 61.5% of boards do not regularly make ethics and culture a full board agenda item according to the FRC’s report. Corporate values and ethics have been keywords in lamenting the recent large corporate scandals, which continue unabated at home and abroad. Media reporting focuses not only on corporate governance and the board, but on the ethical standards of the board and the individual directors. In an article published by Reuters last September entitled “Wells Fargo scandal reignites the debate about big bank culture”, it was reported that two former Wells Fargo employees filed a class action in California seeking $2.6 billion or more for workers who tried to meet aggressive sales quotas without engaging in fraud and were later demoted, forced to resign or fired. “Wells Fargo knew that their unreasonable quotas were driving these unethical behaviours that were used to fraudulently increase their stock price and benefit the CEO at the expense of the low level employees,” the lawsuit said. All this was reported in The Guardian in September 2016. Closer to home, Fintan O’Toole expressed his outrage in the Irish Times on 2 January 2017: “The appalling scandal in which the banks deceived at least 15,000 of their customers into moving from tracker mortgages to considerably higher interest rates, often at dreadful personal as well as financial cost. It is clear that this defrauding of customers was systematic and deliberate. It operated in 15 banks – essentially the entire Irish system – and so far as we know there is not one case of a “mistake” favouring the customer. It raises in the starkest way exactly what [Matthew] Elderfield was talking about: individual accountability for misselling and overcharging”. Apart from the human misery which we as a society are accepting, what this means for Ireland is that – despite our high levels of compliance and regulation – we have not created corporate and individual accountability nor a culture of ethical behaviour in our institutions. There is much to be done to align corporate culture and individual ethical standards. In Leading with Integrity: A Practical Guide to Business Ethics, Ros O’Shea firmly positions corporate ethics as the responsibility of the individual directors on the board. She links individual leadership values to the values which filter down through the organisation. This conversation is likely to gain momentum in 2017 with ongoing lawsuits and as we continue to further review, question and discuss our ethical guidelines and our own professional ethics. Corporate governance reform We can expect further corporate governance reform from the UK. Prime Minister Theresa May states that: “for people to retain faith in capitalism and free markets, big business must earn and keep the trust and confidence of their customers, employees and the wider public”. This quote is part of her introduction to Corporate Governance Reform: Green Paper 2016, which sets out a new approach to strengthen big business through better corporate governance. In the foreword, the UK Secretary of State, Greg Clark, summarises that “the green paper seeks views on three areas where we want to consider options for updating our corporate governance framework: first, on shareholder influence on executive pay, which has grown much faster over the last two decades than pay generally and than typical corporate performance; second, on whether there are measures that could increase the connection between boards of directors and other groups with an interest in corporate performance such as employees and small suppliers; and third, whether some of the features of corporate governance that have served us well in our listed companies should be extended to the largest privately-held companies at a time in which different types of ownership are more common”. Certainly the thinking in the UK, surmised from this report, indicates that Adam Smith’s Wealth of Nations is left far behind, and society and democracy are not separate from, but are an integral part of, the values and actions of corporations. The wider societal responsibilities of companies and boards are under scrutiny. There is a recognition, certainly in the UK, of companies’ responsibilities to employees, customers, suppliers and wider society. Diversity Diversity on boards remains an area of huge interest for researchers and policy-makers. We are starting to accept the causal link between board diversity and better profitability. The green paper referred to above suggests that board composition should better reflect the demographics of employees and customers. Implicit in that statement is a board more representative of the community it serves. According to a McKinsey report published in September 2016, workplace diversity would improve gross domestic product (GDP) in the UK: “Bridging the UK gender gap in work has the potential to create an extra £150 billion on top of business-as-usual GDP forecasts in 2025, and could translate into 840,000 additional female employees. In this scenario, every one of the United Kingdom’s 12 regions has the potential to gain 5-8% incremental GDP”. Robert Swannell, Chairman of Marks & Spencer, is quoted in the Hampton-Alexander Review of FTSE Women Leaders as saying: “I certainly believe having more diverse boards and senior teams is right and brings better perspectives, challenge and outcomes. It is right for business to reflect the world in which we operate and so we should just get on and do it”. Adam Smith’s support for maximising profits by harnessing employee expertise is replaced by boards, executives and management addressing and including the concerns of all stakeholders in the corporate world. Stakeholder engagement Considering the FRC statement below, directors are being charged with aligning the interests of business and society as part of their corporate governance responsibility: “We share the objective of wider stakeholder engagement by companies and