FSI / ICSA:BVI Corporate Governance Seminar

The Value of Good Corporate Governance

What we will cover

What do we mean by governance?

What does it mean for NEDs?

Main points from ‘Boardroom Behaviours’ and ‘Board Effectiveness Guidance’

reports

Good (and bad) governance – can it deliver value/prevent loss?

Benefits of perceptive governance

How can we define governance?

Cadbury definition- ‘the process by which an organisation is directed or controlled’

This is repeated in UK Governance Code 2014

It is NOT ‘How you behave when you think no one is watching!’ (per Bob Diamond)

Concerns exercise of power by different groups – directors, shareholders, etc.

…and disclosure and transparency, accountability, internal control, avoiding

concentration of power in too few

hands and conflicts of interest

Governance and the NED’s role

Distinction between governance and management

Management - ‘hands on‘; implements strategy

Seeks to meet performance goals/budgets

The board has a governance role

It agrees the strategy and ensures key processes and controls are in place

The NED’s role is about governance

BUT:

1. Executive recklessness: still untamed

2. Executive enterprise: often smothered

3. Executive pay: unchecked

4. Scandals &failures: recurrent

5. Sickly corporate cultures: unaltered

6. Complex operations: unmonitored

7. Trust in business: fragile

Boardroom Behaviours

Four uncomfortable truths:

1. Well-run companies could make strategic, sometimes catastrophic,

misjudgments.

2. Risk management was not properly overseen, monitored or reviewed by the

board; nor was risk appetite assessed and discussed by the board.

3. Remuneration and incentivisation were not aligned with shareholders’

interests.

4. Disclosure failed to inform stakeholders sufficiently.

https://www.icsa.org.uk/assets/files/pdfs/consultations/09.04%20ICSA%20Policy%20Report%206.pdf

Boardroom Behaviours

Three areas identified as requiring attention:

1. Institutional: are corporate governance policies and ‘architecture’ fit for

purpose?

2. Organisational: has management installed adequate processes and systems?

3. Behavioural: are directors exhibiting the appropriate behaviours?

Boardroom Behaviours

Better articulation of business case for good practice corporate governance may

incentivise directors to exhibit appropriate boardroom behaviours more rigorously

and readily

More focus on duties, responsibilities and liabilities may generate heightened

awareness of the need to exhibit appropriate boardroom behaviours more

rigorously and readily

Boardroom Behaviours

Good practice boardroom behaviour characterised by:

1. Clear understanding of the board’s role

2. Appropriate deployment of knowledge, skills, experience and judgment

3. Independent thinking

4. Questioning of assumptions and established orthodoxy

5. Challenge: constructive, confident, principled, proportionate

6. Rigorous debate

7. Supportive decision-making environment

8. Common vision

9. Achieving closure on each item of board business

Board Effectiveness Guidance

The guidance is non-mandatory

Intended to assist boards in implementing the leadership and effectiveness aspects

of the new Code

It relates principally to behaviours and good practice

https://www.frc.org.uk/Our-Work/Publications/Corporate-Governance/Guidance-on-Board-Effectiveness.pdf

Board Effectiveness Guidance - the role of the board

An effective board develops and promotes its collective vision of the company’s

• business purpose,

• culture,

• values

• and the behaviours it wishes to promote in conducting its business

Board Effectiveness Guidance: The Chairman

The chairman‘s role is crucial in creating the conditions for board and individual

director effectiveness

He sets the tone and standards for the board

He should demonstrate ‘the highest standards of integrity and probity’

Board Effectiveness Guidance: NEDs

Devote time to comprehensive induction extending beyond the boardroom

Devote time to developing knowledge/skills

Need to make sufficient time available to discharge their responsibilities effectively

Have a responsibility to uphold high standards of integrity and probity

Should insist on receiving high‐quality information sufficiently in advance

Board Effectiveness Guidance: Decision Making

Good decision‐making facilitated by:

1. high‐quality board documentation

2. obtaining expert opinions when necessary

3. allowing time for debate and challenge, especially for complex,

contentious or business critical issues

4. achieving timely closure

5. providing clarity on the actions required, and timescales and

responsibilities

Board Effectiveness Guidance: Decision Making Hampered By...

A dominant personality/ group of directors who can inhibit contribution from others

Insufficient attention to risk

Treating risk as a compliance issue

Failure to recognise value implications of running business on basis of self-interest

Other poor ethical standards

Executives’ reluctance to involve NEDs

Family owned or controlled companies

They need to embrace good governance:

• CLICO

• Stanford Financial Group

• Hotel companies in St. Lucia:

o Discovery

o Smugglers Cove

o Landings

• VW

What is good governance?

1. Clear, consistent strategy

2. Clarity of business purpose

3. Board articulated values

4. Clear and appropriate communication

5. Robust processes and controls

6. Good open relationships with stakeholders

7. Board has balance of skills and experience

8. Sufficient independent directors

9. Transparent appointments process

10. Clear distinction between roles of chairman & CEO

11. Good succession planning

12. Clear delegations of authority

Complying with governance provisions

How much attention should be given to this?

Proportionate approach

Governance measures embedded on a ‘business as usual’ basis

Factor into the annual cycle

Look at governance policies/views of major stakeholders

Engage early if planning to depart from published governance policies or the Code

Complying with governance provisions

Box ticking’ - a missed opportunity

One can tick all the boxes and miss something crucial

Not being able to tick all the boxes is not necessarily a sign of poor governance

Essential to think through what is right for your organisation

Governance essentials

Clear board and committee structure and terms of reference and delegations of

authority – right number of meetings

Clear and embedded process and controls

A committed, skilled, constructively ‘challenging’ board

Keeping up to date – high quality MI

Transparent and open relationships with stakeholders

Benefits of good governance

1. Saving time and money

2. Better risk management

3. Lower cost of capital

4. Enhanced reputation

5. Better stakeholder relations

6. More investor support when ‘non-compliant’ or when problems arise

The value of governance

1. Good governance should help support corporate value by enhancing

reputation, reducing losses and inefficiencies, saving board time and

improving the decision-making process

2. Why do it otherwise?

Thank you.

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