Ethics and Governance

Ethics and Governance

Boards increasingly need to show how they measure their organisation’s culture, but the key information is likely already available within the business, writes Ros O’Shea. The South Sea Islanders have a word, “mokita”, which translates as “the truth that everyone knows, but nobody speaks”. Other notable definitions of culture include “a system of beliefs, shared values and behavioural norms”, “the way to do things around here” or even the “mood music” or “resting heart-rate” of an organisation. Whatever the definition, stakeholders, still shaken by a litany of corporate scandals including endemic ethical failures in financial markets, now recognise that, as Peter Drucker said, culture does indeed eat strategy for breakfast – and arguably for lunch and dinner too. Their demands have led to concerted efforts in recent years to rebuild trust and restore integrity to the heart of the enterprise. Figure 1 highlights some of these welcome developments, which go way beyond extending the rule book or adopting a tick-the-box approach to compliance. It seems everyone has seemingly landed on the same page, which says: you can have all the rules in the world but there is no substitute for character. Much has been written already about how to cultivate character and foster a values-based culture. Indeed, Chartered Accountants Ireland published my book on the topic, Leading with Integrity, in 2016 and has issued several related guides and research papers since. As organisations seek to embed cultural change, the question everyone is now grappling with is: how do you measure it? How can those charged with governance determine if the tone from the top is being cascaded through the ‘muddle in the middle’ and reflected via the ‘echo from the bottom’? Is it possible, with any degree of accuracy, to properly calibrate an organisation’s mood music or gauge its steady-state operating rhythm?  The answer is yes. My ‘5 Organisational Culture Caps’ (5OCC) approach aims to do just that. Loosely based on Edward de Bono’s ‘Six Thinking Hats’ system (where coloured hats represent different modes of thinking), with 5OCC, each cap is assigned to one of five different stakeholders. By donning each cap in turn and thinking about culture from each of these perspectives, a holistic view is developed of how your espoused values align with how your organisation behaves towards these key constituencies in practice. Four caps are pre-assigned – your customers, staff, shareholders and community all deserve their own headgear. You get to pick who wears the last cap, and your choice is likely to be heavily influenced by the sector in which you operate. For example, financial services firms may well pick the regulator; key vendors may be a valid choice for those downstream in the supply chain; whereas for other organisations, agents or brokers, or other business partners on whom they rely to deliver products or services, may get to wear a cap. Once you determine the full suite of stakeholders, the next step is to select key metrics that best capture their unique expectations of your organisation’s culture. Let’s don each cap in turn. The customer Arguably the single best way to actively test the consistency of stated values with the customer experience to attempt to buy the product or the service. Or you could try to make a complaint and follow what happens. Other key cultural indicators from the customer perspective include: Customer surveys; Net promoter scores; Complaints statistics; Feedback from customer focus groups; Social media and press coverage; Litigation and claims; and Awards and ratings. The staff Here, staff is defined in its broadest sense (i.e. from the boardroom to front-line employees). Again, boards should recognise that only so much governing can be done within the confines of the boardroom, and one of the most effective means of assessing the organisation’s tempo and temperament is to get out and about and engage with staff at all levels. Ideally, this should be done in informal ways and settings (such as townhalls or listening lunches, for example) so that site visits don’t become ‘state visits’. The HR department will be a deep reservoir of information to help you understand and monitor the extent to which values are truly lived across the organisation. There are many possible metrics under this heading, some of which are set out below: Staff surveys, engagement indices and culture audits; 360 reviews of senior management and board evaluation surveys; Remuneration and incentive policies; Ethics training and communication strategies, and their effectiveness; Statistics on staff turnover, absenteeism, safety and disciplinary actions; Whistleblowing and grievance reports, and relationships with unions; Diversity and inclusion data; Recruitment processes, succession plans and promotion decisions; Integrity awards or similar; and Online employee feedback (e.g. via Glassdoor and exit interview notes). The shareholder The nature and extent of shareholder engagement will very much depend on the type of organisation, and metrics will need to be calibrated accordingly. For private, charitable or state-owned firms, it may be a relatively straightforward process to monitor the strength and success of the relationship with the organisation’s owners, trustees or relevant government department – most likely by being party to regular discussions. Some of the following metrics may also be relevant and will certainly be pertinent for companies with a larger and more dispersed share register: Governance structures and board performance; Correspondence and engagement with key shareholders; The AGM experience; Internal and external audit reports; Independence and competence of risk, compliance, audit and legal personnel; Investor or analyst reports; Industry benchmarks; and Transparency and disclosures of financial and other reports. The community Here again the relevant community may be local or global, or somewhere in between, and metrics will need to be commensurate with the organisation’s scale and footprint. Particulars will differ but overall, they will aim to measure the extent to which the business is contributing to – and valued by – the communities in which it does business. Specific metrics are more elusive under this heading, but assessment of culture wearing a community cap will include discussions around: CSR activity in the community; In-house ‘green’ initiatives; CSR ratings and ESG credentials; Sustainability reporting; Progress towards committed UN Sustainable Development goals; Carbon footprint, water use and waste; and Local press coverage. A.N. Other As outlined earlier, you get to pick who wears the fifth cap. If, for example, suppliers are an important stakeholder group for you, measures such as promptness of payment, supplier audits and feedback from key vendors would be important to consider. If the regulator is to wear the cap, relevant areas of focus could include the number of fines, regulatory breaches, risk appetite exceptions, inspection reports and the general tone of correspondence. Metrics can also be devised for any other stakeholders by considering what aspects of your culture are likely to matter most to them. Such metrics may best be ascertained by directly canvassing their opinions. The most helpful aspect of the 5OCC approach is its practicality. Most, if not all, of the information required for the various measures will already exist in your organisation. It is simply a matter of collating and synthesising these valuable, but currently disparate, sources of data to provide a five-way mirror back to the organisation showing how the espoused values are truly living and breathing. There is no doubt that what gets measured gets done. Metrics matter. Boards and directors will increasingly need to prove and publish how they measure and monitor their organisation’s culture and I hope this model is a helpful aide in that endeavour. But again, we must remember that there is no substitute for character. All the KPIs in the world won’t displace the board’s most important role, which is to ensure they have the right leadership team who will do the right things for the right reasons. You can’t cap that.   Ros O’Shea FCA is an independent director and governance consultant.

