UK Corporate Governance Code

Risk management – a motto:

The disruptive intelligence that pierces “perfect-place” arrogance

Richard Anderson – Chairman of the Institute of Risk Management

FACTS

BP, Siemens, Microsoft, the Banks ……  they all manifested major, repeated and value destroying failures in governance, risk management and compliance…

BEWARE

You may well think that these incidents were not you, not your organisation, That it couldn’t happen to you  …..  that’s what they thought  ….  and repeatedly the risk failures re-occured.

ROUNDTABLE EVENING

At a presentation to Genius Methods guests, Richard Anderson covered the importance of Risk Management at Board level, including issues like risk capability, capacity and maturity, risk clockspeed, measurement and testing.

Genius Methods reviews risk management, strategic risk and risk challenge when performing Board Evaluations.   Typically we find that Boards understand operational risk, as described and addressed by management, what we often see lacking is the handling of strategic risk, reputational risk and the taking responsibility at board level for risk appetite.

Another question that needs to be addressed by Boards and that is the “home” of risk management.  Is this to be the Audit Committee or the Risk Committee.  Walker recommended that risk be addressed by its own committee and this is largely been followed by financial services organisations.  36% of the non-financial FTSE organisations have also gone down this path.

Our view is that audit is about confirming and evidencing facts of the past and risk is about imagining the unknown.  These views on business do not necessarily come encompassed in one person’s or committee’s ability.  There definitely needs to be an overlap between these committees to ensure that there is not the proverbial gap into which everything falls.

Genius Methods guests enjoyed a roundtable discussion and shared their ideas on various aspects of risk which we have summarised into a White Paper.  This covers their experiences and views on Board level risk management.

Internal Board Evaluation - there is the primary concern of drectors about confidentiality.  Our concern is also the content of the evaluation which is often not effective when designed internally.  Self evaluations always rate higher than impartial evaluations, this is normal, so therefore there is the risk that only comfortable questions are asked.  It will be difficult to internally address the elephant in the room as it has not been addressed up until then.

External Evaluation – the emotional concern is “will I match up to expectations and scrutiny?”

Genius Methods experience provides evidence that the success of a Board Evaluation is related to the Chairman’s comfort with the exercise.  Even a very successful and enlightening Board Evalaution will not engender change if this is not championed by the Chairman.

The quote from the article cited below supports our observations:

Board Evaluations: Rigorous Process or Kabuki Theater

“Board evaluations often move through a predictable progression: refusal, active resistance, passive resistance, check the box, several other steps but finally among man boards there is a desire for continuous improvement and being proactive. The process can help boards reach a consensus on what’s working, what’s not and what to work on in what order. It often induces a productive conversation about what directors want to see changed at the board level.

The most important thing is the conversation. Identify some actionable items. The better the conversation, the better the evaluation. Evaluations are the catalyst. Start at group level, moving to individual level. For a good evaluation, the board needs to have a good understanding of its role and the role of individual directors. Direct feedback to individuals is important.”

Genius Methods conclusion:

Boards that want to improve will not fear evaluation and recommendations constructively provided, instead they will implement the Learning Board concept and continuously improve.

The Chairman is the helmsman, they define the direction of the entity and their personality has an immense impact on the way the Board performs.

Genius Methods’ experience has noted the following 10 key observations in recent board evaluation work:-

1.   A weak Chairman, who does not lead the Board, results in a casual atmosphere,  low governance and matters of management rather than those of a strategic nature fill the agenda.

2.  A personable Chairman, who has good listening and leadership skills can competently lead the Board provided other specific industry or technical skills required are present.

3.   An autocratic Chairman is the one least open to board development input, change and implementing recommendations.

4.   Most Chairmen have little knowledge or understanding of the impact their actions, words and body language have on others.

5.   Many Chairmen do not understand what the role entails when performed correctly and are least likely to realise the importance of the role in stakeholder communications.

6.   An autocratic Chairman often shuts down discussion way before the Directors feel they have had their say.

7.   Subject matter competent Chairman risk defining the conclusion of a discussion before the discussion has been held.

8.   Executives turned Chairman struggle with the new role and should take on training or mentoring to make the transition.

9.   Finance oriented Chairmen see the five year financial plan as the strategic plan, this understanding stunts true strategic planning.

