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Governance Resource Centre

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On this page we present special articles on governance, a selection of relevant articles from Accountancy Ireland, as well as recent news from across Chartered Accountants Ireland in relation to governance.

Governance news and articles

Governance, Risk and Legal
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Governance of Charities and Not for Profits – Webinar Highlights

At a Chartered Accountants Ireland webinar on 23 March on the governance of charities and not for profits (ROI), David Brady, non-executive director and management consultant, presented on the “charity board maturity model”. Five Levels of Charity Board Maturity*   Level Board characteristics Non-Compliant Negative attitude to governance. Unaware of strategic developments. Short-term funding focus. Receives only basic financial information. Unaware of outdated policies. Does not insist on a risk register. No rotation or succession planning. Antagonistic relationship with staff. Weak AGM process. Compliant Tolerant attitude to governance. Closed to developments other than self-beneficial. Ensures mixed portfolio of income sources. Ensures policies are current. Ensures risk register prepared for compliance. Rotation policy not implemented. Provides superficial staff support. AGM limited to board only. Effective Understands benefits of governance. Revises board and staff structures to exploit opportunities. Focused on seeking funding opportunities to support strategy. Use policy register to refresh and revise policies. Reviews risk register to manage risk and plan contingencies. Ensures appraisals and rotation policy implemented. External members attend AGM and decisions made. Progressive Seeks improvement governance. Keen to benchmark board maturity. Seeks collaboration in new initiatives that reflect market changes. Ensures policies updated in line with business/market changes. Defines risk appetite. Ensures skills gaps aligned with strategy. Ensures strategy informs decisions. Staff and board rotations planned and implemented. Elite Delivers a series of strategic programmes resulting insignificant impact and/or funding. Board and staff have collective problem-solving mind set. Reviews a series of financial and non-financial KPIs. Employs long-term resource planning. Promotes risk management culture. Reviews strategy regularly. Succession planning includes pro-active identification of new chair and board members. Embraces and learns from occasional failure positively. * Source: David Brady, FCA, of DB Consulting. In an insightful presentation in which he persuasively argued that compliance with a governance code should a basic expectation, David provided recommendations for moving a charity or non-profit on to the levels of effective, progressive or elite governance. The keynote presentation was followed a panel discussion featuring Inez Bailey, CEO of the Centre for Effective Services; John Roycroft, non-executive director National Advocacy Service for People with Disabilities and chair of its policy, communications and governance committee; and Aisling Fitzgerald, Director with PwC. Issues discussed in detail included: Is complying with a governance code, or an equivalent set of standards, sufficient to achieve good governance? A non-executive director’s experience of implementing the Charities Governance Code. Insights on how the senior management of a charity or non-profit can effectively manage and meet stakeholder expectations in relation to compliance and performance. Whether a charity is complex or non-complex per the Charities Governance Code. The importance of innovation in a charity or non-profit organisation. The societal contribution of the charity and non-profit sector in Ireland, and considerations for providing support to assist people suffering because of the crisis in Ukraine. The event was opened by Tony Ward, Chair of the Chartered Accountants Ireland Charity and Non-profit Network Group, chaired by Níall Fitzgerald, Head of Ethics and Governance, with a closing address delivered by Terea Campbell, Member of the Council of Chartered Accountants Ireland and Chair of the Institute’s Ethics and Governance Committee. A full recording of this webinar is available to viewed at: Governance of charities and non-profit organisations (ROI). Níall Fitzgerald FCA Head of Corporate Governance & Ethics at Chartered Accountants Ireland

Apr 06, 2022
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Governance, Risk and Legal
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EU proposal for new directors’ duties and rules on corporate sustainability due diligence:

