7 statements a Chair is least likely to welcome in a board evaluation, but should…

Fantasy letter to a Chair from a board evaluator:

Dear Chair,

While I’m sure you will find a way of asserting in next year’s annual report, as you did last year, that your Board complies with FRC/QCA/Wates codes and principles I feel I should draw your attention to the following seven statements by members of your board made during the course of my evaluation:

– while we may comply with the code, behind the scenes the board is utterly & behaviourally dysfunctional

– the Chair is too weak/too overbearing/in post too long

– excellent recommendations from last year’s board evaluation were not implemented because they would have increased external oversight

– we don’t believe in all this ESG stuff and are totally sick to the teeth of ‘purpose’.

– some of the NEDs are lazy, don’t read the papers and terrified of challenging the Chair because they feel lucky to be NEDs at all

– most of the key decisions are made before board meetings; I wouldn’t be surprised if the minutes are too

– [Interestingly] I want us to ‘do’ ESG well but the board doesn’t know how

Of course this list will never see the light of day nor will it be addressed by your board.

But it does raise the question as to the return on investment in your board evaluation process and the value of your Corporate Governance statement in your Annual Reports.

For sure the codes force you through a public corporate governance process and “to comply or explain” and, at a level, to reassure stakeholders that the basics are in place, and while you do privately address some matters arising, it’s a lot of work and expense if it doesn’t lead to a measurable increase in board decision-making performance. For if not that, what is your board for?

What if this year, Chair, you took a different approach and since you have total control and responsibility over corporate governance you were to issue the following memo to your directors:

Memorandum

To: Main Board Directors, GC/CoSec

From: The Chair

Subject: The Board Evaluation Process

Colleagues,

I’m concerned that the ROI from our annual board evaluation process in terms of time and money is too low. Our decision-making performance is not measurably improving.

In recent years all three codes and principles – FRC/QCA/Wates have been updated and are excellent frameworks for reflection.

But despite regulators’ appeal to us not to take a tick box approach, we do. We will in this year’s annual report, as we did last year, assert that we comply – in our case – with the QCA code. It would be odd, would it not, if we didn’t?

And yes, last year, we did privately address some of the matters raised by the evaluator but, hand on heart, we didn’t address any of the sensitive issues, did we?

For example, I happen to know that some directors are unhappy with my performance and that of some of the NEDs but that has not been addressed at all.

Nor has the complaint from some NEDs, including me, that the CEO and the CFO sometimes tightly manage the board pack to the point of censorship.

I’m also concerned that the GC/CoSec, who is meant to be independent under SRA regulations, just isn’t as they report to the CEO and not to me. You all will have witnessed evidence of the impact of this on some key legally and ethically borderline decisions we made last year.

The QCA code we use is excellent but we waste it. Not this year.

So while nothing will change in our Annual Report, because we don’t make the reporting rules, everything will change in the matters arising process. The evaluator will facilitate a closed-door, no minutes, no-holds-barred series of workshops on matters arising.

For a start, we willl spend far more time this year debating the first three Principles of the QCA Code:

1. Establish a strategy and business model which promote long-term value for shareholders

2. Seek to understand and meet shareholder needs and expectations

3. Take into account wider stakeholder and social responsibilities and their implications for long-term success.

We have a clear strategy and business model – but let’s not kid ourselves: it’s resolutely short-term.

We all know that we pander to some shareholders and ignore others.

As for “wider stakeholders” we know we haven’t gone through the pain of changing from a shareholder to a stakeholder model . Have we?

Next year I want to see a measurable increase in our decision-making performance under the QCA Code.

End of Memo.

Chair, what’s stopping you from sending a Memo like that?

Yours sincerely,

Your Board Evaluator

Ciarán Fenton

Should HM Cabinet comply with Wates-type governance Principles?

The Cabinet Manual, published by the The Cabinet Office is “a guide to laws, conventions and rules on the operation of government. Chapter 4 puts us in no doubt that the PM can run Cabinet as he or she sees fit:

4.6 Cabinet is established by convention and
does not have specific terms of reference or
powers laid down in legislation.
4.7 The Prime Minister determines and
regulates the procedures of Cabinet,
including when and where meetings take
place…

https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/60641/cabinet-manual.pdf

Even following public rebukes, as Mr Blair received in The Chilcot Report for “sofa style” government during the Iraq War, nothing has changed in the governance of the Cabinet as result of these rebukes.

Some may reasonably argue that it would impossible for Prime Ministers to “get things done” if their hands were tied by complex governance rules or that good decision-making processes necessarily lead to good decisions.

However the purpose of good governance is not to tie hands but create an environment of disciplined decision-making some of which decisions may be wrong but not wrong because of the process.