are considering how corporate governance principles can best meet the demands of all stakeholders or be amended to do so. We look forward to responding to the Government’s consultation later this year and will propose measures to realign the interests of business and society… the FRC supports the need for change in the relationship between business and society. As the guardian of the UK Corporate Governance and Stewardship Codes, the FRC is keen to explore how it can ensure governance and investment are more closely aligned with the broad public interest”. This statement goes way beyond the corporate social responsibility (CSR) programmes which corporations heretofore were content with. Corporations are now charged with holding obligations to all stakeholders and being accountable to society as a whole. Similarly, directors are therefore held to account in relation to their obligations to all stakeholders. The UK Stewardship Code, while not updated since 2012, is under continuous review for its impact and implementation. Directors: some key concerns The broadening and better definition of the role and responsibility of directors is a likely interest area for the future as directors are increasingly responsible for a much wider range of legislation and compliance. Recent surveys show that role clarity, complexity, sustainability, changing business models, corporate culture and business reputation in the community are key concerns. Recent research undertaken by Chartered Accountants Ireland, published in the October 2016 edition of Accountancy Ireland and written by Mary Halton, suggests that role clarity in the boardroom is a driving factor in board effectiveness. It states: “In theory, this should be a relatively straightforward issue, particularly in light of the significant legal, regulatory and good practice guidance available. In practice, however, boards and their members face a number of challenges in delineating roles and ensuring that these are consistently understood by all”. Increasing complexity and the time commitment involved in non-executive directors’ roles is the key finding from a survey by the Institute of Directors in Ireland of 385 of its members in 2016. The Institute of Directors surveyed non-executive directors from private state and public boards. The Australian Institute of Company Directors, meanwhile, surveyed its members in December 2016 on the issues most likely to keep them “awake at night”. The results were identified as follows in order of importance:   Sustainability and long-term growth prospects; Structural change or changing business models; Corporate culture; Business reputation in the community; and Legal and regulatory compliance. Directors are not only showing interest in the business environment which delivers profits, but also showing an increased self-consciousness about themselves as directors and their roles and responsibilities. Formalising this trend, the board self-assessment questionnaires mandated by the Code of Practice for State Bodies 2016 requires boards and the audit and risk committees of state boards to self-assess for effectiveness. Corporation and the state In 2016, we saw the rise of a populist, anti-establishment voter. In Ireland, the water charges were an example. The tussle between states and corporations was exposed with the Apple Inc’s taxes and Deutsche Bank’s fines, both of which resulted in a dialogue between European and American legislative and tax authorities. As our corporations change their goals and purpose and our governments struggle with the corporate environment, this tectonic abrasion between corporations and governments looks set to continue. Conclusion Corporate governance reform is under way in the UK, and indeed in Ireland, against a background of government-led reforms. There is a corporate interest in being more responsible and more state-like. This suggests that the lines between corporation and state may be blurring. Boards are under pressure to represent a more diverse opinion and to mirror the communities which they serve. Meanwhile, these communities are becoming more vocal. Peter Cosgrove of CPL showed the recent Chartered Accountants Tech Forum how employees at Mozilla effectively fired their CEO, Brendan Eich, through social media pressure, which looks remarkably similar to a form of popular voting. (Eich maintained a public stance against gay marriage in 2014, and employees disagreed). Similarly, the US elections were beleaguered with accusations of corporations wielding influence on the outcome via large funding for the candidates. Certainly the future lies in greater regulation of corporations and greater expectations of corporate governance standards. This is occurring at a time when corporations are gathering more power, money and influence than sovereign states and at a time when the workplace is becoming more transparent and more democratised. Chartered Accountants are charged as professionals and often as board members to navigate in this increasingly political space – not just to direct and govern, but also to influence, guide and comment on compliance and regulation. The duties and responsibilities of board directors require more professionalism and more knowledge. We know our responsibilities do not increase or decrease with the size of the organisations we direct and govern, nor with remuneration for these roles, yet those responsibilities are expanding. The boundaries of the study and discipline of corporate governance itself are widening and shifting. We have seen from the UK Prime Minister’s comments on the reform of corporate governance that better corporate governance is seen as a driver for such issues as corporate responsibility, improved profits and more stakeholder engagement to name but a few. Interesting opportunities abound. Penelope Kenny FCA is author of ‘Corporate Governance for the Irish Arts Sector’, published by Chartered Accountants Ireland. 