On 23 February 2022 the European Commission presented its proposal for a Directive on corporate sustainability due diligence. If adopted by the European Parliament and the European Council, the new rules will apply: firstly to all large private companies with over 500 employees and €150 million turnover in the EU; after two years to companies with over 250 employees and €40 million turnover and where at least 50% of this was generated from operations in high-impact sectors such as manufacturing of food and textiles, wholesale of agricultural raw materials and live animals, extraction of minerals and others. The due diligence obligations do not apply to micro companies and SMEs. However, the Directive does provide for supporting measures for those likely to be indirectly affected as part of the supply chains of larger companies, for example a requirement for a larger company to bear the cost of any third-party assurance required from a SME to verify compliance with its code of conduct or measures to prevent adverse human rights or environmental impacts in its supply chain. It is expected that the Directive will apply to approximately 13,000 EU companies and 4,000 third-country companies (non-EU companies operating in the EU). What are the proposed rules? The objective is to require companies to: implement processes that mitigate the risk of adverse human rights and environmental impacts in their value chains; integrate sustainability into their corporate governance and management systems, and frame business decisions in terms of human rights, climate and environmental impact, as well as in terms of the companies’ resilience in the longer term. Companies concerned must have a due diligence policy that is reviewed and updated annually, detailing: the company’s approach to due diligence a code of conduct describing the rules and principles to be followed by the company’s employees and subsidiaries the processes to implement due diligence, including measures to verify compliance with the code of conduct and to extend its application to established business relationships. Companies are required to conduct human rights and environmental due diligence by: putting in place a due diligence policy; integrating due diligence into their policies and management systems; identifying actual and potential adverse impacts; preventing, ceasing or minimising adverse impacts; ending, neutralising and remediating adverse impacts; establishing and maintaining a complaints procedure; monitoring the effectiveness of their due diligence policy and measures; publicly communicating on their due diligence. Business relationships In establishing the extent to which due diligence is to be applied, there is one approach for the company’s own operations and subsidiaries and another for its business relationships. In relation to the latter, a company’s obligations extend only to established business relationships that are, or expected to be, lasting and that do not represent a negligible or ancillary part of the value chain. There are further considerations in the Directive that apply to a company’s direct and indirect business relationships (e.g. suppliers of the company’s direct suppliers), including circumstances in which a business relationship cannot reasonably be brought to an end. Combating climate change through strategy, risk and remuneration Companies will be required to: have a plan that ensures their business model and strategy of are compatible with the transition to a sustainable economy and with the limiting of global warming to 1.5°C in line with the Paris Agreement; include emission-reduction objectives in cases where climate change is or should have been identified as a principal risk or a principal impact of the company’s operations; have regard to the fulfilment of the above obligations when setting variable remuneration, if variable remuneration is linked to the contribution of a director to the company’s business strategy and long-term interests and sustainability. New directors’ duties The Directive introduces a duty for directors of EU companies to set up and oversee the implementation of corporate sustainability due diligence processes, including a due diligence policy, and to adapt the company’s strategy to take into account adverse impacts on human rights and the environment arising from their own operations. The Directive also clarifies the general duty of care requirement in relation to these new rules. Directors are required to take into account the consequences of their decisions for sustainability, including, where applicable, human rights, climate change and environmental consequences, in the short, medium and long term. Third party assurance The Directive refers to situations where seeking independent third-party verification is appropriate; for example, verification of compliance with contractual assurances provided by a supplier in relation to meeting human rights and environmental required by the Directive.  Independent third-party verification in this context is to be provided by an auditor that is independent of the company, free from any conflicts of interests, has experience and competence in environmental and human-rights matters and is accountable for the quality and reliability of the audit. Enforcement A national authority will be designated to supervise and impose effective, proportionate, and dissuasive sanctions, including fines and compliance orders. Civil liability will apply to companies, directors (in cases where courts decide to lift the corporate veil) and/or senior executives (where legally accountable). Victims may be entitled to compensation for damages arising from the failure to comply with the obligations of the new rules. The company’s own monitoring measures and compliance functions will play an important role in ensuring effective identification, prevention, minimisation, ending and mitigation of adverse impacts on human rights and the environment. The Directive establishes minimum requirements for monitoring, though companies should also be aware of other measures (e.g. whistleblowing), that can assist in identifying adverse impacts or breaches of the company’s policies and procedures.   Persons who work for companies subject to due diligence obligations under this Directive or who are in contact with such companies in the context of their work-related activities can play a key role in exposing breaches of the rules of this Directive. Directive in the context of the EU Green Deal and Ireland This Directive represents a significant step towards achieving a primary objective of the European Green Deal, for sustainability to be further embedded into the corporate governance frameworks of organisations across the EU. The Directive complements the EU Corporate Sustainability Reporting Directive (CSRD) by adding a corporate duty to perform due diligence. This Directive will underpin the EU Sustainable Finance Disclosure Regulation (SFDR) which requires financial market participants to publish a statement on their due diligence policies with respect to principal adverse impacts of their investment decisions on sustainability on a comply-or-explain basis. The Directive will also complement the EU Taxonomy Regulation, a transparency tool that facilitates decisions on investment and helps tackle greenwashing by providing a categorisation of environmentally sustainable investments in economic activities. The Directive will also complement several other EU Directives and policies aimed at combatting human trafficking and forced labour, establishing deforestation-free supply chains, an action plan on a circular economy, a strategy for financing the transition to a sustainable economy, and more. Sustainability in corporate governance, or ‘sustainable corporate governance’, encompasses encouraging businesses to consider environmental, social, human and economic impact in their business decisions, and to focus on long-term sustainable value creation rather than short-term financial value. The value of good corporate governance to long-term sustainable success is not new to companies familiar with the first principle of The UK Corporate Governance Code. While the Directive will apply to large private companies, we can expect that many businesses in Ireland’s small, open, export-lead, economy will be impacted. Níall Fitzgerald FCA Head of Corporate Governance & Ethics at Chartered Accountants Ireland Note: Click for further information on the Corporate Sustainability Due Diligence Directive.    