Dec 03, 2019
Ethics and Governance

Níall Fitzgerald explains how to achieve consensus, do your duty, and be yourself as a charity or non-profit trustee. There is something exceptional about those who volunteer their time, skill and expertise to a board, or sub-committee, for the benefit of a cause they feel passionate about. As Nelson Mandela put it, “there can be no greater gift than that of giving one’s time and energy to help others without expecting anything in return”. But being a board or sub-committee member (trustee) for a charity or not-for-profit organisation is not without its challenges. These challenges can present themselves around the board table in the form of disagreement or frustration as you strive to get things done. People skills and leadership skills will be called on in order to listen effectively and convey concern, constructively challenge and support the ideas of other trustees in order to achieve consensus. Difficult dilemmas Achieving consensus is not always easy, especially when resource constraints (financial or otherwise) impact the organisation’s ability to realise its strategic objectives. Difficult dilemmas can be tabled at board meetings, which can present challenges for the organisation and test the core values that compelled each trustee to volunteer in the first place. A classic example involves proposals to suspend services in one area to the detriment of some beneficiaries in order to ensure continuity in another. An avalanche of conflicting priorities around the board table can result in an impasse. Challenges like these can make a trustee grateful for a good governance framework. Such a framework can provide clarity on their duties and responsibilities to the organisation, including the various stakeholders it serves. There can be comfort in understanding the policies and procedures that ensure the collation and adequate flow of accurate information from the front-line service providers (both staff and volunteers) and senior management to the board. Such information results in better decision-making that is in the best interests of the organisation as opposed to any individual or group of trustees. Such a framework will also provide a welcome format for effective and well-chaired discussion at the board, and ensure that the right level of diversity, skills and expertise are enabled to inform the decision-making process. Rule of law But what about the rule of law regarding the trustee’s duties and responsibilities? An understanding of these rules will help channel a thought process towards what is important for the organisation. A trustee does not need a law degree to understand these requirements. Rather than feel overwhelmed, it is useful to first understand the organisation (including its vision, mission and values), its legal structure (e.g. company, trust, unincorporated etc.) and the area within which it operates. This process will highlight the laws and regulations that are most relevant for consideration. Figure 1 illustrates the types of legal and regulatory duties that apply to trustees. Notice that some overlap and they have a common design to ensure that the organisation is always the focus of consideration. Being involved as a trustee can be the gift that keeps on giving for the individual and the organisation. Challenges present opportunities for trustees to exercise values, apply skills, provide expertise, assess problems and inform decisions in a different way – for example, through the lens of life-changing consequences. A good governance framework and adherence to the rule of law will provide another useful lens to guide, rather than impede, trustees towards consensus on trickier dilemmas.

