Strong corporate governance is the hallmark of responsible corporate citizenship and lies at the heart of successful, ethically responsible and sustainable business. Setting and maintaining a culture of sound governance is among the primary responsibilities of the company board.
Essential to effective corporate governance is ensuring that the right information is raised to the right leaders, board members and shareholders so that the right questions can be asked, appropriate challenges addressed, and the organisation steered in the best possible direction for success. Of course, that’s easy to say, but in today’s complex business environment, it’s increasingly difficult to do. It’s the reason why organisations seek to appoint the best board directors to govern their businesses – the ones with extensive experience, a track record of success and a visible commitment to the future success of the organisation. But those directors can only be as good as the information and systems with which they are working.
Today’s business environment calls for an approach that wraps around and unifies governance activities; one that empowers boards with the systems and knowledge they need to direct complex, multifaceted organisations. At Diligent, we call this ‘enterprise governance management’ and we define it as the application of technical tools and resources to support the full range of governance needs. The aim of enterprise governance management is to empower boards and company secretaries to carry out their duties in a way that best fits the pressures, technologies and time frames in which modern businesses operate. To see why the time is right for this approach, let’s take a look at how corporate governance has evolved and the central role it plays in businesses today.
Lessons from history: scandals spark scrutiny
Perhaps surprisingly, the concept of corporate governance is relatively recent. It wasn’t until the mid-19th century that British legislation on joint stock incorporation and limited liability granted companies autonomous legal personhood and created the entity of a corporation as we know it today.[1] However, academics suggest that the term ‘corporate governance’ didn’t really surface until 1981 and was slow to gain traction.
Although the genesis of the UK’s corporate governance code arose from the Cadbury Report into high-profile corporate governance failures in 1992, it was the increasing deregulation of businesses in the early 21st century that sparked a spike in public interest around the regulation and control of corporate activities. That’s when we saw the first hints of corporate governance as we know it today and the real era of publicly scrutinised corporate governance began.
It often feels as though the development of corporate governance is shaped by scandal. The collapse of Enron, the fall of Northern Rock, the banking crisis and, most recently, the disintegration of the construction company Carillion, have kept the topic of corporate integrity and governance in the forefront of public and political awareness.
And with good reason.
It need hardly be reiterated that corporations have the potential to wield enormous power – and the larger they are, the more influence they have. Employees depend on them for their livelihood and customers trust them with critical personal and financial information. Their commercial decisions can have profound effects on society, the environment and the economy. It is essential that entities with such wide-ranging scope and impact are governed with integrity, transparency and – in order to deliver the best value for shareholders – efficiency.
Codes and compliance: avoiding a box-ticking approach to governance
As the business environment has evolved, we’ve seen national governance codes evolve alongside them, with the aim of ensuring best practice and preventing repeats of the failures of the past. The UK’s Corporate Governance Code, overseen by the Financial Reporting Council (FRC), has now been in place for a quarter of a century and is recognised as a world-leading example of best practice.
Over recent years, however, the FRC has sensed that organisations have come to view governance as a box-ticking exercise based on compliance with provisions, rather than as a principles-driven approach that should be continuously applied to the organisation.
Correcting that issue is the purpose behind the latest revisions to the code, which come into effect on 1 January 2019. The new code is ‘shorter and sharper’ and is based on demonstrating evidence of the application of its principles, rather than purely compliance with its provisions. The FRC believes this shift will refocus organisations on the ultimate purpose and objectives of governance, rather than simply ‘ticking boxes’ through rote compliance with rules.
This new ethos is designed to encourage businesses to engage proactively and in-depth with the code, questioning which approaches are right for their organisation and providing robust and considered explanations where it has been determined that the business will deviate from the code’s principles.
Beyond the shift in ethos, there are other key areas that will change the way that boards approach their duties, and I believe that these will also have implications for how enterprises manage governance. The new code places strong emphasis on workforce engagement, as well as ensuring that the board understands the views of shareholders and wider stakeholders. Linked with this is a focus on the role of the board in setting the right organisational culture and establishing appropriate channels to assess how well it is embedded within the organisation. It also prioritises ensuring that policies around remuneration for senior executives and the general workforce are aligned. There are new provisions around board tenure, effectiveness, succession planning and evaluations.
More data, more analysis, less time
The effect of the revised UK Corporate Governance Code will undoubtedly be to increase the board’s requirements for company-wide data, reports and analysis. This will allow directors to gain greater exposure to the views of the workforce, shareholders and wider stakeholders. Added to this, the sheer volume of data generated by organisations today and the speed at which businesses are required to respond to changing market conditions means that boards need to be entirely confident that they have the latest, most accurate information for board and committee meetings.