Feb 25, 2022
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Governance, Risk and Legal
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Companies are embracing the spirit of the Wates Principles

The Financial Reporting Council has issued the first in-depth assessment of the quality of reporting from private companies who have chosen to follow the Wates Principles. The report, which was conducted with the University of Essex, shows that the Wates Principles are the most widely adopted corporate governance code used by large private companies.   The research shows that companies are grasping the spirit of the Wates Principles in their governance reporting. They are using the principles as a tool for self-reflection and improvement, and seeing the yearly governance reporting as an opportunity, not a burden. This research also includes examples of good reporting and acknowledges that it is too early to draw too many conclusions as most companies were in their first cycle of reporting. The financial sector was the biggest adopter of the Wates Principles.

Feb 23, 2022
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Accountancy Ireland articles

Ethics and Governance
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The future of the charity director

The role of the charity director is an onerous one, but what about performance? David Brady considers the characteristics of an effective charity director, and future challenges and opportunities. The implementation in 2021 of the Charities Governance Code poses important questions for the effective governance of charity boards in Ireland, including the challenging, and occasionally sensitive, review of board performance and the performance of individual constituent directors.  Compliance with the Code is, however, a baseline measure of effectiveness. Beyond the legal requirements for directors under the Charities Act 2009 and the Companies Act 2014, the qualities, roles and responsibilities of the ideal charity director are largely undefined. Are charity directors different? Is being a director of a charity really that different to being a private sector director? Directors of charities and private sector directors have shared experience in overseeing the challenges: of recruiting, motivating, and retaining the right people; of there being sufficient funds to pay salaries; and of competitors in the same sub-sector.  There are also similarities in how the business of the board is conducted; the calendar of board meetings, sub-committee meetings, and annual general meeting; the annual audit; the risk register; and—increasingly common—evaluation of the board itself.  In both contexts, the chairperson is often selected for their relevant experience, ability to guide decisions or bring order in the face of complexity or challenge. There are, however, factors that are unique to charities, including: charities legislation and guidance from the Charities Regulator; compliance with the Charities Governance Code; a mixed-income revenue model, whereby funding is derived from a combination of restricted-purpose and unrestricted-purpose revenue sources; a volunteer, unpaid board of directors; staff members who may be unfamiliar with private sector/commercial work environments and practices; volunteers, who assist the organisation on an unpaid basis, but who may feel they have a stake/voice equivalent to employed members of staff or even board directors; functioning as public benefit entities, with accountability to end users and the public in general, and the fulfilment of a public-benefit purpose;  service-level agreements with funders. None of this makes life easy for the charity director and can be reason enough for some to shy away from holding board positions.  Nonetheless, there are many experienced and qualified people who wish to give something back to organisations that have positively impacted their lives or to causes aligned with their beliefs and values — often donating significant amounts of their time. How good is good? As noted above, the implementation of the Charites Governance Code has heightened awareness of governance standards in the sector and the importance of the role of the charity director in achieving these standards.  However, beyond meeting base-level compliance with the Code, the debate on how to define highly effective charity boards and directors, and their ability to impact on the success or effectiveness of their governed organisations, has yet to commence in earnest.  In this article, I propose a five-level model for evaluating charity boards in terms of their ‘maturity’ or otherwise (see Figure 1), from a non-compliant to an elite standard. I suggest applying the same model to the evaluations of individual directors. In devising and articulating this charity board maturity model, I considered the following: How mature is a charity board? What aspects of a board’s conduct define its maturity, or otherwise? What is the evidence of a board achieving the higher levels of maturity? For example, is it aware of charity sector challenges and opportunities in Ireland and internationally? What does this mean for director competencies and performance? Is it possible to connect board maturity with the related, distinctive competencies required of individual board members? Non-compliant boards typically have a negative attitude towards governance. They are often unaware of strategic developments within the sub-sector and have a short-term funding focus, relying on basic financial information and outdated policies and procedures. They have no board rotation or succession planning processes. Their AGM processes are weak, and they do not insist on the maintenance of a risk register. Compliant boards adopt a tolerant attitude to governance; however, strategically, they are largely closed to sector developments other than matters of self-interest. Their policies and risk register are compliant rather than effective; their rotation policy is not fully implemented, and the AGM is limited to board members only.   