So, what if the current Cabinet under the the Chairmanship of Prime Minister Jonson were to undertake an immediate “snap” board evaluation and remedial action of matters arising at this time of national crisis using the six Wates Principles as a guide?

I choose The Wates Principles because they are the closest and most appropriate of the three codes currently available to the Cabinet’s analogous corporate modus operandi: a large private company.

Here’s a back-of-an-envelope evaluation of the current Cabinet using the main requirements of The Wates Principles as a guide:

Principle 1 Purpose, Culture & Values, Strategy

While I may disagree with the current purpose of Mr Johnson’s cabinet I can’t accused him or it of lack of clarity on this especially in relation to Brexit and COVID-19. And to be fair, most Cabinets are clear on these, like them or not.

But might we all not be safer and better off if there were rules of governance around Cabinet development and execution of strategy in the achievement of its purpose as set out in its manifestos?

Such rules might have avoided oven unready Brexit deals and COVID-19 strategies that fail.

Principle 2 Board Composition

The Wates Principles states that “effective board composition requires an effective chair  and a balance of skills, backgrounds, experience and  knowledge, with individual directors having sufficient  capacity to make a valuable contribution. The size of a  board should be guided by the scale and complexity of  the company”.

Few would argue that some of the best talent on the Tory benches were sacked and that the current Cabinet was chosen for its hard Brexit stance rather than ability. I don’t deny it would be tricky to draft a piece of Cabinet Governance that addressed this issue but a rule requiring some form of “hearing” system on Cabinet appointments would go some way to forcing a Prime Minister to assemble a Cabinet of the best available talent.

Principle 3 Directors Responsibilities

One aspect covered in this Principle that relates to Cabinet is “effective decison-making and independent challenge”. The Chilcot Report highlighted the fact that some Cabinet members were afraid to challenge Mr Blair on the basis that he had won them three elections and must be right. Mr Johnson appears to have chosen Cabinet members likely not to challenge him and his alleged enforcer Mr Cummings. Surely some form of Cabinet Governance could at least reduce the likelihood of this happening?

David Owen in his book Cabinet’s Finest Hour writes “It is the strength of Churchill’s period as wartime Prime Minister that he did not try to bypass either Cabinet or Parliament”. Would we not feel safer if there were rules in place to prevent a Prime Minister even trying?

Principle 4 Opportunity & Risk

There appears to be no rules around risk management in Cabinet. Is there even a risk register? At any stage was the risk of a no deal Brexit RAG-ed RED? Are the risk pros and cons of each key decision discussed and minuted? I suspect not and the “Red Risks” mount.

Principle 5 Remuneration

I hold the unpopular view that cabinet ministers should be paid at least as well as highest paid civil servant.

Principle 6 Stakeholder Relationships and Engagement

Perhaps this is the area that deserves most attention in any cabinet governance review. There appears to be no scrutiny of cabinet governance, little or no reporting from it or on it and no attempt to connect the purpose of cabinet with the purpose of parliament in meaningful relationship management and engagement.

That’s a quick canter through the six headings as they might relate to Cabine Governance. It may be naive to expect any Prime Minister to agree to a new Cabinet Governance Code which might tie their hands but surely The Cabinet Manual could be at least updated with stronger guidance that would protect us all from poor governance in government?

It’s odd, is it not, that successive governments have pushed for improved corporate governance codes leading to the well received updated FRC Code 2018, the current QCA Code and The Wates Principles but has not got its own house in order?

Ciarán Fenton

After many years practising as a generalist leadership consultant working with leaders, boards and teams I’m now focused on facilitating board evaluations using FRC, QCA and Wates codes and principles as well as ESG awareness. Endorsements for my work can be seen here: https://www.linkedin.com/posts/ciaranfenton_please-can-you-like-this-if-you-would-be-activity-6722128127906091008-5HZB

QCA board evaluations: a framework for AIM boards to respond to the ESG trend

It’s unlikely that quoted companies using the QCA code will want to report anything other than they have adopted the QCA Code and are compliant with all of its Principles and that Disclosures required by the QCA Code have been made both in their annual report and website.

They could also use their evaluations at this time of change in societal attitudes as an opportunity to improve board decision-making performance in relation to the primarily behavioural QCA Principles, especially 3, 7, 8, & 9 which include taking into account “wider stakeholder and social responsibilities”; seeking “continuous improvement” in board performance; promoting a corporate “culture that is based on ethical values and behaviours” and supporting “good decision-making processes” by the board.

The verbs used in these QCA Principles create a low bar for compliance: taking into account, seeking, promoting and supporting.

Much harder is creating an environment in which decision-making behaviour by each director ensures that these Principles are lived rather than ticked.

