WHAT MAKES A BOARD ‘EFFECTIVE’ IN 2022?

Board effectiveness reviews are now part of the corporate governance landscape, carried out annually and often with external involvement in the form of questions, assessment and peer comparisons. But what made the Board of a bank or other financial institution ‘effective’ a few years ago won’t hit the mark in 2022. The broad themes look the same but there are different perspectives and regulatory expectations to accommodate.

  • Strategy is still a key topic, but it’s now strategy ‘plus’, with strategy as a vehicle for other points to be addressed.
  • Knowledge is front and centre, but it’s now about knowledge in many different forms.
  • Diversity has been a focus of the last few years and diversity in 2022 isn’t how we thought of diversity five years ago.
  • Meetings are how boards gather, but meetings can now take different forms, which can promote or put a brake on effectiveness.

This article considers those points in more detail.

Strategy

Boards determine a firm’s strategy. They will almost certainly respond to proposals from senior management, headed by the executive directors, but it’s the board that sets the strategic direction of the business and approves the strategic plan. Business implementation, allocation of resources, budgets and financial forecasts follow from that.

The broad approach hasn’t changed but the strategic plan now needs to show how a number of regulatory topics are being addressed.

  • Climate change – boards are used to considering risks to the business when considering strategy but climate-related risks present new challenges. These risks arise over longer periods and there are considerable uncertainties around the impact a risk might present and the probability of it occurring due to the range of potential scenarios and outcomes. Historic data is also likely to be of limited use when considering how climate-change scenarios will unfold in the future. But the PRA has said that it expects firms is regulates to “undertake longer-term scenario analysis to inform strategy and risk assessment” (emphasis added).  Assume that the FCA takes the same view.
  • Diversity and inclusion – both regulators are committed to driving diversity and inclusion (D&I) and a firm’s strategy should be consistent with achieving that.
  • Operational resilience – boards need to identify important business services and set impact tolerances for those. The strategy needs to allow for and support:
    • Preventing disruption to the business;
    • Continued provision of services and functions if an incident occurs; and
    • Return to normal running of operations promptly when the disruption ends.
  • Consumer outcomes – these are a core component of the new Consumer Duty, in addition to being an area of FCA focus, and boards will need to show how strategy is consistent with achieving good and fair outcomes to consumers.

Expect regulators to ask how these topics are being addressed by the board, as topics in their own right and when setting the strategic plan.

Knowledge

There’s been emphasis on competence and capability, and learning and development, for some time but the topics have altered and the standards expected are probably higher.

  • Tech knowledge – assume that this is now something all directors should have; it’s no longer feasible to have one independent non-executive director who’s the person other INEDs turn to when there are tech points to consider.
  • All directors to have knowledge and skills – following from the previous point, the standard of knowledge required of directors across all topics has increased. Directors are there to contribute to the discussion on all aspects of the agenda, not just their own special subject.
  • New topics – climate change is high on the list and the most obvious example of a new – or newer – topic. And it’s clear that regulators expect the whole board to have a working knowledge of this and other topics that have risen on the regulatory agenda.
  • On-going L&D – this has been a message over the last few years and a key point under the senior managers regime. And the topics directors need to cover as part of their learning and development – personally, and as part of wider board training programmes – is increasing.
  • MI and board packs – management information should provide directors with what they need to carry out their responsibilities. As the topics they need to consider evolve and as levels of knowledge across the board need to increase, board packs and MI will need to evolve too.

Diversity

I’ve already touched on D&I but there are some specific points relevant to effective boards.

  • Diversity of thought – both regulators have made it clear that they consider diversity to mean diversity of thought, which is said to involve different perspectives, abilities, knowledge, attitudes, information styles and demographic characteristics or any combination of these. That frames diversity in very wide terms and beyond anything resembling a quota system for board composition.
  • D&I and group-think – diversity of thought is seen as an antidote to group-think.
  • D&I and governance – there needs to be a plan for achieving D&I targets and objectives across the firm, overseen by the board, with metrics being set to measure progress.

Meetings

Board meetings have continued through the pandemic but there’s been a move to virtual meetings. These have served a purpose and will continue to do so but there’s clear value in face-to-face (rather than screen-to-screen) meetings too. I expect that effective boards will find a balance between the two, allowing the benefits of the chats over coffee and before and after the meeting, as well as the convenience of virtual meetings and saving travel time and expense.

Two points that might be relevant to D&I are set out below. This is an evolving area and I hesitated before including these points but they might trigger a debate even if readers don’t agree with them.

  • Meetings and group-think – I have no clear evidence for this but I’m sensing that different types of interaction between board members, achieved through a mix of in-person and on-screen meetings, help to avoid group-think. With a similar lack of clear evidence, I wonder whether there might also be a risk of group-think establishing itself or becoming more embedded where only virtual meetings are held over a long period. But I might be completely wrong about both of these points.
  • Virtual meetings and D&I – if the objective is to draw in diverse views from people with diverse backgrounds, it might be easier to attract (for instance) women with child care and other responsibilities if meetings are held remotely, at least for part of the cycle of meetings.

As I said above, this is an area in a state of rapid development, at the confluence of a key topic relevant across society (D&I) and a profound change in working patterns due to the pandemic (remote and hybrid working). The key point for a board, at this stage, is to consider what makes it most effective. Considering these – and other points in this article – and making decisions about how to address them need to be high on the list for boards in 2022.

This article is intended to provide general information about recent and expected items that might be of interest. It does not provide or constitute, or purport to provide or constitute, advice relevant to any particular circumstances. Legal or other professional advice relevant to any particular circumstances should always be sought.

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