Effective boards see the benefits of good governance and revise board and staff structures to exploit opportunities. They seek funding opportunities to support strategy and use risk registers to manage risk and plan contingencies. They ensure that board appraisals and rotation of directors policies are implemented. AGMs include the attendance of, and participation by, non-board, external members of the charity.  Progressive boards seek continuous improvement in their governance of the organisation. They are keen to benchmark their maturity against the boards of peers. They seek collaboration in new initiatives that reflect market changes. Policies are updated in line with current business/market changes. The organisation’s risk appetite is determined and defined, and the board ensures that its skills gaps are identified and addressed. Board rotations are planned and implemented. Elite boards deliver strategic programmes resulting in significant impact and/or funding. Board members and staff have a collective problem-solving mindset. The charity’s performance is managed using both financial and non-financial KPIs. At the elite level, the board employs long-term resource planning, promotes a robust risk management culture, and reviews strategy regularly. Succession planning includes pro-active identification of new chair and board members, as well as key executive management positions. They embrace and learn from occasional failure positively. Benchmarking director performance As suggested, the five-levels of maturity model can be applied by analogy to the evaluation or benchmarking of individual board directors. The articulation of competencies, or rather their absence, of the ‘non-compliant’ director is straightforward.  They are unfamiliar with the sector or sector trends. They bring no valuable experience or expertise to the board, are unfamiliar with governance frameworks, and generally blame others for problems rather than take responsibility themselves. The compliant director has an up-to-date understanding of the charity, brings technical knowledge to the position, is familiar with the Charities Governance Code and brings governance oversight to the organisation.  Moving up a level, the effective director will have served previously on multiple charity boards and brings valuable experience. Other board members will be aware of their specialist knowledge and draw on their expertise to derive solutions for organisational issues.  Their awareness of internal and external stakeholders will be strong and their input to decision-making will reflect this. The progressive director is a strategic thinker. In addition to having specialist knowledge, they bring a strategic understanding of the niche in which the charity operates and its competitive advantages.  Their leadership qualities are also evident from previous directorships, and they are skilled in multiple business and/or charity sectors.  Accepting change as normal and necessary, a key characteristic is their desire to introduce innovations to the charity’s operations, particularly ideas that are working well in the commercial sector. Finally, the elite director provides economic, political, and social thought leadership to the charity, in addition to the strategic leadership attributes of the progressive director. They possess the qualities required to chair either the board or one of its sub-committees.  Through a broad network of private and public sector collaborators, they are well positioned to plan for the sustainability and growth of the charity.  They set the tone of communication within the board, between the board and the staff of the charity, and between the board and the sector and broader public arena. The style of the ‘elite’ charity director is, paradoxically, non-elitist, collaborative and influential, with an evident social purpose. What next for charity directors? As well as understanding the characteristics, competencies and behaviour of the ideal charity director, and applying these when evaluating boards and their individual members, there are several critical issues that pose important challenges and questions for the sector as a whole: Should there be mandatory term limits for holding the position of charity director and/or defined limits for the role of chairperson and secretary? Should charity directors be paid, and if so, in what circumstances, how much, and under what terms and conditions? How can more experienced businesspeople, qualified professionals and members of the public be encouraged to hold board positions in charities? What can the sector do to facilitate this? What training and development, beyond the compliance level, do charity directors need? Should mandatory, accredited training be introduced before board positions are offered and accepted? What can Irish charities learn from international experience and best practice regarding governance? Should the legislation be changed to make it easier to identify, caution, penalise or remove ineffective charity directors? The implementation of the Charities Governance Code has given an important boost to the raising of standards across the sector and the priority must be to ensure this happens promptly and comprehensively.  The extension of governance into territory beyond compliance is an exciting and challenging move with long-term benefits for all stakeholders.  Defining charity boards in terms of their maturity, from non-compliant through effective to elite, and evaluating director competencies by analogy, will serve to both challenge and develop a trusted and vibrant charity sector.   David Brady is a principal at DB Consulting.  (Views expressed in the article are strictly those of the author.)