Sep 13, 2019
Ethics

CEOs aren’t given instruction manuals when it comes to boards. Kieran Moynihan explains how CEOs and executive teams can give respect to the board while also demanding excellence for the shareholders and stakeholders. My board frustrates the hell out of me. We put a huge effort into producing our packs and I seriously question if they read them properly. They second-guess me and my executive team on a continuous basis, haven’t a strategic bone in their bodies and, to be quite honest, other than their watchdog oversight role, I seriously question if they add any value to this company.” These were the opening words from a CEO in a board evaluation I was leading some time back, and they’re nothing new. I have heard them from CEOs across a wide range of sectors, scale of companies and maturity/experience level.  I asked this CEO to place himself in the shoes of one of his non-executive directors (NED) and imagine how open and engaging the CEO and executive team were towards himself and board. What is the level of genuine accountability and performance culture? Is respect being demonstrated in terms of getting a big complex board pack out four or five working days ahead of the board meeting as opposed to 24 hours beforehand? Are you and the other NEDs expected to drop everything to prepare properly? Finally, how much opportunity does the CEO give NEDs to get them involved in the formation of the company's strategy?  The CEO responded very honestly that he had never really thought about the board in this way and that, in the cold light of day, he could see that he had been in a pattern of ‘managing the board’, and after many years, had arrived at a point where he basically had no expectations of them. This is a sad indictment on this board and the real losers here are the shareholders and broader stakeholders.  The reality is that often the shareholders and stakeholders do not even realise what is going on. I believe that the vast majority of CEOs are very conscientious, and understand the value of a high-performing board, but often struggle with genuinely partnering with their board to enable an outstanding combination of executive and non-executive board members so they can deliver outstanding value for their shareholders and stakeholders.  One of the reasons for this is that there is no 'Becoming a brilliant CEO' manual where CEOs can learn best practice for engaging with the board. As a former CEO, I can testify to the fact that in the early stages, I was very cagey with the board. I wanted to concentrate on the good news, demonstrate that I had the strategy all figured out, and so slipped easily into managing the board. This is a natural and understandable starting point for many CEOs. I was blessed to have an outstanding board chair who gave me a dose of salts early on and helped me engage with and leverage the board properly.   Best practice There are a number of key areas that I have found represent best practice for a CEO and executive team in enabling high-performing board teams. Respect for, and accountability to, the board It should go without saying that a CEO should respect the board but in reality, some CEOs are quite disrespectful, both to the board itself and the board members individually and collectively. In many cases, this can be an aggressive, dominant CEO who merely tolerates the board. In other cases, it can be a lot more subtle. Respect for the board is the key foundation for the CEO and executive team to demonstrate the highest levels of accountability (and, by extension, the shareholders). When a CEO and executive team are accountable to the board, they enable the non-executive board members to discharge their oversight responsibilities. When the CEO and executive team’s reporting is accurate, honest and timely in terms of the performance and progress of the organisation, it means the NEDs don’t have to deep dive into the operational and financial minutiae, or have to second guess the CEO. They can, instead, devote a far bigger portion of the board’s time to strategic discussion and, thereby, adding value to the executive team. Performance culture  Every time I see a high-calibre CEO properly engaging with the board, they not only set high expectations for themselves and employees across the organisation, but also set a very high bar for the board members themselves. Working closely with the board chair, a CEO is absolutely entitled to insist that the board works hard, is able to add value to the executive team and the company, has regular evaluations (both internal and external) and is continually looking to add that extra 10% to the board’s performance.  