The Next 25 Years – Taking UK Corporate Governance Into Adulthood
Jennifer Sundberg, Co-Chief Executive, Board Intelligence writes:
The typical British boardroom has changed considerably in the last 25 years. It no longer has the appearance and atmosphere of a gentleman’s club, with a retired admiral or two dozing in the corner, and well-meaning amateurism has been replaced by a more professional and purposeful approach.
Good governance is, and always will be, a work in progress, but it has come a long way since 1992. The UK Corporate Governance Code in its various guises must take much of the credit for that, as must the FRC – it acted as midwife at the birth of the Code, and later took on the responsibility of guiding it through its difficult teenage years.
Our understanding of the factors that contribute to good governance has also evolved over that period.
To over-simplify terribly, we started with systems and structures – checks and balances such as audit committees, the separation of powers and the mechanisms for making boards more accountable to shareholders.
We then realised that simply installing these structures was not sufficient. They would not be effective unless the right people were operating them, and so attention then turned to issues such as board balance, independence and diversity.
Most recently we have recognised that having well-qualified people in the room does not itself guarantee a good outcome – hence the focus on improving corporate culture and unlocking the door to the ivory tower to engage with employees and other stakeholders.
And it doesn’t stop there. Good governance doesn't just happen by itself. It depends on a vast amount of work being done in the backroom as well as the boardroom, making sure the board has the assistance it needs. Things like agenda management, clear board papers and training and support for directors are not exactly glamorous, but they are essential.
In fact, I would argue that they are now more important than ever. The expectations we place on boards have grown considerably and with each development, the information and time they need to do their job has increased. This has been accentuated by the regulatory trend to make individual directors more personally and legally accountable.
In many companies, the support systems on which boards rely are already buckling under the weight of these expectations.
At Board Intelligence we see companies with over 20 items on their board agenda, often leaving little or no time for meaningful discussion. Over 50% of respondents to our recent survey reported that the size of board packs had increased over the last five years, with some now reaching over 1,000 pages. There is no way that even the most knowledgeable and diligent director can take in all of that information in the time given.
Unless these problems are addressed, the ability of boards to perform their role effectively will be undermined, and the gap between what is expected of them and what they can deliver will grow.
The FRC has long emphasised the importance of companies applying a materiality test when preparing their annual report and accounts. The same test is needed for the board pack and meeting agendas.
A short, sharp and strategic board pack focused ruthlessly on ‘what matters?’ can help to unlock the board’s potential; an over-long, backward looking and operational one can have exactly the opposite effect.
In large part, it is up to the boards and those who support them to address this problem. But I would encourage regulators and policy-makers - including the FRC - to pay attention to the issue as well. It may not grab headlines or garner much praise directly, but the reality is that their policy objectives can be thwarted by practical constraints just as much as ill intent.
We should also be asking ourselves whether there might come a tipping point at which loading further responsibilities onto boards will render them unable to exercise the current ones to the standard we expect. There comes a point when even with discipline and a keen sense of materiality, the volume of agenda items and board papers is still unmanageable. If so, what is the answer?
Is it to re-evaluate our expectations of what boards are realistically capable of managing, and perhaps reallocate some responsibilities? Or is it to vastly increase the time that we expect directors to spend on their duties, which may spell an end to the independent non-executive director as we understand the role today? These are uncomfortable trade-offs, but they are ones that we may have to address if we are to continue to build on the achievements of the last 25 years.