A Director's Guide to Governance in the Boardroom

Across the Private, Public, and Voluntary Sectors

Arturo Langa, Monica Langa, Arturo Langa, Monica Langa

• Publisher: Routledge
• Year: 2022
• ISBN:
  9781000570472
• Edition: 1
• Topic: Business
• Subtopic: Governance d'impresa
• Index: Business

This book is a practical guide for executive and non-executive directors and aspiring directors to lead, govern, and steer UK-based organisations to long-term sustainable success.

In today's turbulent environment, corporate governance is increasingly scrutinised, and this book will consider how directors can 'bring the future forward' with respect to responsible and ethical governance and leadership against the challenging political, environmental, and economic backdrop. While other books discuss UK corporate governance, this one uniquely demonstrates how the work of directors can build an organisation's antifragility, and offers a view of stewardship approaches to every sector and type of UK organisation, from large premium listed companies to start-ups, the public sector, not-for-profits, partnerships, and family-owned and private-equity-backed organisations.

Aspiring and experienced directors will each benefit from this book as well as those who provide board evaluation services, professional advisers, auditors, and those who provide training and other support for board members.

CHAPTER ONE Governance and the Role of the Board

David Watt, Arturo Langa and Eileen Maclean

DOI: 10.4324/9781003142850-1

Introduction

For any organisation, how it is governed is crucial and the board it appoints and empowers to ensure that the process is well done can be absolutely vital.

Other chapters in this book consider the nature of the individuals on a board and the way to recruit the best people, as well as the context in which they operate. However, there is a need to understand in some depth what a board is, what is does or, indeed, does not do – or more accurately, in many cases, what it should do and what it should not do.

There are legal obligations on the board and the directors who make it up, but there is more to being effective as a board than just knowing how to comply with legislation. A board needs to add value to the organisation and in the 21st-century world that can be quite complex and very onerous for the individuals concerned.

There will be some differences highlighted between the private, public, and voluntary/charity sectors, but what always amazes people is the similarities in good governance and potential problems far outweigh any differences which are often of tone and accountability rather than board operation.

Governance

This is an oft-used and little understood term which stretches back to the early days of the private sector and company construction in the UK. When companies began to have shareholders and not just patriarchal ownership it was realised that a wider group must be involved in the oversight of how a company operated and what direction it would take.

The topic is a vast subject that enjoys a long and rich history. The issue of governance began with the beginning of corporations, dating back to the East India Company, the Hudson’s Bay Company, the Levant Company, and other major chartered companies during the 16th and 17th centuries.

While the concept of corporate governance – the term gained popularity initially in the United States, during the post-Second World War boom, it has existed for centuries, albeit the name did not come into vogue until the 1970s. The balance of power and decision-making between board directors, executives and shareholders has evolved over centuries. The issue has continued to be a “hot topic” among academic experts, regulators, executives, investors, and other stakeholders. It should also be noted, as pointed out by the Institut Européen d’Administration des Affaires (INSEAD) that the UK has one of the oldest systems of corporate governance in the world (Commonalities, Differences, and Future Trends Board Chairs’ Practices across Countries Contents, n.d.). While the term “corporate” is often seen as applying to companies in the private sector, in this case it applies to any incorporated body or body established under statute and therefore, this chapter uses the term corporate governance as applying equally to organisations in the public sector and the charity/voluntary sector as well.

Since the 1970s corporate governance had become the subject of debate worldwide by academics, regulators, executives, and investors. By the end of the 1990s, the term “corporate governance” was well-entrenched as academic and regulatory shorthand.

Recent developments and the need to maintain the inter-relationship between directors, executives and shareholders of publicly traded companies and other entities mean that the concept of corporate governance is likely to be with us for the foreseeable future. More recently structures have been established in all sectors of civic society to ensure that wider stakeholder views are represented in how organisations are run, the actions they take, and the values they portray.

It is amusing, for example, to witness sports journalist deliberate on terms such as corporate governance every time a football club gets into financial trouble or a rugby club is struggling to survive, when clearly, they have little or no idea what it is. Equally politicians can use the term quite loosely in criticising others when, it could be argued, they are not quite so good at keeping their own house in order.

To be fair there are many definitions and to some degree the reader can take their pick or look to a whole variety of texts and find different definitions or emphasis.

Investopedia (Chen, n.d.) defines it as,

Corporate governance is the structure of rules, practices, and processes used to direct and manage a company.

The OECD Principles of Corporate Governance (Oecd.org, 2015) states,

Corporate governance involves a set of relationships between a company’s management, its board, its shareholders and other stakeholders. Corporate governance also provides the structure through which the objectives of the company are set, and the means of attaining those objectives and monitoring performance are determined.

The Chartered Governance Institute (ICSA) (www.icsa.org.uk, n.d.) has a much more comprehensive definition:

Corporate Governance refers to the way in which companies are governed and to what purpose. It identifies who has power and accountability, and who makes decisions. It is, in essence, a toolkit that enables management and the board to deal more effectively with the challenges of running a company. Corporate governance ensures that businesses have appropriate decision-making processes and controls in place so that the interests of all stakeholders (shareholders, employees, suppliers, customers, and the community) are balanced.

All such definitions are fine and in their own way correct – people, processes, policies, and procedure must all be in place, but experience shows that this is not enough. The governance piece is certainly about what is in place to ensure things are done but we also need to remember that the corporate word added means that we are usually applying that to an organisation and sharing the responsibility.