May 31, 2022
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Ethics and Governance
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Becoming trusted problem-solvers

Barry McCall speaks to Níall Fitzgerald, Head of Ethics and Governance at Chartered Accountants Ireland, about the findings of recent trust and ethics surveys commissioned by Chartered Accountants Worldwide and the Consultative Committee of Accountancy Bodies. New research carried out by Chartered Accountants Worldwide and Edelman Data and Intelligence (DXI) has found that trust in the accountancy profession remains strong after the turmoil of the COVID-19 pandemic. The study found that business decision-makers around the world consider Chartered Accountants among the most trusted professionals, catching up to doctors, engineers, nurses and teachers, and ahead of other prominent groups in society such as legal professionals and politicians. Furthermore, Chartered Accountants are the most trusted finance professionals ahead of bankers, financial advisors, economists, and insurance brokers. Edelman DXI began working with Chartered Accountants Worldwide in 2018 to track the attitudes of senior decision-makers (e.g. CEOs, directors, heads of function, etc.), but this marks the first time the results have been made publicly available. The 2021 study surveyed 1,450 business leaders across the Republic of Ireland, Northern Ireland, England, Scotland, Wales, South Africa, Australia, and New Zealand. “There is a lot to be proud of in these findings for the Chartered Accountancy profession in Ireland,” says Níall Fitzgerald, Head of Ethics and Governance at Chartered Accountants Ireland. “The results point to an opportunity for Chartered Accountants to use their position of trust to tackle the challenges of the recovery after COVID-19 and build towards a sustainable future.” Among the key results of the research was the finding that performance on integrity has improved since 2019. However, scrutiny has also increased, with transparency more important in driving trust in Chartered Accountants. Chartered Accountants are also rated highly as business professionals. Most business decision-makers (84%) believe that Chartered Accountants have the skills and expertise to make businesses thrive today. Meanwhile, 81% are confident in Chartered Accountants’ ability to navigate a new operating environment in the future. At the same time, there is a growing expectation that they must also follow up with action. Overall, 85% of business decision-makers say it is important that Chartered Accountants demonstrate a track record of helping businesses thrive. Most respondents (70%) see Chartered Accountants as credible spokespeople on societal issues such as sustainability, diversity, equity and inclusion. But they also expect Chartered Accountants to follow through by driving sustainable environmental practices within businesses and doing more to foster diversity, equity and inclusion practices. Speaking at the global launch of the study in November, Chartered Accountants Worldwide chairman Michael Izza said: “Chartered Accountants are the first port of call for many businesses and saved many livelihoods during the pandemic. Over the next ten years, Chartered Accountants will play a leading role in tackling critical problems, including climate change, which is one of the biggest challenges humanity has faced. As problem solvers, Chartered Accountants can be counted on to find solutions to the world’s most complex economic and moral issues, including global warming and net-zero.” But the profession still has some work to do if it is to play that leading role on those critically important issues, according to Fitzgerald. “We can, of course, be proud of the results, but we have to be realistic as well,” he says. “When you drill down into the detail of the findings, you find that the most strongly positive results were about the ‘bread and butter’ activities, the things accountants are meant to be good at anyway.” He adds