Dec 03, 2019
Ethics

C-suite executives deploying 4IR technologies have a tough ethical terrain to navigate. Putting in place a policy for ethical usage of technology could benefit their businesses – and society. By Timothy Murphy, Swati Garg, Brenna Sniderman and Natasha Buckley Leaders are increasingly demonstrating that they want their organisations to do well by doing good, and with reason. Doing good can be good for business, especially in an intensifying economic, social, and political milieu that is challenging organisations to reinvent themselves as social enterprises. Deloitte Global CEO Punit Renjen’s Success Personified in the Fourth Industrial Revolution report, released at the World Economic Forum conference in Davos, Switzerland, earlier this year highlights that leaders are putting a greater focus than ever on advancing society through their technology efforts. In fact, leaders rated “societal impact” (including income inequality, diversity, and the environment) as the number one factor in assessing their organisation’s annual performance, ahead of financial performance, customer experience, and employee satisfaction. This view manifests in their actions as well – more than 73% of the surveyed organisations have developed or changed a product in the past year to generate positive societal impact through Fourth Industrial Revolution (4IR) technologies. But as organisations strive to take society forward with 4IR solutions, they are often confronted with a host of ethical issues, which can have societal as well as business ramifications. Examples of ethical “missteps” by companies abound in the media these days. One issue highlighted in the news regularly is that of data privacy, and it has left consumers understandably worried about how their data is captured, saved, and used. Another emerging threat is algorithmic bias, where biased data manifests itself in biased recommendations, but we’re yet to fully understand the ramifications of algorithmic bias. Even lack of inclusivity in technology design can negatively impact consumers, as seen in some smart city designs where people in wheelchairs are unable to access eye-level retina scanners as they require the person to be standing. These ethical issues, and others, have led to product recalls, public backlash and/or lost revenue for companies. In this technologically and ethically complex environment, organisational values matter more than ever. If leaders don’t formulate and implement policies on the ethical usage of technology, it will likely become difficult for them to navigate the Fourth Industrial Revolution. More importantly, it could inhibit innovation and financial growth at their companies. Our survey data from this year’s study reinforces the link between ethics and organisational growth (see the sidebar, “Methodology”), providing further rationale for why companies should care about ethically using 4IR technologies. The study found a positive correlation between organisations that strongly consider the ethics of 4IR technologies and company growth rates (Figure 1). For instance, in organisations that are witnessing low growth (up to 5% growth), just 27% of the respondents indicated that they are strongly considering the ethical ramifications of these technologies. By contrast, more than half (55%) of the respondents from companies growing at a rate of 10% or more are highly concerned about ethical considerations. Ethical concerns don’t always translate into action Most executives responding to our survey were concerned about ethical usage of 4IR technologies. More than 30% of the respondents strongly agreed that their organisations are highly concerned about ethical technology usage and another 50% indicated a moderate concern. Yet when it comes to action, this number dropped significantly – just 12% of the respondents strongly agreed that their companies are actively exploring related policies or already have them in place. So, what’s preventing leaders’ ethical concerns from being translated into ethically driven actions? The answer may lie in the dynamics of the C-suite. Our survey found that concern over ethically using 4IR technologies is not consistent across the organisation (Figure 2). Starting at the top of the C-suite, only 15% of CEOs and presidents expressed strong concern about ethical technology usage (considerably less than the 30% average across the C-suite). The chief information officer (CIO), a role often charged with managing these technologies, averaged only 16%. Contrast this with roles like the chief sustainability officer (CSO) and the chief operating officer (COO) who indicated strong ethical concerns at 50% and 41% respectively, and a clear disconnect emerges between the CEO/CIO’s line of thought and that of the CSO/COO. Given that reputation and social impact are critical aspects of the CSO’s role, executives in this role are more likely to care about ethics. The COO, who oversees enterprise-wide operations, is likely to be more aware of how work is executed and, therefore, have greater awareness of potential ethical issues. However, those with more influence on the 4IR strategy – the CEO and, to a lesser degree, the CIO – seem to be disproportionately swaying organisational policy. Only 12% of the organisations whose executives were surveyed have policies in place or are actively exploring the implementation of policies (tracking closer to the level of concern conveyed by the CEO and CIO) on ethical usage of technology. Extending ethical thinking across the organisation While 4IR technologies offer immense opportunities, they also bring many ethical challenges as they’re poised to transform the way we live, work and interact with each other. As a result, leaders at the helm of companies looking to benefit from these technologies need to navigate a complex ethical environment. Organisations could benefit from ensuring that proper policies are in place and are adhered to. The following steps can help leaders move forward in this direction: Set the tone at the top: if the CEO doesn’t consider ethics a priority, it will likely be difficult to get the rest of the organisation to do so. Not only should the CEO emphasise the importance of ethical considerations in the usage of technology, they should also encourage other members of the C-suite to express their concerns. The CSO and COO, by virtue of their roles, have a unique line of sight into the importance of ethics in supporting growth initiatives. This knowledge-sharing between the CSO and COO and the rest of the C-suite can empower executives in the organisation to tailor their solutions with ethics as a top-of-mind design consideration; Cultivate an ethical culture: ethics is not only an issue for C-level executives to consider, but it is also of prime importance to an entire organisation. It starts with clearly messaging ethical policies and guidelines – and leading by example – but it also includes giving your workforce a voice in the discussion. As senior executives work out strategies to integrate these technologies into every facet of the workforce, it’s important that they provide other employees with avenues to express ethical concerns about their usage; and Iterate the policy: 4IR technologies are rapidly changing and accordingly, policy too should change. Just as government regulation is trying to keep pace with autonomous vehicles and smart cities, organisations should establish constant touchpoints to ensure that their ethical policies keep pace with the rapidly changing technology environment. For CEOs and other C-level executives, integrating the ethical considerations of employees across the organisation and other stakeholders into their day-to-day operations also makes good financial sense. The organisations that set the tone at the top are the ones that are likely to be best positioned to help their businesses – and society – flourish. This article was originally published by Deloitte Insights. View the article at www.deloitte.com/insights/industry-4-0-ethics Methodology This research is an extension of the Success Personified in the Fourth Industrial Revolution report, which is based on a survey of 2,042 global executives and public sector leaders conducted by Forbes Insights in June–August 2018. Survey respondents represented 19 countries from the Americas, Asia and Europe, and came from all major industry sectors. All survey respondents were C-level executives and senior public sector leaders including CEOs/presidents, COOs, CFOs, CMOs, CIOs and CTOs. All the executives represented organisations with revenue of US$1 billion or more, with half (50.1%) coming from organisations with more than US$5 billion in revenue. 65% of the public sector leaders represented organisations and agencies with budgets of US$500 million or more.

Oct 01, 2019
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