A partnership model between execs and non-execs  At the core of outstanding board teams is a genuine partnership model between the executive and non-executive board members, which balances a strong level of oversight and significant value-add by the board. The best boards simply embrace the highest levels of robust challenge and debate in order to stretch their brain cells and understand complex issues, get to the bottom of performance problems, see around dark corners and, ultimately, make the very best decisions. A progressive CEO will set the tone for this partnership. By working closely with the board chair, the executive team will be able to deliver their part of this partnership model. In return, the CEO and executive team are entitled to expect the NEDs to add strategic value, bring diverse and independent thinking and, ultimately, enhance the thinking and decision-making of the executive team. This partnership model is illustrated in Figure 1. High-quality information model and information flow to the board A progressive CEO understands that the board is highly dependent on the quality and timeliness of the information provided. In board evaluations, I regularly see the common problem of a very dense board pack with reams of complex reports but very little or no quality guidance from the executive team on what’s critical, the areas the NEDs need to focus on, the areas the executive team need help with or the areas of concern for the CEO and executive team. Combine this problem with the bad habit of sending board packs out late and you can understand why NEDs often feel that they have to second guess the CEO and ask detailed questions at the board meeting. Inspire NEDs to bring their independence and A-game If you read any of the memoirs of highly successful CEOs and entrepreneurs, you will often see the following phrase positioned prominently in the early chapters: “I made a very conscious decision to surround myself with people who were a lot smarter than me”. I often come across CEOs who are very sharp but yet quite happy to pack their board with mediocre NEDs who simply do not add any value. While this is clearly a failure of the board chair, the CEO in many companies has a key role in selecting board members.  Progressive CEOs see the critical value of diversity in their NEDs across age, gender, ethnic background, sector and, most importantly, thinking style. When it comes to NEDs, a CEO and executive team who are partnering extremely well with the board are perfectly entitled to expect each NED to bring their A-game consistently, underpinned by a strong work ethic and commitment to the company. Where NEDs are not doing this, a CEO should work with the board chair to replace those NEDs with ones who will perform and deliver serious value – shareholders absolutely deserve nothing less. Partnering with the board on strategy One of the biggest changes in recent years with how CEOs engage with their boards is in the whole area of strategy. High-performing boards have increasingly moved away from the traditional model of the CEO coming into the boardroom with the company strategy 90% cooked, looking for the board to rubber-stamp the document and allow the executive team to get on with it. Apart from the fact that this legacy approach is very disempowering to the NEDs around the table, and can lead to very serious flawed strategies and group-think problems, CEOs are realising that making big strategy calls in today’s marketplace is a lot tougher than five years ago. These days, the CEO and executive team develop a range of strategic options that they bring to the board at an early stage. This enables every single NED to be involved. In addition to encouraging high-quality challenge and debate around the strategic options identified by the CEO and executive team, it helps the NEDs to put other options on the table which the executive team may not have considered and could ultimately result in a stronger strategy being adopted. Crisis management and asking for help Most companies have to deal with a serious crisis (either self-inflicted or outside of their control) at some point. This could be a significant change in the competitive landscape (business model, pricing, innovation), technology disruption, serious quality problems in products/services, poor sales performance, financial problems, a cyber-attack or a business-impacting loss of critical staff in the company. No matter how strong and battle-hardened a CEO and executive team are, it can be very difficult in the eye of a storm to get an objective perspective on not only root causes, but the optimal way for the company to navigate stormy waters.  A high level of good will, respect and trust that the CEO and executive team have built up with the board over the years is critical in crisis situations. This is where a CEO and an outstanding board can turn to their NEDs, who will roll up the sleeves, get stuck in and provide high-quality help to the executive team and, most importantly, provide a cold, independent perspective to help with the tough decisions.  Setting the example in terms of culture, ethics and behaviours We are in a new era where the spotlight on the behaviour, ethics and culture being demonstrated by a company’s CEO has never been greater. The genie is definitely out of the bottle and the days of some CEOs feeling that it is perfectly acceptable to demonstrate disrespectful bullying, aggressive and passive-aggressive behaviours to their board, their employees and shareholders/stakeholders are coming to an end. Any board worth its salt should be setting the highest of standards for the CEO and executive team. Summary The impact of the CEO and executive team’s approach to the board has a fundamental impact on the effectiveness and performance of a board. I am always moved by the powerful impact it has on the board when a CEO and executive team partner with the NEDs in a respectful and accountable way, demonstrate the highest level of behaviours, ethics and integrity, provide high-quality information flow, partner on strategy, inspire NEDs to go the extra mile and integrate with them to excel on behalf of their shareholders, employees and stakeholders.    Kieran Moynihan is the Managing Partner of Board Excellence.

