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The challenges of the boardroom in today’s environment

I stood down from the Institute of Directors Council last month, after 4 years.  While on the Council, I was often asked to speak on governance.  One speech in particular seemed to strike a chord, with multiple requests for copies, so presumably it's worth sharing. 

Good afternoon, everyone, and thank you for the opportunity to speak to you today on “The challenges of the boardroom in today’s environment". First, a disclaimer: I’m not a lawyer; I’m not an expert on governance theory; I’m just a practising director. I can’t regale you with inside knowledge of recent corporate failures, and I won't bore you with the details of the current regulatory changes. What I can do is talk about some of the broader issues, what they mean to me, and hopefully offer you a positive perspective on the role of the director. Although I will speak in terms of being a company director, just about all I say applies to any board, be it charitable, sporting, cultural, or institutional

I’m not a Rotarian, but I have been a guest on several occasions,. The last time was a Rotary lunch in Kingston, Jamaica, and I remember being impressed at the time with Rotary’s universality. In a different country - with a different culture, a different ethnic mix, and a different business community - the Rotary rituals, the humour and the general vibe all felt very familiar. The governance community is also a universal one; there are some basic principles of being a good director which apply throughout the world. The challenges facing directors - in Britain or Canada, in Brazil or Portugal, in India or Malaysia - are very familiar to us in New Zealand. Risk management, crisis management, executive pay, shareholder relations, directors insurance, the risk and reward for directors; we could talk all day on such topics. To keep things simple, I’ll focus on just a few:
  • the core principles of good governance,
  • the need for skills and diversity,
  • the regulatory environment,
  • the role of the board in setting the tone of the organisation,
  • and last, the most important challenge for any board; but more on that later.
Good governance principles
Any small business operating as a company has at least one director. Almost anyone can be a company director in New Zealand; the only restrictions are that you can’t be bankrupt, convicted within the last 5 years of dishonesty, or barred by a regulator or court from serving as a director. There is no requirement to be a member of a professional body or to have undertaken any training, and frankly, many directors do not understand their duties and responsibilities. But things are getting better.

Let’s talk a little history. 1n 1992, the Cadbury Report was published. Before Cadbury, directorship was for many people an obscure and arcane subject, with widespread misperceptions among practitioners, legislators and the general public. (Some might argue that’s still the case). Aiming to lift the UK’s standards of governance, the London Stock Exchange, the UK Financial Reporting Council and the UK’s professional accounting bodies commissioned a special report, chaired by Sir Adrian Cadbury. The Cadbury Report has become a global touchstone on good governance, defining the role of the board and the duties of directors in simple and unequivocal terms; for example:
Corporate governance is the system by which companies are directed and controlled.”
“Board of directors are responsible for the governance of their companies.”
“The responsibilities of the board include setting the company's strategic aims, providing the leadership to put them into effect, supervising management, and reporting to shareholders on their stewardship.”
Cadbury also placed the company and its directors firmly in wider society:
“Corporate governance is concerned with holding the balance between economic and social goals and between individual and communal goals. The corporate governance framework is there to encourage the efficient use of resources and equally require accountability for the stewardship of those resources. The aim is to align as nearly as possible the interests of individuals, corporations and society.”
The principles of good governance espoused by Cadbury rapidly achieved wide acceptance amongst legislators, regulators and professional directors. Here in New Zealand, the Institute of Directors published “The Four Pillars of Governance Best Practice”, which is regarded worldwide as one of the best guides on the subject. The Four Pillars are:
  • Determining the purpose of the organisation, its goals and strategies;
  • Creating an effective governance culture to oversee the company;
  • Holding management to account for the performance of the company and the execution of the strategy; and
  • Ensuring effective compliance by ensuring the company remains solvent, acts with probity in accordance with the law, and manages its risks effectively.
Skills and diversity
The Four Pillars sound simple. But to build those Four Pillars, a director needs to know how to be a director. I’m trusting companies to look after my money and to pay my invoices; I want the directors of those companies to know how to do their job as directors. There is no excuse for directors who are ignorant of their duties and lack the skill and knowledge to fulfill them

Obviously, as a professional body with a significant training business, the Institute of Directors has a vested interest in promoting this; indeed, the Institute is launching a new Chartered Director qualification which we hope will be valued and even demanded by shareholders and investors.

But the challenge is more than just the technical knowledge of directing. To successfully steer the organisation, a board needs a wider mix of knowledge, experience, and viewpoints. Thankfully, we're starting to see the waning of the grey, male, pale and stale board, largely comprising lawyers and accountants. I’m talking about not only more women on boards, but also diversity in its wider meaning - different ethnicities and cultures, different ages and lifestyles; different areas of expertise like marketing, engineering, or HR. Diversity of thought makes for a more effective board

I’m glad to see the directing profession helping to lead this change, but we still have a long way to go. Boards and owners should be asking themselves - have we got the skills and mix of people we need round the board table, both now and in future; and if not, how do we get them? And directors need to ask this question in a broader context beyond the boardroom. Have we got the skills and mix of people we need in the leadership team and throughout the business, both now and in the future; and if not, how do we get them? But that’s a whole speech topic in itself.