The level of scrutiny of public companies is arguably at an all-time high, and responsibility for their reputations, revenues and results lies at the door of the boardroom. In short, it has never been more important that the right information gets to the right leaders in a timely way and in a format that enables them to make the best, most fully informed decisions.
A growing challenge for the company secretary
The responsibility for making sure that this happens falls squarely on the shoulders of the company secretary and his/her team – and it’s a team that’s under pressure. The increasingly complex regulatory environment and the growing profile of the company secretary role mean that providing comprehensive board support is becoming a bigger challenge.
Company secretaries are aware of the need to address this issue. Forty-eight per cent of respondents to a recent survey of company secretaries by executive search consultancy Leathwaites indicated that the quality of board information needed to improve.[2]
Linked to this, 32 per cent of respondents rated digitisation and automation as challenges that must be addressed. When asked which areas most needed improvement to meet the demands of the role, 57 per cent said that better use of technology and data was essential, while 43 per cent felt they needed to enhance efficiency.
Clearly, improving the processes and systems of governance is a priority among company secretaries and they feel that better use of technology is the way to do it. On that principle, there are several themes that they can explore to implement best practice enterprise governance management.
Cracking the communication challenge
Effective and open communication between directors, the company secretary and the executive team is a cornerstone of successful board operations, yet achieving this positive flow of ideas and knowledge-sharing can be easier said than done.
A culture of regular, relevant communication must be set by the chair and supported by the company secretary, encouraging directors to ask questions, share insight and spark debate. The new principles of the Corporate Governance Code are likely to provoke greater levels of debate about the approach a business should take to implementing them, and it’s reasonable to believe that not all these conversations will happen within meetings.
Of course, the confidential nature of board communications means that it is prudent for director interactions to be subject to the appropriate levels of security. This is particularly relevant to non-executive directors, who may be using personal email accounts or those of their employer company to receive sensitive information. Greater security is afforded if directors are furnished with secure communications channels. This eliminates the risk of confidential information being intercepted and provides directors with a trusted and convenient platform on which to share information and ideas.
Tackling the issue of organisational visibility
To deliver better board information, it’s essential that directors have clear visibility across entities, territories and business units. As organisations grow larger and more complex, keeping track of the different entities, local legislation and compliance issues naturally becomes more difficult.
Most companies use point solutions to manage risk and compliance in different departments. These range in sophistication from the humble spreadsheet to industry-specific, tailor-made software. Each generates a wealth of data and reports on their regulatory environment. The challenge is bringing together all of the distributed information and making sense of it at the board level.
“WHEN THE BOARD HAS COMPREHENSIVE VISIBILITY OF WHAT TODAY’S PICTURE LOOKS LIKE, IT IS FAR BETTER POSITIONED TO HELP SENIOR MANAGEMENT VISUALISE GOALS FOR TOMORROW”
In a complex, data-intensive landscape, it’s impossible to have a holistic view of governance, risk and compliance without seeking support from technology and automation and, fortunately, there are some excellent solutions out there that can deliver the insight required. We strongly recommend that organisations investigate the potential of governance, risk and compliance software that enables companies to integrate compliance data from all of the relevant business units into a single framework and management interface. This avoids data becoming trapped in silos, with the associated risk of duplicated effort and wasted resources.
Once governance, risk and compliance can be viewed on a holistic level, it is easier to measure and set targets for improvement. When the board has comprehensive visibility of what today’s picture looks like, it is far better positioned to help senior management visualise goals for tomorrow.
Making the most of directors’ time and talents
When you have a strong board composed of talented individuals, you want to make the most of their skills and get them working together for the benefit of the organisation. Given that many directors sit on multiple boards and have other high-level commitments, it’s important that they can be efficient in discharging their duties.
The age-old tradition of the board pack is a key area where companies can bring technology to bear to save time and make life easier for both directors and the hard-pressed staff in the secretariat. Board packs never seem to get any smaller – and with the coming emphasis on greater engagement with stakeholders, shareholders and employees, the amount of information directors are expected to absorb prior to board meetings is only likely to increase. By digitising board packs and making them securely accessible online, directors can access them anytime, anywhere.
This approach has the added bonus that information can always be updated as new intelligence arrives, meaning that directors always have the latest data in board meetings. Plus, for the pressured secretariat team, the days (and days) spent photocopying and collating confidential documents before consigning them to couriers become a thing of the past.
As organisations commit to the new principles and ethos of the UK Corporate Governance Code, this is also an excellent opportunity to examine the tools and technologies that they have in place to support the processes of governance. Strong enterprise governance management that includes technical tools and resources to improve communication, visibility and accessibility will alleviate some of the pressure on the company secretariat, enabling it to provide the high-quality board information that competent decision-making requires. This will support corporate governance at the highest level and help boards to deliver success and sustainability as responsible corporate citizens.