The incentive for living the Principles is strong: at a time of pandemic society, which grants business its mandate to trade, will look for higher standards of behavior from directors in these behavioural areas as business becomes more part of the S in ESG than apart from it.

Those companies taking advantage of COVID financing and furlough schemes will find that many of their employees, customers, suppliers and ESG-minded investors will expect them to pay more attention to ESG related Principles and, where required, to report properly on compliance with Section 172 of the Companies Act 2006 which requires directors to have regard to issues beyond shareholder return. The QCA Principles can enable compliance with S172.

If the board steps back and finds a shared language to express its wider purpose within society, then it’s more likely that it will comply with Principle 3, and mean it.

If each director were to negotiate and “trade” small changes in their behaviour as reasonably requested by colleagues then the aggregate impact on performance of these small changes would have a big impact on outcomes and enable easy compliance with Principle 7 along the way.

If ethics were promoted as a company-wide responsibility and not someone’s job title and people were given permission to call out ethical misbehaviour then Principle 8 would be lived rather than ticked.

If your board appointed a Devil’s Advocate by rotation at each board meeting with permission to challenge anything said at that board meeting by anyone, then adherence to Principle 9 on decision-making could be, above all else, the potential saviour of the company in avoiding major risk events and spotting and exploiting opportunities earlier than they might.

But no code will make directors care about environment, society and governance issues, if they don’t. There was a time when this didn’t matter and to some extent that’s still the case.

But the zeitgeist suggests that directors who ignore ESG related Principles may be drinking in last chance saloon. At the very least they should consider the risks to themselves, if not the business, that they could be in for a hard time by investors, customers, employees, and the wider community – if not the regulator – after last orders.

Your QCA evaluation can create a framework for behavioural change, not just compliance.

Ciarán Fenton

After many years practising as a generalist leadership consultant working with leaders, boards and teams I’m now focused on facilitating board evaluations using FRC, QCA and Wates codes and principles as well as ESG awareness. Endorsements for my work can be seen here: https://www.linkedin.com/posts/ciaranfenton_please-can-you-like-this-if-you-would-be-activity-6722128127906091008-5HZB

Should board behaviour evaluations under FRC/QCA/Wates be substantially oral, not written?

In an ideal world boards should focus on fixing the matters arising from their board evaluations. They don’t because the purpose of board evaluations of many boards, despite pleas by regulators, is to tick boxes for annual reports and/or to use them as sticks to beat colleagues.

Even organisations who pride themselves on carrying out rigorous board evaluations including on behaviour issues can miss important systemic weaknesses because of the key limitation of written board evaluations: fear of writing down, for example, the belief by most directors that the CEO, CXO or Chair is a narcissistic bully who brooks no challenge. Delete as appropriate.

The collapse of Carillion is a chilling example of the limitations of written evaluations. Its annual report in 2016 noted that its board evaluation had “confirmed that the board, each of its committees and directors continue to be highly effective’.

I suspect there were were no boxes to tick on “recklessness, hubris & greed” in its (Carillon’s) board evaluation questionnaire because that’s precisely how the behaviour of the directors was described in the subsequent joint select committee inquiry.

To be fair to the Carillon evaluators they were and are not alone in struggling to cope with a UK governance structure which, despite widely acknowledged improvements in the FRC, QCA and Wates codes, nevertheless has failed to deal with the box ticking problem. Simply asking boards not to approach evaluations in that manner will not lead to compliance.

Which Chair will sign off an annual report which includes a statement from the board evaluation that they have low emotional intelligence, talk over colleagues at meetings, and don’t read the board papers?

Since boards will continue to publish broadly self congratulatory board evaluation statements where required to publish them and often ignore behaviour matters arising in confidential internal written board evaluations I propose they should, alongside current box ticking, use facilitated oral workshops to address behaviour issues if they are serious about improving board performance.

All but the most pathological Chairs and CEOs genuinely care about improvement in board performance especially at a time of pandemic and at a time when society, investors and customers are hyper alert to ESG defaults.

I propose three steps:

Step 1:

1-1 oral interviews with each director on board behaviour issues. No notes.

Step 2:

Facilitated oral plenary sessions of the board where key concerns on each other’s behaviour are aired and mediated. No notes.

Step 3:

As many 1-1 and plenary sessions as required to facilitate new ‘behaviour contracts’ between colleagues with due regard to legislating for the breach of these. No notes.

I have facilitated these steps and they work.

I agree that they won’t work with personalities “not for turning”. But in that case the board is already broken anyway and failure or a major “risk event” is only a matter of time.

Surely the pain of confronting the truth in private is worth it in the service of personal and shared purpose and that of society?

Ciaran Fenton