10.  Often Chairmen find treating Directors equally very difficult and prejudices, personalities, knowledge etc risk clouding the objectivity of the Chairman.

We share with you the work of Alvarez & Marsal – What makes an exceptional Chairman?  where their research identifies 8 key behaviours of successful Chairmen.

Genius Methods has developed a Chairman self assessment based on the work of Alvarez and Marsal to enable a Chairman to get confidential and objective view of their Chairmanship skills.  We have also developed a checklist on how to chair a meeting.

Please email us on info@geniusmethods.com for further information on services focused on supporting Chairmen.

Tony Hayward – BP CEO June 2010

An intelligent man, who under pressure said the wrong thing in a crisis which had the result of causing a total collapse in the share price.  It was ages before the Chairman was visible or the right voice was provided for the audience.

Today’s media is instant, whether you are Tony Haywood, BP CEO or Captain Sullenberger pilot of Flight US1549.

It is critically important to train Directors and Management to face the media or key stakeholders that may not be very sympathetic at that moment.  This requires role play training by experts in the field to understand how to face the questions, choose your words and control your body language.

This became very apparent to me recently when on an IoD course, Developing Board Performance, where three days of role play prepared directors to handle many issues in the Board room.  The last day was role play of a crisis and the need to face the media.  Not one member in the class tasked with this responsibility could carry out the interview competently even after becoming comfortable with role play in the previous days. 

An interesting article “Preparing the Board for a Crisis” covers some key points, most importantly the importance of being prepared in advance.  The article does state that this is an area of risk management that is not well addressed by Boards.

Genius Methods experience confirms this observation – a common question, to seeing this section on a Board Evaluation, being “this has not been on a Board Evaluation before, why is it here now”.  The market has changed and crisis management is a reality and role play to prepare are what Boards should be giving serious attention to.

The Board sees the compliance easy route out is to do an internal Board Review, which is permissible in most circumstances except for the UK Corporate Governance Code which requires, under the comply or explain rule that there is an external evaluation at least every three years.

Genius Methods concerns about Board self evaluation are –

-        Structured to an internal agenda rather than all encompassing including specific needs

-        The rating of answers

-        The answer content should be multiple choice in the style to ensure valuable information is accumulated

-        The quality of the answers provided that are effectively tailored to the organisation

-        The ability to compile and assess the information provided accurately and completely in an effective manner

-        Risk that Directors will not be totally open with an insider

-        Confidentiality of commentary and individual assessments

-        Ability of someone internal being able to deliver the message objectively and competently

-        There is the risk that the messages are not accepted if not given objectively by someone external

-        Risk that nothing happens and there is no party to whom they feel accountable

-        A head rolls … which is not the brief of an external evaluator who promotes board development

Therefore an external process is risk free in comparison to the above and is cost effective and brings experience with it. The concerns of Boards are more about perception than reality.

Genius Methods runs Board Evaluations and we find that, without fail, the value accepted by the companies substantially outweigh the cost of the exercise.  Our process is very thorough, rigorous and totally transparent.  Tailored and aimed at the “softer” issues – for example leadership, debate, decision making, risk culture, risk maturity, strategy, process, governance, succession planning, communication, crisis planning and more … We all handle Director self evaluations, peer reviews and the reviews of the Chairman.

The providers of services to this market is growing rapidly in the UK and it is for the organisation to understand the different USP’s of each provider and find the one that matches their style, maturity and personality to ensure that the value is extracted.

The combination of a series of detailed questionnaires specifically tailored for the company, together with one to one interviews provides a high order of rigour, breadth and depth to the evaluation. The multi-stage process is both structured and creative and provides a superb combination of hard, quantitative information as well as surfacing and teasing out the softer, human orientated and communication issues as well as those that are difficult to address or handle.

These are facets highlighted by Walker, The UK Code and from experience, those issues that impact board effectiveness.

However, the key value of the process is not just its highly bespoke nature, it is the exceptionally detailed approach to questionnaires and interview post-processing. The sheer volume of evaluation and comparison work that is undertaken on respondent’s answers ensures all aspects of Board workings are assessed in considerable detail and from a number of different directions.  All issues are given fair and equal air-time, not only the noisiest subject.

The benefit of this firstly is that the interview stage is a highly informed event for the interviewer who is then able to provide an unbiased focus on the key issues identified. Secondly the interview results are analysed and compared to the questionnaire, highlighting further key variances.