that being great at everyday things will not be enough in the new post-COVID decarbonising world. “Chartered Accountants are rated very highly for activities like accounts preparation, tax returns, data analysis, and general business advice, which we are trained for. Those are all things we are supposed to do, and while it is good to be held in high regard for them, we must ask ourselves why our core skills are not seen to be transversal into other important areas for business.” Those areas include adopting transformative new technologies like artificial intelligence and all aspects of the environmental, social and governance (ESG) agenda. “We need to up our game when it comes to those areas,” Fitzgerald continues. “At the moment, Chartered Accountants are not seen as the go-to people for ESG issues, diversity and inclusion, or becoming purpose-led as an organisation. While 60% of respondents said accountants had some part to play, no one said we were integral to the process. We might think we are, but others don’t. We need to work on that.” He doesn’t believe that should be viewed entirely negatively, however. “There are some very real opportunities opening up with the advent of new sustainability reporting standards and other regulations,” he notes. “These things are all about data and measurement, and those are things accountants are very good at. They are also very good at technical standards and translating them into processes and so on.” Fitzgerald also believes that the profession needs to reposition itself to capitalise on those opportunities. “Finance professionals in future will have to be seen as solutions providers in a wide range of areas. Large organisations seeking advice on their sustainability journeys can get it externally, but SMEs don’t have the money for that. So they have to look internally, and who better than their head of finance or external accountant to guide them on where they need to go? Sustainability has a direct bearing on finance, after all. For example, in the future, companies will find it very difficult to get bank loans or access investment capital if they are not on a verifiable sustainability journey. Accountants have the skills to do that. We are very good at taking standards, putting them into practice, and giving investors and lenders the assurances they need in many areas. In future, that will apply to sustainability as well.” Fitzgerald also points to another recent report from the Consultative Committee of Accountancy Bodies (CCAB), which surveyed accounting professionals in Ireland and the UK. It found that 27% had been put under pressure, or felt under pressure, to act in an unethical way in the last three years. The most common instances related to over-optimism concerning budgets and business cases, unreasonably downplaying risks in budgets, and categorising personal expenses as business expenses. In most cases (78%), the accountants concerned spoke up to prevent pressure to break the ethical code. Just 10% of those under pressure carried out the unethical task, while 25% did so but only partially. Interestingly, those figures correlate strongly with the 35% who said they didn’t turn to anyone for support or guidance. Fitzgerald advises any Chartered Accountant who feels under pressure to act unethically to reach out for help. “Chartered Accountants in Ireland have a fantastic network of 30,000 fellow members to call upon for assistance in cases like this,” he says. “Many will have encountered similar situations themselves and will be able to offer very practical advice. We also have resources on the Institute’s website, which provide guidance on reaching an ethical decision. “Generally speaking, the advice is to look after the small things before they grow. For example, don’t overlook things like overstating mileage. A disciplined approach to such things will help create a culture where the pressure to act unethically doesn’t arise.” Níall Fitzgerald is Head of Ethics and Governance at Chartered Accountants Ireland.

