This started as an article about what makes a board of directors ‘effective’ but I decided that was aiming too low. Why shouldn’t a board be outstanding? Let’s begin though with board effectiveness.
1 Board effectiveness
What made the board of a bank or other financial institution ‘effective’ a few years ago won’t hit the mark now. The broad themes look the same but governance standards and regulatory expectations have shifted.
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, including diversity and inclusion (D&I), operational resilience and alignment with the Consumer Duty. 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 (L&D), for some time but standards are higher now. L&D plans should be aligned with competence assessments and it’s assumed that all directors have ongoing L&D needs. Each director should have a good working knowledge of all relevant topics, including IT and operational resilience. Leaving one or two individuals to do the heavy lifting isn’t an option.
MI – 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. Expect more focus on trend analysis, analysis of risks and scenarios presented in new combinations – and taking account of emerging types of non-financial risks and striking a balance between quantitative data (for the measuring and metrics regulators are looking for) and the qualitative data that provide a richer mix of information.
Diversity – I’ve already touched on D&I in the context of the strategic plan but there are some specific points relevant to effective boards. Both the Prudential Regulation Authority and the Financial Conduct Authority 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 a simple quota system for board composition. Diversity of thought is also seen as an antidote to groupthink – and there’s more about that below.
2 The outstanding board
An effective board is part of a wider governance framework made up of tightly-knit policies, processes, systems and controls. However, those aren’t the whole story and focusing, exclusively, on the control framework, robust controls and processes can limit board performance. My rather contrarian view is that two further things are needed in order for a board to be outstanding.
• A strong focus by the board on what’s coming down the track, allowing the board to refine strategy, respond to issues before they become problems and exploit opportunities.
• A culture of robust and consistent challenge by directors to avoid groupthink.
Here’s the analysis.
• Governance and control frameworks and governance infrastructure are necessary. They address wider aspects of governance (such as reporting lines, the three lines of defence model and risk management frameworks), as well as the role of the board. And regulators require governance arrangements to be in place – both wider governance frameworks and arrangements setting out the board’s responsibilities and how it operates.
• However, over-reliance on processes can reduce effectiveness and hinder both a board’s ability to excel and a firm’s ability to grow and compete. As an example, I often see tight adherence to an agenda of reporting by the CEO, the CFO and the CRO and templated reports being followed at each meeting that differ little, in essentials, from one board meeting to the next. This leaves little time for consideration of competition, strategy, opportunities and risks specific to the firm.
• An effective board will review risks in and to the business, including key risk indicators (KRIs) and early warning indicators (EWIs). If those vary little from month to month (or quarter to quarter), the impact of overarching or underlying messages within the risk MI can be diluted or lost.
• An outstanding board will want to see and understand what’s coming down the track in more detail and at an earlier stage. This will involve:
o More focus on EWIs – and, possibly, very early warning indicators (VEWIs);
o Consideration of novel risks and novel combinations of risks;
o Detailed commentary on the board MI, including trend analysis across combinations of risks;
o Briefings for the board on wider developments – economic factors; geopolitical developments; other intelligence;
o Briefings for the board on competitors and what they’re doing; and
o Making connections between risks, KRI/EWI/VEWI reporting, other management information and briefings.
• As well as being able to respond to problems and potential problems at an earlier stage, the board will also be able to adjust the firm’s strategy by course-correcting and taking advantage of opportunities. Time needs to be allowed for this at board meetings, in addition to annual strategy sessions and strategic reviews.
• It’s implicit in all of these points that directors will question and challenge. Supervising management and holding management to account is a key role of a board – and particularly non-executive directors – but an outstanding board will also challenge strategy and strategic decisions, views of the future, received wisdom, risk reports and MI. Each of the directors will understand that dissent is neither dangerous nor disloyal and will see a desire to test alternative propositions as a better way to reach an optimal outcome and pursue opportunities. Challenge is seen as a better way of being a team player.
This article is intended to provide general information about current and expected topics and perspectives 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.