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People and the right information are vital for effective governance

Published: 23rd July 2019

Author: Kirsten Patterson, CEO, Institute Directors

Published in: Fineprint Issue 79

The damage from governance failure can be profound, and can attract significant unwelcome media and public scrutiny. Focusing on the learnings from these cases is how we can get some real benefit and continuous improvement in corporate governance.

He tāngata – it is the people
Governance is, above all, about people. It’s a team game and, like any team, the board’s composition, and its culture and dynamic, are all critical to its effectiveness. Boards need a broad mix of skills and experience now and for the future. Individual attributes of directors are also highly relevant such as integrity, courage, judgement, emotional agility, energy and curiosity. Other factors relating to board composition include diversity, new membership and tenure. Getting the right mix and balance can be as much art as science. Putting time and thought into developing a skills matrix to determine the board’s needs is worth the investment.

While a balanced board is necessary, it is not sufficient to create an effective team. It is board culture that allows directors to work together to make the most effective decisions for the benefit of the organisation’s stakeholders.

What does this look like? It should be one where the board supports open debate, diversity, thoughtful challenge and constructive dissent. While the chair may lead this, all board members have responsibility for creating an inclusive culture that enables contribution with respect.

But a board is not an island. Management is part of the wider governance team and this relationship must be nurtured and valued. It is essential that a healthy and effective relationship exists. A board exists to support and guide management, as well as to hold them to account for performance and compliance matters.

Be clear about roles and responsibilities
The roles and responsibilities of individual directors, the board and management should be clearly understood and recorded. A lack of clarity can lead to conflict and dysfunction so getting this right is critical. The company’s constitution, a board charter and letters of appointment are all key tools to help set out roles, responsibilities and expectations.

The board’s role in holding management to account was emphasised earlier this year in the Final Report of the Australian Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry:

“Boards must … use the information that they have to hold management to account. Boards cannot, and must not, involve themselves in the day-to-day management of the corporation … The task of the board is overall superintendence of the company, not its day-to-day management. But an integral part of that task is being able and willing to challenge management on key issues, and doing that whenever necessary”.

Quality over quantity in board reporting
We’re hearing more and more about board packs exceeding 1,000 pages. This presents a real challenge for directors to focus on material issues and risks, and to balance time spent in board meetings on strategy and performance, with time on compliance.

What is the right information for board papers? A key criticism of boards and management by the Australia Royal Commission was that boards of financial services entities often did not receive the right information. It said that the quality, not the quantity, of information provided to a board was vital in order for a board to discharge its function.

A board must make decisions based on sufficient, accurate, relevant and timely information. It must define its information requirements so that reporting is meaningful, with management providing thoughtful interpretation about key matters. Measuring what matters, and providing trend information, has never been more important for an organisation’s core financial and non-financial performance indicators.

If the board’s information requirements aren’t being met by management, this should be raised as a priority.

The learning board
A board, like any team, must focus on continuous improvement to ensure ongoing effective corporate governance. Board and director evaluations help hold the board accountable and improve individual director and whole-of-board performance. Evaluation, formal and/or informal, should be undertaken regularly to help boards and directors identify their strengths and weaknesses, assess their performance and determine opportunities to improve.

Ongoing director development is a core focus for the Institute of Directors, through resources, courses and events. Our Continuous Professional Development (CPD) requirements emulate those of other professions, such as law, and help drive directors to keep up-to-date on governance developments.

At the end of each meeting, all boards should also be able to answer, ‘Did we add value today?’

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