If you consider the many organisational failures we have seen over many years – such as Carillion, or the highly concerning cases of abuse in USA Gymnastics – do we really think that the board did not believe that all these mechanics were in place? It is very likely that all the directors – right up until the crisis blew up in their face, were totally confident of their governance and they had all the necessary checks and balance in place.

Certainly, governance is about the proper monitoring and control as well as ensuring compliance with legal and regulatory requirements, as well as financial probity.

It is always about ensuring that governance delivers long term relationships which deal with checks and balances, incentives for manager and communications between management and investors/stakeholders; in addition to transactional relationships which involve dealing with disclosure and authority.

Governance is also about a culture based on a foundation of sound leadership ethics which fulfils the long-term strategic goal of the owners/members/beneficiaries while considering the expectations of all the key stakeholders, and in particular considering and caring for the interests of employees, past, present, and future. It works to maintain excellent relations with both customers and suppliers and takes account of the needs of the environment and the local community, while maintaining proper compliance with all the applicable legal and regulatory requirements under which the organisation is carrying out its activities.

For the board in the 21st century the real question in governance is,

Is what we believe going on and what we agreed, actually happening?

Sounds an easy question but in truth so many boards get caught out with what they believe to be happening is not true in practice – they might have agreed something, but they always have real challenges to know if that is being implemented day to day.

It is doubtful that the board of Boeing knew that the 737Max Airplanes were not fit to fly in their early days, but they were still responsible, or the boards of the banks when they banned the use of credit derivatives squared – only to find they were still being operated by lower-level staff.

For many voluntary organisations, the health and safety and wellbeing of clients and staff is paramount and is a great example of how boards must “walk the walk” to find out what is going on. For example, as a board member is a sports and leisure trust board members should visit sites and ask what exactly is going on and not just sit round a table asking questions. That way you will get genuine feeling for the staff commitment and involvement in the process as well as their faith in the senior management and indeed the board in backing the culture of health and safety.

So, despite all your best efforts as a board, there may be things going on which you do not desire or did not agree – the real challenge of corporate governance is not just that all the policies and procedures are in place but the delivery of the business controls and action on the ground.

The key activity then of the board is to be the agent who delivers this proper organisational governance and ensures that the organisation keeps on track to deliver its purpose. Ensuring that mechanisms are in place to deliver your policies and an audit – internal and external – is carried out to check that they are being effective, is the crucial action a board must take.

Governance is about:

• Accountability.
• Probity.
• Transparency.
• Integrity.

Understanding the Role of the Board

As far back as 1995 the business guru John Harvey-Jones said,

The job of the board is all to do with creating momentum, movement, improvement, and direction. If the board is not taking the company purposefully into the future, who is?

While not all organisations are incorporated as companies, for example, some public bodies and some charities, the majority of organisations in the private, public, and charity/voluntary sectors are incorporated so it is helpful to consider the key legal duties and potential liabilities of Directors as outlined by Companies House are as follows.

General Duties

As a director, you must perform a set of seven duties under the Companies Act 2006 (Legislation.gov.uk, 2010).

These still apply if:

• You are not active in your role as director.
• Someone else tells you what to do.
• You act as a director but have not been formally appointed.
• You control a board of directors without being on it.

Constitution

You must follow the organisation’s constitution and its articles of association (governing documents). These are written rules about running the company, agreed by the members, directors, and the company secretary.

The constitution sets out what powers you are granted as a director, and the purpose of those powers.

Promote the Success of the Organisation

You must act in the company’s best interests to promote its success. You must consider the:

• Consequences of decisions, including the long term.
• Interests of its employees.
• Need to support business relationships with suppliers, customers, and others.
• Impact of its operations on the community and environment.
• Company’s reputation for high standards of business conduct.
• Need to act fairly to all members of the company.

If the company becomes insolvent, your responsibilities as director will apply towards the creditors, as well as the company. A creditor is anyone owed money by the company.

Independent Judgement

You must not allow other people to control your powers as a director. You can accept advice, but you must use your own independent judgement to make final decisions.

Exercise Reasonable Care, Skill, and Diligence

You must perform to the best of your ability. The more qualified or experienced you are, the greater the standard expected of you.

You must use any relevant knowledge, skill, or experience you have (e.g. if you are a qualified accountant).

Avoid Conflicts of Interest

You must avoid situations where your loyalties might be divided. You should consider the positions and interests of your family, to avoid possible conflicts.

You should tell other directors and members about any possible conflict of interest, and follow any process set out in the company’s articles of association.

This duty continues to apply if you are no longer a director. You must not take advantage of any property, information, or opportunity you became aware of as a director.

Third-Party Benefits

You must not accept benefits from a third party that are offered to you because you are a director. This could cause a conflict of interest.

The company may allow you to accept benefits like reasonable corporate hospitality if it is clear there is no conflict of interest.

Interests in a Transaction

You must tell the other directors and members if you might personally benefit from a transaction the organisation makes. For example, if the organisation plans to enter a contract with a business owned by a member of your family.

Other Duties

There are other duties you must perform as a company director. For example, you must:

• Not misuse the company’s property.
• Apply confidentiality about the company’s affairs.

In addition, there are a number of broad roles and responsibilities to be followed.

• Ensure annual accounts and returns are produced and received by Companies House.
• Keep accurate and up to date company records.
• Be responsible for the health and sa...