Is a tick-box approach to governance failing your firm?

Jul 7th '17

A new report by Tomorrow’s Company suggests it probably is.


The think tank’s latest report, NEDs: Monitors to Partners, analyses the governance changes companies need to make in order to create long-term, sustainable businesses.


It argues that increases in regulation over the last 25 years have led boards to focus on risk mitigation and monitoring, rather than acting as strategic partners to the organisation.


This regulation burden, the report claims, makes companies risk averse: the focus ‘is too often on how to comply with an overly prescriptive list, rather than choose the structure and processes that help create long-term value’.


The report focuses on three areas:


  • The need for change
  • A focus on form over substance
  • Actions and questions to consider


Here we summarise all three to give you a flavour of the report.


  1. Need for change

The report identifies two key reasons why change is needed:


  • The current approach is not improving outcomes. Although regulations are reformed and added to regularly, there is no evidence that the current definition of ‘good governance’ improves outcomes.


The authors point to a decline in the number of limited companies, low investment and public trust, and the ongoing occurrence of corporate scandals as proof that the current approach isn’t working.


  • The current focus is on risk mitigation rather than opportunity. The compliance burden is pushing companies towards a risk-averse position that doesn’t support entrepreneurial behaviour or long-term investment.


More rules, the report argues, are not the solution here. Instead, boards are encouraged to invest in tackling societal problems, rather than trying to curb scandals through prescriptive red tape.


  1. A focus on form over substance

The corporate governance code in the UK is designed to offer flexibility. But the report argues that the way it has been interpreted delivers the exact opposite of this. The response to compliance rules has become formulaic – and this reduces board effectiveness.


This tick-box approach fails boards because:


  • A growing regulatory burden means that they don’t have enough time to discuss the issues that will drive the business forward
  • The expectations of directors, particularly Non-Executive Directors (NEDs) have risen disproportionately with the amount of time and resource they have
  • Reforms have meant that directors are increasingly expected to perform a monitoring role, rather than acting as a partner to the business in strategic decision making
  • This creates a focus on backward-looking financial data, rather than forward-looking decisions looking at issues like disruptive technology, innovation, culture or strategy.


The report argues that firms should have more leeway in the way they tackle governance: ‘In reality, the right approach is different for each company and should change through time…we should encourage companies to make an active decision on what mix of roles and focus for each individual is most suitable’.


  1. Actions and questions to consider

To create this optimal approach, there are a number of things the board and firm should consider:


  • Clarity of purpose and success

What is the aim of the board; who does it serve? What are the organisation’s purpose, values and appetite for risk? Who are the key stakeholders, and what is the relationship with them?


  • Clarity on each NED’s remit and value

Does each NED (or board member) know what their role is in achieving the above? Are clear objectives set out, and are all members are familiar with them?


  • Monitor vs partner

What is the best way to divide up the two distinct roles directors play (monitor of governance vs strategic partner to the business)? Should each director be responsible for both, or should individuals be given specific responsibilities?


  • Time allocation

How much time is sufficient for directors to carry out their duties effectively? Is the time split between risk mitigation vs forward-looking decisions as it should be?


  • Information

What information do board members need to be effective? What level of detail is required, and how is this information best delivered?


  • Diversity of voices

Can a more diverse board help with the challenges you face? Almost certainly. The FCA has talked about the need for cultures where challenges to current practices are encouraged.


  • Alignment

Aligning your board and business is vital if all of this is to be delivered.


Investors need to ask their own questions:


  • Do they approach governance discussions with the business from a ‘box-ticking’ perspective or a wider one?
  • How much do they engage with NEDs, as well as with corporate executives and the chairman? Do they get a rounded picture of the board’s composition and work?


And regulators and policymakers should ask how they can shift the focus from preventing scandals towards long-term investment – a more positive approach to corporate strategy.


You can read the full report online – it gives interesting insight into how boards can move from a prescriptive approach to compliance, and its resulting focus on risk prevention and mitigation, to a more positive standpoint.


It’s a theme we’ve addressed before, and one that ties in closely with the FCA’s aim to create firms where compliance is in-built rather than ‘regulated in’


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