What the Board gets out of the process is the detailed output required to prove that the evaluation has been meticulous, professional and impartial. More importantly the Board receives extremely valuable information upon which it can act to address recommendations and prioritise accordingly over the year.

The bespoke questionnaire, with possible minor tweaking, is then an excellent tool to use for the next two years’ board evaluations and provide year on year benchmarking”

Risk based regulation which allows legal firms to tailor services to the particular needs of clients.

The new requirement, embodied in the new Code of Conduct within the Handbook, requires a risk-based approach to regulatory compliance and aimed at high-level outcomes governing practice,  the quality of that outcome to the client and increased emphasis on business management.

It has brought in the concept of Indicative Behaviours to guide firms to achieving outcomes.

This whole concept is confusing for solicitors who are more familiar with clarity of one way or another, whereas outcomes style regulation is very different.

An overview on the Law Society website will help guide firms.

The Principles of the Code are:-

1. uphold the rule of law and the proper administration of justice;
2. act with integrity;
3. not allow your independence to be compromised;
4. act in the best interests of each client;
5. provide a proper standard of service to your clients;
6. behave in a way that maintains the trust the public places in you and in the provision of legal services;
7. comply with your legal and regulatory obligations and deal with your regulators and ombudsmen in an open, timely and co-operative manner;
8. run your business or carry out your role in the business effectively and in accordance with proper governance and sound financial and risk management principles;
9. run your business or carry out your role in the business in a way that encourages equality of opportunity and respect for diversity; and
10. protect client money and assets.

There is often a clash of views on the value of a Board polarised between the views of the Executive versus Non-Executive Directors.

Typically:-

-        Executives see the Board as a nuisance, adding little value

-        Non-Executives find there is a resistance from Executives to provide adequate information

There is a maturing of understanding of these views by both groups as the impact of the UK Corporate Governance Code is filtering into the consciousness of Directors.

The requirement for constructive challenge is a key to the change, one example noted by Genius Method during an interview of a Non-Exec was “now I understand my role”.

The FRC “Guidance on Board Effectiveness” is a very useful guide to Directors on the interpretation of their roles and responsibilities.  Understanding Director responsibilities as also defined in the Companies Act, Clause 172 as described by David Chivers in his Guidance is what is giving Directors the support to challenge constructively.

Board evaluations are focusing on the existence of challenge by NED’s which is helping all Directors understand their need to question constructively for the benefit of long term sustainability of the entity

The opening quote is from Mervyn King, the “brains” and driver behind “King III”  (and I and II), the South African Corporate Governance Code – probably one of the best in the world.  King states

“Good corproate governance is about ‘intellectual honesty’ and not just sticking to the rules and regulations”

This view is mirrored in the UK style of Corporate Governance, that of Comply or Explain within a princpled based system.  This compares to a more US oriented approach of tick boxes with “huge gaps” inbetween which become “unaccountable”.

The Executive summary is an interesting read for all public sector and NFP sector governing body members.  Even though these are framed specifically for the NHS, our experience in the private sector indicates that the issues are not all totally unique to the NHS. 

Therefore the Executive summary of findings, recommendations and conclusions are a worthwhile read for every director – Pages 4 to 6

Steve Bristow who is a Board of Examiners member at the IoD and is involved in the public and NFP sectors give his view:-

He also stated that what gives him value is “.. the process of change and developing. It’s about finding where you are and trying to get better.” He is also an advocate for challenge, debate and diversity within the boardroom.

A chairman is a lonely role, one for which there is little experience gained on the way there. One of the key roles of the Chairman is the protection of the “reputation” of the organisation. In times of crisis it is less likely to be the CEO walking the plank, these days it is the Chairman out there as the voice of the organisation in the public eye and handling the new media trends.

The Chairman is a key custodian of the organisation reputation and requires the Board to be a team that meshes well together in every board meeting and is poised to act constructively in times of crisis to protect its reputation which the media and world at large would relish seeing damaged (even if only to “sell the story”).

Rolls Royce had its difficulties and the fact that it did not cause as much damage as it could have done is down to their handling of the press. Leading by Reputation gives more information on the annual awards by the Reputation Institute where Rolls Royce were awarded top position overall.

Reputation is an asset you need to build up for a rainy day and the Board need to have a strategy for handling crisis that is in line with current public expectations.