Nov 30, 2021
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Ethics and Governance
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The three traits of effective directors

Dr Margaret Cullen explains the characteristics of good directors, which in turn contribute to board effectiveness and sustainable companies. Although there is no comprehensive definition, the Companies Act 2014 describes a director as “any person who occupies the position of director by whatever name called”. While under previous company legislation, courts recognised some practical differences in capacity, role, duties and responsibilities, the distinction between categories of directors is not widely recognised in the Act. It is within governance codes and guidelines such as the UK Corporate Governance Code, the Code of Practice for the Governance of State Bodies, and the Central Bank of Ireland Corporate Governance Requirements for Credit Institutions that this distinction is made. Executive directors are those involved in the day-to-day running of the company. Non-executive directors, on the other hand, are not actively involved in the day-to-day running of the company. They are typically appointed because they bring particular expertise that can contribute to the company’s success and sustainability. Within the non-executive director element of the board, there are non-executive directors (NEDs) classified as non-independent directors and those classified as independent non-executive directors (INEDs) because they meet the independence criteria specified within the applicable code. NEDs can be further delineated into directors employed within the group to which the company belongs and those who do not work for the group but do not meet the criteria necessary to be deemed independent. A principle enshrined in many corporate governance codes is that at least half the board should comprise NEDs whom the board considers independent. Adam Smith wrote in 1776 that executive directors or managers of companies, “being managers of other people’s money, cannot be expected to watch over it with the same vigilance with which they watch over their own”, thereby articulating the classic agency problem. This agency problem and its solutions constitute the crux of the most articulated corporate governance theory: agency theory. At the heart of agency theory is the assumption of managerial opportunism: that managers are motivated solely by self-interest, not by moral obligation. Thus, agency theorists advocate for monitoring devices, incentive mechanisms, and checks and balances to ensure managers do not abuse power to the detriment of shareholders. INEDs are one such mechanism. The conceptual underpinning of corporate governance codes around the world is the need to respond to this agency problem. Therefore, it is not surprising that principles related to INED representation on boards and INEDs chairing board committees are typically front and centre in these codes. Interestingly, agency theorists assert that the sole objective of a company (de facto the board) is to maximise returns for the shareholders. However, this assertion is inconsistent with directors’ duties under common law. There are, of course, alternative theoretical perspectives that articulate more positive assumptions on the character of managers – stewardship theory, for example. Although they advocate for INED representation on corporate boards, stewardship theorists’ advocacy relates to the advisory and guidance dimension that INEDs bring to the board rather than the need to protect the company from managerial misconduct. Anyone who has sat in my corporate governance class will know that I sit in this camp. I say this not because I am naive as to the propensity for poor behaviour within organisations. On the contrary – we have seen enough corporate governance scandals over the years to know that unscrupulous and greedy people can do bad things. However, for every scandal, thousands of companies survive, prosper, and make significant contributions to society and the economy. I hope that the current gusto in relation to company purpose and environmental, social and governance (ESG) criteria will further influence companies’ societal and environmental footprint to the benefit of all. Sometimes, companies make headlines for a breakdown in controls or sub-optimal risk management rather than any deliberate attempt to defraud the company or customers. Unfortunately, the distinction between the former and the latter is not often made clear by – or to – stakeholders. NEDs are not involved in the day-to-day operations of the company. The entire board should work hard to create a governance framework (across the company and in the boardroom) bespoke to company context, where accountability is created and the board receives the information necessary to do its job. The board is entitled to rely on the integrity of information emanating from within this framework once it has no reason to suspect that the people providing this information are not fit and proper. Wilful blindness to inappropriate behaviour is, of course, not acceptable. If I start as an INED from a position of professional