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Recent shareholder revolts and public protests show that tolerance of high salaries for poor performance by UK companies has worn thin. It’s a development that means company success will in future be more closely aligned with boards getting the right balance between business and society’s expectations. To achieve this, diversity at board level and setting the right tone at the top will be key.
The board is often seen as the guardian of a company's 'financial' assets, but good stewardship is much broader than performance alone. Jim Sutcliffe, current chair of the Financial Reporting Committee’s (FRC) Codes and Standards Committee has practical experience of the problems boards face. As a former Chief Executive Officer (CEO) of Prudential and Old Mutual he understands how easy it is for boards to get bogged down with complicated financial issues, particularly following the 2008 crisis. But he firmly believes it’s important for boards to keep their primary role in sight and stay closely aligned with a strategy for driving the business forward.
“Worrying over issues such as whether the company’s US dollar exposure is more or less what it ought to be is primarily a managerial concern. A board needs to be discussing company strategy and whether the policies the board lays down for management to operate within are working. These are the areas where the board can add most value,” explains Sutcliffe.
They are areas, among others, that the FRC is trying to address in its latest code on governance and stewardship, which it is currently working on. Much is about getting the right mix and level of expertise on board.
Achieving diversity is not simply about skill sets relevant to financial and business experience, it is also about achieving diversity in behavour.
“A board needs diversity across a whole lot of axes — by personality type, by suitability and background. You also need a balance between people who can react quickly as well as those who are more analytical in their approach,” says Sutcliffe.
Anthony Carey, a Partner at Mazars where he focuses on corporate reporting, board effectiveness and public interest issues, agrees that getting the right balance is vital to a board’s effectiveness, as this ultimately dictates the sustainability of a business in the long-term.
“It’s important to have the right balance between challenge and support, particularly when you have the team complexities of an executive and non-executive board to consider. For example, it's often difficult for non-executives to challenge, particularly when it’s not welcomed," says Carey. As a result, non-execs may often spot a problem, but don't have the confidence to confront the CEO, he explains.
And as Carey points out, a CEO requires support as well as challenge. “It’s just as important to know when to pull back from locking horns to restore harmony. It’s often a question of recognising the best way to get a point or challenge across by taking into account the personalities involved, including our own."
In Carey's experience successful boards are often ones with chairs who ensure the right balance is struck between challenge and support and so help sustain better relationships between all board members.
It is this human side of a board’s make-up that often presents the bigger challenge for some companies. What Carey describes as “Board Polarities*” it is the balancing of critical behaviours in order to ensure the board works to its full potential. At a very basic level, board polarities is all about getting the right mix of strategic thinkers, people orientated, visionaries and risk guardians on board to cope with different economic and business scenarios as they crop up.
Sutcliffe agrees you need board members who by their nature are able to approach company issues in different ways in order to empathise, liaise and interact with different stakeholders and help avoid unnecessary conflict. “Having people on the board who, for example, can cultivate conversations with the buy-side community can be a valuable asset for gaining advice on strategic projects going forward. As for shareholders, I think it’s important that the CEO as the figurehead of the company possesses the necessary attributes to have the primary relationship with this group.”
One way to ensure that the correct balance is achieved is to hold regular board assessments. The FRC’s code encourages the use of assessments, which should be undertaken with an “external person every three years”. Carey agrees that regular assessment of board effectiveness is a good way to address any potential shortfall in skills and close any gaps in critical behaviours.
“Board reviews should not be seen as a sign of weakness. Even good boards can get better,” concludes Carey.
*Board Polarities is a concept developed by Mazars in conjunction with Tomorrow’s Company and YSC. As well as a general Board Polarities model, Mazars has produced sector specific models for charities and pensions. See here for more information.
The polarities approach is based on the concept that each vital positive attribute of the board, and more widely in the organisation, needs to be in harmony with another countervailing one. If pursued on its own, a potential strength can become a weakness as a result of being followed to excessive lengths. So while organisations must be entrepreneurial in order to have a sustainable future, if they do not have a balancing interest in risk management they run the danger of taking reckless decisions.
What happens when boards do not balance polarities? Click through the numbers to find out the effect of a bias towards any one particular boardroom style.
An insufficient focus on risk management
Inability to focus on strategy implementation
A overbias towards values and not on financials
Promotes an emphasis on team decisions, which can lead to 'group think' to the detriment of better solutions
Insufficient attention to board adaptability in times of crisis.