Board Evaluation issues: behaviour matters arising under the new FRC Code

board behaviour

The focus of the recently published revised UK Corporate Governance Code 2018, according to the accompanying “highlights” note, is board composition, remuneration and notably: “positive relationships between companies, shareholders and stakeholders [and] a clear purpose and strategy aligned with healthy corporate culture”.

The FRC places “improving the quality of the board and the company’s relationships with a wider range of stakeholders” at the heart of the Code.

There is also an explicit reference to “the ability for directors and the workforce to be able to raise concerns” and a clear reference to “constructive challenge of the boardroom.”

The language of the Code appears designed to move away from “box ticking” to factual reporting. This presents boards, evaluators and consultants – like me – who address matters arising, with several challenges.

In my consulting practice, I undertake informal board evaluations, and I facilitate programmes on behaviour matters arising from both informal and formal evaluations carried out by others, but I don’t undertake formal evaluations myself – i.e. those which are published in annual reports. Several specialists deal with the latter.

The challenge for companies will be the requirement to report “on the application of the Principles in a manner that can be evaluated” while at the same time ensuring that “companies should avoid a tick-box approach”.

This challenge is all the more daunting given the requirement “to demonstrate how the governance of the company contributes to its long-term sustainable success and achieves wider objectives” [my italics].

Logically, therefore, I would expect in the future to facilitate in my programmes situations where an evaluation highlights, for example, the following issues:

negative “relationships between a director with some shareholders and some stakeholders.”
lack of “a clear purpose and strategy.”
[an un]“healthy corporate culture.”

These are not new to me. I deal with them frequently because they emerge informally in the course of a programme with a board. But in future will companies formally admit these in the course of evaluations under the new Code? And if not, how will they “explain” if they don’t “comply”?

This tricky point is best illustrated by picking three issues which could be “tick boxed” and three which don’t fit in tick boxes. I have selected these from the Guidance on Board Effectiveness “the Guidance” which accompanies the Code.

Tick-box or easy-answer examples

  • “What proportion of Board time is spent on financial performance management versus other matters of strategic importance?”
  • “Are we using scenario analysis to help us assess the strategic importance and potential impact of our challenges and opportunities?”
  • “Is there a forum for the workforce to share ideas and concerns”

Non-tick-box or nuanced examples [my italics]

  • “How do we demonstrate ethical leadership and display the behaviours we expect from others? “
  • “What evidence do we have that the chief executive is willing to listen, take criticism and let others make decisions?”
  • “How comfortable do our people say they are with challenging and reporting issues of concern and is there any evidence that they are doing this?

It will be interesting to see how evaluators deal with these questions and to what extent companies will cooperate with evaluators on them.

The Guidance emphasises that “evaluation should be bespoke in its formulation and delivery”. I’m designing programmes to support companies and to work alongside evaluators on the behaviour matters that could arise.  I have chosen, as my focus,  seven behaviour related headings from the Guidance:

  • To support the Chair in drafting those sections of the report which relate to behaviour and culture issues since the Guidance encourages the Chair to report “a summary of the outcomes and actions of the board evaluation process in their statement in the annual report.”
  • To support the CEO, using an updated version of my Purpose, Strategy and Behaviour (PSB) Programme, on matters arising concerning “clarity of, and leadership given, to the purpose, direction and values of the company”.
  • To support the entire board, using my Relationship Grid tool, on “how the board works together…tone set by the chair and CEO…key board relationships…effectiveness of individual directors… the clarity of SID role..”
  • To support the Chair regarding the “process the Chair uses to ensure sufficient debate for major decisions and contentious issues”
  • To support the General Counsel/Company Secretary to ensure “clarity of the decsion-making processes and authorities, possibly drawing on key decisions made over the year”
  • To support the board in how it “communicates with, and listens and responds to, shareholders and other key stakeholders”.

Many companies will have to “comply or explain” and will feel under compliance pressure to do so. Others will apply the Code, whether they must or not, because it’s the right thing to do, for us all.

 

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