By Roger Barker*
Given the level of regulation across the board in the UK’s complex economy, it is surely something of an anomaly that almost anyone over the age of 16 can become a director of an organisation without any required preparation, training or qualifications?
This principle may be the hallmark of a free economy but there is a very real danger that, as a consequence, new board members are inadequately prepared for the responsibilities and pressures facing them in their new positions.
No one should be under any illusion about the challenges executive directors now face having to juggle operational responsibilities with the need for ensuring proper corporate governance across their organisations.
Corporate governance – how companies are directed, controlled and held accountable – is a crucial determinant of how companies behave. Given the importance of modern corporations and the role they play within our society, these represent a crucial set of checks and balances – ones are supportive of economic competitiveness and company performance.
Good corporate governance requires that directors have a general overview of operational activities, an understanding of the company’s exposure to risk, and have identified its strategic direction.
They also need to think strategically, and must be cognisant of their company’s position in the market, its purpose, the available resources, as well as the gap between where it is currently and where it wishes to be. In the private sector, it is the process of creating value for principle stakeholders.
It is the directors’ collective responsibility to bridge this gap and achieve competitive advantage by focusing down on priorities that will enable the long-term success of the company and find that tough balance between entrepreneurship and risk.
All this is complicated still further with the ever-growing diversity of large organisations, which makes full and proper oversight extremely difficult. But it was the failure of governance procedures in a number of multi-national financial institutions that lead to the banking crisis which in turn led to revisions to the UK Corporate Governance Code in 2010, and again in 2012. Thankfully, failures on this scale are rare. However, there have been, and continue to be, innumerable examples of where shareholder value has been lost through flawed or poorly executed strategy.
As history has so often demonstrated, legislation, regulation and codes of best practice will only go so far in shaping behaviour inside the boardroom. Of greater importance is the presence of able and motivated directors around the table with a detailed understanding of their distinctive role.
Despite the challenges they face, many new directors are given precious little opportunity to learn about their roles before joining a board. This can lead to a lack of confidence in contributing to debates for fear of ‘saying the wrong thing’.
And this is exactly the kind of behaviour that can propel a board towards ‘group think’, where outcomes of discussions may be determined or directed by one or two strong personalities. It creates all kinds of perils and limitations for companies, not the least of which is that decisions are insufficiently thought through.
And unlike other jobs and careers, it must be remembered that there is not much scope to "learn on the job" as a director. Liability and accountability exist on day one.
As a starting point, therefore, we would recommend that all new directors be provided with a board induction to enable them to build an understanding of the nature of the company, its purpose and the markets in which it operates.
Training is another important consideration and the reasons why more directors aren’t trained before they set foot in a boardroom are probably many and varied – from a lack of awareness that training is available, to perhaps a lack of appreciation of the complexity of their new role and the legal and regulatory requirements inherent within it. There may be an element of ego as well, associated with finally attaining a place at the top table.
High quality professional development for directors, we believe, should be considered an essential component in equipping first-time directors, and indeed be an on-going requirement for established directors, ensuring they are up to date on the political, social and the ever changing business landscape.
*Roger Barker is director of corporate governance and professional standards at the Institute of Directors