Increased legislation
Let’s turn now to the challenge of increasing regulation. Directors have long had their duties and responsibilities defined in various laws and regulations. In ancient India and later the Roman Empire, there were corporate entities which carried on business and were the subjects of legal rights and responsibilities. A millennium later in 16th and 17th century Europe, the rise of the Chartered Company led to much of modern-day corporate governance and regulation.

With this long legislative history, why are directors today caught in the crosshairs of the politicians’ gun-sights? The global financial crisis, our own finance company failures, the IcePak and Pike River deaths; in recent years there’s been an almost unending stream of stories at home and abroad recounting business fraud, loss, failure, mismanagement, deceit, and disaster - with terrible consequences for investors, customers, suppliers, employees and communities. Stories like these have generated public demand for tighter controls, greater accountability, and harsher punishment for those deemed responsible. Hence we’re seeing swathes of new regulation and legislation brought into place

You’ll be relieved to hear that I won’t be giving you chapter and verse on all this, but here are a few examples:
  • The Reserve Bank’s “fit and proper person” requirements for directors of banks, insurers and other deposit-takers;
  • The Financial Markets Conduct Bill, making directors criminally liable for deliberately-misleading statements in disclosure documents;
  • The Companies and Limited Partnerships Amendment Bill, which introduces criminal liability for directors if they act recklessly, causing serious loss to the company or the company’s creditors;
  • The upcoming Health & Safety at Work Bill, which proposes stronger requirements and harsher penalties for directors of companies directly or indirectly responsible for the well-being of people.
The Institute of Directors has supported this greater accountability for directors, and we’ve worked actively with lawmakers to help shape the new legislation. We want to preserve the concepts of the limited liability company and legitimate business risk taking; we want to attract and retain talent and experience on our boards; but we also want investors, customers, suppliers and staff to have confidence in our businesses. It’s not about excessive and intrusive compliance; it’s about doing what you should be doing anyway

Setting the tone
But trust requires more than just rules and accountability. Running an organisation based on a rule book misses the point. Rules don’t prevent bad behaviour. Most transgressors either don’t know or don’t care about the rules, or they look for loopholes through which they can get away with bad behaviour. They and their organisations lack ethics, they lack principles. Rules are technical constructs to be obeyed (or disobeyed); principles are how we choose to live our lives. It’s all too easy to espouse high principles; but people judge you by what you do, not what you say. Now while sainthood is not realistic for most of us, on the whole we aspire to live up to our principles.. And that raises another challenge for boards - setting the tone for the organisation.

People’s everyday behaviour is subtly influenced by what they see their leaders doing, and what behaviours are condoned, ignored, praised or punished. These establish an unwritten ethos for the organisation. And once established, it’s hard to shift.. As Professor Richard Rumelt says in his book Good Strategy/Bad Strategy, “Social herding presses us into thinking that everything is ok (or not OK) because everyone else is saying so”.

What ethical standards can you expect when the organisation routinely endorses dodgy behaviour?
  • Staff ignore safety guidelines because they just want to get the job done;
  • Shoddy materials are ok because they’re cheap;
  • Advertising contains deliberately deceptive images;
  • Product specifications are over-egged;
  • Online ordering tricks customers into unwanted extras;
  • Excessive entertaining of clients is routine;
  • People lie to customers in an attempt to ingratiate themselves;
  • Underlings are harangued and bullied when reporting bad news;
  • Managers collude with competitors over territory or price?
If you ignore dodgy behaviour (or worse, encourage it) because you like the increased sales and profits, then a) it is likely to be absorbed into the general ethos of the organisation, and b) it is likely to evolve into far worse behaviour like bribery and corruption. The tone of the organisation comes from the top, and that means the board. What the board says and does, where it focuses its attention, who you hire or fire, who you give an important project, who gets promoted, rewarded or praised - these all send important and closely-watched signals. That especially goes for who you appoint as CEO. What you do as a board sets the tone for the organisation.

To quote from the Four Pillars:
"Unethical behaviour ultimately damages companies and their personnel. Lost customers, employees and sales; the loss of a hard-won good reputation can take years to rebuild. Some companies may never recover.
Conversely, running a company with consistent integrity and high ethical values is simply good business. Such companies attract the best people, the most sought-after customer and supplier relationships and investment opportunities".
Strategic intent
Let’s bring this all together:
  • We've talked about the principles of good governance;
  • We’ve talked about skills and diversity around the board table and throughout the organisation;
  • We’ve talked about the increased regulatory environment;
  • We’ve talked about the need to set the tone for the organisation;
  • And we could have talked about risk management, crisis management, executive pay, shareholder relations, directors insurance, or the risk and reward for directors.
These are all important challenges for directors and it’s critical to get them right; but don’t fall into the trap of being mesmerised by them and spending all your time on them. They are second-order challenges. The most important challenge for directors remains what it always has been - the first pillar of good governance - determining the purpose of the company, its goals and strategies. The board needs to spend most of its time and energy on the organisation’s strategic intent.

To build and operate a great business, you need:
  • an overarching purpose: what you offer the world, to whom (customers, shareholders, staff, communities, business partners), and why they'd want it;
  • a clear, coherent, consistent and elegant design of how you will make and fulfill that offer - your principles, processes, people, and products;
  • to do what should be done to build that business (and not doing what shouldn't);
  • lastly, and don’t be shamefaced about this, to think, plan and act for greatness.
Thank you.

Address first delivered to the Rotary Club of Wellington, 9 September 2013