Blog: Directors are important if the UK is to remain a global business leader
24 August 2018
James Jarvis, Corporate Governance Analyst, Institute of Directors
It’s easily overlooked, but a fact worth restating: the UK’s cohort of business leaders possess an astounding depth and diversity of expertise and aptitudes.
But despite this array of talent, no individual can afford to consider themselves a ‘finished product’. Experience must always be complemented with the desire to learn more. There is always room for improvement and refinement. As Renaissance philosopher Francis Bacon wrote, “natural abilities are like natural plants, that need pruning by study.”
Private limited companies comprise over 96% of UK companies, powering the economy, providing jobs and driving wealth creation. The directors who sit on their boards of these companies, particularly the larger firms being covered by the Wates principles, have significant responsibilities. They must have consideration not just for the investment made by the founders and owners, but also for their large supply chains and the livelihoods of thousands of workers.
Compounding this responsibility is the sheer difficulty of adapting to a constantly evolving business environment. Today’s major risks may not have even existed a decade ago. Despite this the boards of many major UK companies have yet to embrace the full potential of board level professional development.
Improving standards of corporate governance in UK companies will require a more systematic approach to director education and professional development. The role of a director is increasing complex and specialised, and is not merely an extension of a senior executive role. Particularly in respect of large and complex companies, it requires specific training, mentoring and skills development. This is something the guidance to the second of the Wates principles touches upon: “Companies should demonstrate a commitment to the ongoing professional development of their board and directors should engage with such opportunities.”
Just as non-executives are tasked with challenging what is put in front of them, so all directors should recognise the importance of challenging their own thinking, and of being prepared to grasp new ways of thinking, and of leading.
The boardroom should never be an overly comfortable place. One only needs to look at the evidence coming out of the autopsies of recent corporate failures to see that without an effective board a company can go wrong, fast. A board that equips itself with relevant knowledge and skills, that is aware of its legal duties and can effectively scrutinise the performance of senior management, has a far greater chance of contributing to a company’s long-term sustainable success.
Business does not and cannot operate in a bubble; this is truer today than it has ever been. The public, whose trust in the institutions around them is perilously low, is more critical of the companies it interacts with than ever. As consumers we are asking questions of the products and services we buy and as employees we are demanding more from the organisations we serve. The best way in which a business leader can embrace this heightened scrutiny is to ensure they are equipped with the skills and competencies to be as effective as possible.
The investment community is also paying closer attention to the competencies of boards when deciding where to place their money and this will not be confined to the listed market. While focusing on equity markets, Morrow Sodali’s 2018 Institutional Investor survey shows that an increasing number of investors are focusing their attention on board effectiveness and looking at the skills of each board member.
Business failures are a natural and necessary component of our economy and it is impossible to guard against this entirely. What can be done with highly skilled competent business leaders, is reduce the likelihood of avoidable failures. Furthermore this can help companies unlock additional potential by engaging with the pursuit of best practice in earnest. Good governance is only an imposition on firms which do not practice it.
Effective and measured frameworks and structures will always play a crucial role in ensuring a high standard of corporate governance. But without directors who are aware of their roles and duties, who are equipped with the necessary aptitudes and experience, and who recognise the importance of continuing development, these frameworks alone are not sufficient to ensuring the UK remains a standards-setter in the global business world.
The consultation on the Wates Corporate Governance Principles for Large Private Companies closes on 07 September, and can be accessed here.