Aug 01, 2019
Ethics and Governance

How can companies transform corporate social responsibility from a ‘nice to do’ activity into a strategic imperative? While corporate social responsibility (CSR) is a discretionary expenditure, leaders are increasingly tuned in to the corporate value of CSR. Indeed, in the current socio-economic environment, it can be argued that companies must be seen to be involved in CSR in some way. And there are many benefits for companies including improved company reputation, a more attractive employer brand and greater employee engagement. As a cost, companies should be able to evaluate the return on their CSR expenditure as they do for any other expenditure. However, many companies do not view CSR expenditure in this way. Instead, they see it as a moral obligation to give back to the community. Nonetheless, many companies are taking a more formal approach to their CSR expenditure. There is growing support for the idea that the measurement of CSR activity is important as it supports decision-making within the company, makes managers more accountable for CSR expenditure and generates support within the company by illustrating the company’s CSR achievements. Thus, companies can use measurement as a means of building a business case to justify their CSR expenditure, which in turn can help protect CSR projects into the future. How, then, can companies go about measuring their return from their CSR activities? One model or framework which encapsulates the process is the Impact Value Chain Model.  Inputs – Activities – Outputs – Outcomes Let us take as an example a company that wishes to employ staff members from minority groupings.  The objective is to reach a certain percentage by a specified date; the inputs are the resources devoted to this objective, in terms of money and employees’ time; the activities are the actions taken in terms of recruitment and retention practices; and the outputs are the number of individuals from minority backgrounds recruited and retained within a specified time period. The short-term outcome would be, for example, the achievement of the company’s goal of reaching the agreed target by the agreed date. Long-term outcomes, on the other hand, would include improved staff morale, a more appealing employer brand among minority groups and a boost for the company’s reputation. However, measuring outcomes can pose difficulties for organisations as there can be both intended and unintended outcomes. Furthermore, outcomes can be examined in the short-term or the long-term and there may be difficulties in linking long-term outcomes to company actions. For example, to what extent does a scheme to pay farmers a fair price in a specific area drive economic activity in that area compared to other initiatives that may have taken place at the same time? In summary, measuring the benefits arising from a company’s CSR activity can help the company assess whether it is achieving its CSR objectives; ensure that it does not waste resources; build support among employees; protect CSR programmes when resources are constrained; and ensure that a strategic approach is being taken. So, how can managers ensure that the right approach is being taken when evaluating CSR expenditure? Define your objectives Clearly define what you want your CSR activity to change. What will the activity achieve for the beneficiaries and for the company? The goals must be set out in quantitative terms as far as possible. For example, a company might want to be seen as an employer of choice. This goal can then be quantified by the number of applications received and whether retention levels have improved over the course of the CSR initiative. Identify the inputs You must be clear on the inputs required. And don’t confine it to financial resources alone – include staff volunteering hours and other resources, such as the company facilities used to provide the CSR initiative. Outline your activities It is also important to define the activities undertaken. Sometimes, more activities emerge from the inputs than was planned. As an example, let’s return to the recruitment initiative to increase the number of people from minority backgrounds. This initiative also adds to the company’s equality agenda and positively impacts the company’s reputation. Be clear on the outputs The outputs generally receive the most attention. If, for example, the aforementioned company is successful in the recruitment of individuals from minority backgrounds and they stay with the company for a specified period of time, or a fundraiser raised a certain amount of money for charity, the recorded metrics can provide a short-term measure of success and can be useful in boosting morale. Classify the outcomes It is important to outline the list of short-term and long-term outcomes accruing from the CSR initiative. These outcomes need to link back explicitly to the overall objectives of the initiative. Quantify the outcomes Difficulties in quantifying the outcomes can make managers shy away from this part of the process. The key question is: can we attribute the increase in the company’s reputation score to the company’s CSR activities? It is important to isolate the issue as much as possible. While the results will not be scientific and may be arrived at through an element of guesswork, it can help identify broad linkages. This exercise will assist in highlighting the value of the CSR initiative and, therefore, safeguard the future funding of the initiative. Ensure the participation of staff throughout the process The participation of staff in the above process is key, as it gives staff ownership of the chosen CSR initiative and thereby increases the likelihood of staff buying into the process. This in turn can lead to increased motivation and greater team cohesion within the organisation. Debrief The need to debrief in the aftermath of a CSR initiative is imperative. The idea is to step back and examine what was achieved, how it was achieved and what could be changed in the future to make the initiative more effective or increase the benefits to both the company and the relevant stakeholders. Conclusion In conclusion, the Impact Value Chain Model is a roadmap for how CSR can be evaluated. It provides a strategic lens through which management can assess the value of CSR initiatives and move CSR from a ‘nice to do’ activity to a strategic activity; one that can demonstrate its contribution in terms of the many benefits it brings and thereby ensure support and funding into the future. Dr Blath McGeough is a Lecturer in Management at the Technological University Dublin, Tallaght Campus. Dr Francis McGeough is a Lecturer in Accounting at the Technological University Dublin, Blanchardstown Campus.

Jun 03, 2019