mistrust, however, I am starting from an impossible position. Trust must be at the heart of the board/management relationship. Therefore, the leadership qualities of the CEO/executive directors and the company’s culture are hugely influential on the standards of corporate governance within. INEDs must bring an appropriate balance of trust and professional scepticism to the boardroom. By taking on a pseudo devil’s advocate role, INEDs add an extra governance dimension, enabling the board to make effective collective decisions and/or determinations based on the information to hand that is considered in an honest and responsible way. Getting this balance right is the hallmark of a good director and requires INEDs to understand what being non-executive truly means. Stakeholders must also understand this. Readers of this article will be familiar with the long-standing debate on whether auditors should be viewed as watchdogs (who bark if they see something suspicious) or bloodhounds (who search for something suspicious). Confusion about this distinction serves to undermine the audit process. Equally, considering the collective responsibility of a board, the non-executive nature of INED roles needs to be understood for what it can – and should – entail. To quote my mentor and colleague, Professor Niamh Brennan, it’s “nose in, finger out”. Agency theorists look at corporate governance practices and behaviours through the lens of the agency dilemma. This is an abstraction at the level of the company and its governance structures rather than board behaviour. While recognising the different lenses that categories of directors bring to the boardroom (for example, the knowledge that comes with day-to-day executive involvement versus the information asymmetry attached to being non-executive), the most effective directors demonstrate objectivity and independence of mind. As so much governance is done outside the boardroom, this objectivity across executive directors and executive committee members sets companies up for long-term success. It manifests itself in executive meetings and discussion forums where challenge and debate are encouraged, management information is scrutinised, tactical and strategic opportunities and threats are acknowledged, alternatives are considered, and decisions requiring board approval and areas that would benefit from board-wide input are identified. In short, the executive directors and executive committee can go a long way towards setting the board and the company up for success. Apart from their specific domain of experience, INEDs bring an extra layer of objectivity (with the balance of trust and professional scepticism referred to earlier) to the board to contribute to collective board effectiveness. Group NEDs bring the group perspective (on strategy and risk appetite) and related challenge, requiring equivalent objective mindsets of other board colleagues. This is particularly important, as group NEDs must always act in the interest of the local company. While much is made of the concept of non-executive director independence related to a schedule of criteria, I have always argued that independence of mind across all aspects of governance and all categories of directors is critical to board effectiveness and sustainable companies. There are, however, other behavioural characteristics critical to board success. Several years ago, in the process of designing a governance programme, I had a brilliant discussion with another colleague of mine, Frank Ennis – an experienced independent non-executive director – on what makes a good director. We had previously agreed on the importance of independence of mind (the first ‘I’) for all directors. We explored the importance of technical skill, experience and knowledge to contribute to collective board strength, but determined that it is how these skills are harnessed rather than the skills themselves that are key. We landed on the second ‘I’, intelligence, referring to the capacity of each director not to allow anyone to insult theirs. This second ‘I’ reflects and extends beyond the professional scepticism discussed. Finally, we reflected on corporate governance failures related to fraud and deliberate, inappropriate actions by those in charge and questioned the lack of integrity. We also remembered a keynote speech made by Warren Buffet at Columbia Business School in 2009 when he observed: “Somebody once said that in looking for people to hire, you look for three qualities: integrity, intelligence, and energy. And if they don’t have the first, the other two will kill you. You think about it; it’s true. If you hire somebody without the first, you really want them to be dumb and lazy.” Thus, the third ‘I’ became integrity – never, ever compromise yours. We were mindful, of course, that living by the three ‘I’s can sometimes lead to a fourth ‘I’ in the form of isolation, but we agreed that this is a price worth paying. Dr Margaret Cullen is Founder and Principal of Think Governance Ltd. This article was written in collaboration with Frank Ennis FCA, independent non-executive director.

Jul 29, 2021
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