Critical Governance Part 1

The four critical areas are:

Issue 1: Dealing with your Regulator

Issue 2: Board Composition and Succession

Issue 3: Identifying Risk and Getting Assurance

Issue 4: Keeping up with Technology and Social Media

 

“The ability to meet current and future regulation is hampered by lingering uncertainty over regulatory details and the potential for reactive and piecemeal implementation,” said Kevin Burrowes, PwC’s UK Financial Services Leader. His comment, made subsequent to a recent report being published about the top risks for businesses in the banking and capital markets where over-regulation was at the top of the list, could be applicable across many sectors.

 

Getting the relationship right with your regulator should be one of the key concerns of any board. If you don’t understand the impact that they can have on your organisation and how you need to adhere to whatever regulatory guidelines they impose then you are not in a position to have an appropriately balanced relationship. I am not suggesting that you operate just to satisfy the regulator but a by-product of good governance and a robust, well documented assurance framework should be a happy regulator.

 

Unfortunately, it not always that easy. As the aforementioned quote suggests in this complex and uncertain business environment that we find ourselves in, having a well thought out strategy around regulatory intervention and dealing with the burdens of regulation is a now a necessary board agenda item.

 

It doesn’t matter whether you are in the private, public or voluntary sector, regulators can have a disproportionate amount of influence on the running of your organisation. I have seen across all sectors the pressure that the regulators themselves are under. They are being called to account for businesses that they have been set up to regulate. As the regulator is under pressure a natural response is to pass on some of this pressure to the organisations that they have oversight of. Dare I say that in my opinion although they clearly understand their overall objective to safeguard taxpayer’s money, respond to ineffective, inefficient and sometimes illegal practice they are not so clear as to how to do this without being over burdensome to the organisations and businesses that they monitor.

 

They are there to maintain standards and the reputation of the market segment that they are responsible for but there is this dichotomy that they also have to be more efficient as their staff numbers are reduced and costs are cut. In theory then a co-regulatory environment would seem to be a logical answer and a risk based approach to monitoring the way forward for regulation. The burden and responsibility for failure rightly rests with the board who are collectively responsible for its decisions and actions if things go wrong and if they work outside the guidelines or best practice… woe be unto you!

 

Thinking about this practically, local authority controlled schools are converting to academies in droves and with no local authority influence have almost complete autonomy to operate as they want. But beware of Ofsted, the regulator for education and the inspector that has had the latest briefing on trying to combat extremist ideologies arriving at your school to nip it in the bud. Or take the Housing Regulator from the Homes and Communities Agency (HCA) who has just had a ribbing about how Cosmopolitan was allowed to happen so anything that resembles the failures there in anyway can expect greater scrutiny.

 

With so many recent examples of failure in provision of health care you can expect the Care Quality Commission, the quality and safety regulator to have a sometimes over zealous approach and Monitor the sector regulator for health services in England to equally anxious. When the Inland Revenue gets a public vote of no confidence for their track record in collecting tax from the big corporations and rich businessmen, some of whom avoid paying their taxes, you can just see the repercussions for the SME without the resources to argue their case.

 

Finally before I conclude my rant, I saw recently another undercover exposure documentary on ITV, called ‘Charities Behaving Badly’. The documentary left the Charity Commission looking like a toothless body without any real power to intervene. You can bet your bottom dollar there will be some consequence for the unsuspecting, well meaning but regulation ignorant charity. I could go on but I am sure you get the picture.

 

So what can boards do?

1. Develop a proactive approach to regulation – take it seriously.
2. Ensure there is a senior leader responsible for co-ordinating regulatory liaison.
3. Review any updates to regulatory compliance that have been issued and become part of the consultations carried out by the regulator.
4. Update your monitoring and assurance protocols to satisfy yourself that you have all the bases covered.
5. Review case studies and experiences of others in your sector.

 

I will not spend so much time on my next critical area for boards since I have commented on this many times over the last few months but want to cover this as it is critical to the success of any organisation.

 

“There is a strong business case for balanced boards. Inclusive and diverse boards are more likely to be effective boards, better able to understand their customers and stakeholders and to benefit from fresh perspectives, new ideas, vigorous challenge and broad experience.” Lord Davies

 

“Company boardrooms are still overwhelmingly being run by white men. In a bid to combat the low ethnic diversity, business secretary Vince Cable launched the 2020 Campaign. The aim is for there to be no FTSE 100 companies with all-white boards by 2020. ” The Guardian Online

 

The Charity Commission estimates that only 0.5% of the trustee population is made up of 18-24 year olds and the average age of a trustee is 57 years old.

 

My second critical area for all boards to consider is the composition of the board. The percentage of women on boards has doubled in the past three years, following a goal introduced by Lord Davies that at least one in four board members be a woman by 2015. The elephant in the room in terms of discussing composition is succession and diversity. Having a competent board will definitely make the difference when directing an organisation in these challenging times. There are many boards that have experienced members who know the organisation, have great professional and board skills but have served terms way above what most would consider to best practice. Independent challenge and scrutiny becomes more and more difficult the longer you serve. In addition, being able to think outside the box or bring an outsiders perspective becomes almost impossible and not having worked at an executive level for some time could make the information that you may provide out dated.

 

Conversely, there is a valid and well-reasoned argument which states; “… if it ain’t broke don’t fix it” and if the board seems to be working well and the organisation is meeting the corporate objectives and hitting those key performance indicators then why worry! We shouldn’t change the board just for the sake of changing the board or adhering to a code of governance. We shouldn’t underestimate the organisational knowledge, the ability to be the custodians of the legacy and the experience that long standing board members have.

 

We are all intimately aware of the concept of Group Think which has the potential to stagnate the ideas, challenge and level of scrutiny if it is allowed to direct the behaviour of a board. A culture like this is bound to lead to issues with poor decision-making and governance that is overshadowed by timid board members who cannot express their views.

 

Who should step down and when, should be part of a well thought out succession plan derived from a succession strategy. This strategy can be developed by thoughtful investigation and consideration of the corporate objectives, future plans of the organisation, current strengths of the board and external influences on the organisation. Replacing key board members will need organisations to think about their pipelines for developing and recruiting talent to ensure they can fill vacancies as they arise with competent and diverse board members. Let’s review the skills that we need to have, how much experience and in what sectors including organisational knowledge but give enough emphasis to creative thought, new ideas and diversity.

 

If you haven’t had a serious discussion on your board about the importance of staying on the right side of your regulator and also the impact of the composition of your board, now is the time!

 

In my next blog, I’ll talk through the next two critical areas.

Until next time…