By going back to the defnition of a Board, it may give us some insight in to what may have gone wrong. This is our view.
As with everything, there is a lot of good going on, and that goes for Boards and Non-Executive Directors (NED’s). However, you do have to ask, how has the recent situation of Carillion been allowed to happen?
At worst, this is due to Board Members and NED’s being too focussed on feathering their own nests to take their responsibilities seriously. If they did, they would have understood their responsibilities and managed risk (which is a part of every business) in an exemplary manner. At this level, you expect the highest standards, the highest integrity and the utmost commitment to ensuring the health of the business is fit for the risks it is taking. Ok, the government has a part to play in the Carillion situation and that will unravel as time goes on, so let us just focus on the role of the Board and NED’s.
The Institute of Director’s (IoD) states that the key purpose of a Board is "is to ensure the company's prosperity by collectively directing the company's affairs, while meeting the appropriate interests of its shareholders and relevant stakeholders". This requires the Board to be absolutely focussed on governance, long-term financial stability and maintaining the highest standards of professional behaviour. Clearly in the Carillion, BHS and Kids Company examples, this expectation of a Board has failed every employee, every worker, the supply chain and as such the ‘appropriate interests of shareholders’.
Surely the Board’s first interest should be the organisation itself? Let us not forget the Shareholders are transient, the organisation is not. As a result, the Shareholders are focussed on the shorter term, and this can certainly impact on the decisions of the Board and NED’s. This seems to be forgotten when we talk about the ‘appropriate interests of shareholders’.
Clearly the overarching issue in these organisations has been the capability of the Board and the NED’s. They have certainly forgotten whose interests they should be focussing on. The Board and NED’s are ultimately responsible.
We are in the early days of the Carillion situation, but it has gone in to forced receivership, with debts of £900m and £537m pension deficit. How can this be allowed to happen? This is a question that the Board and the NED’s should be asking themselves – did they meet their governance obligations? The Board minutes and Executive Board minutes would make interesting reading! Over the coming days and weeks this disgraceful situation will start to unfold. In the meantime, what should we expect of our Boards and Non-Executives?
Let us get past the corporate words and look at some expectations we should have of Boards and NED’s:
- The ultimate responsibility of a Board is governance including financial and risk management. Do not allow anyone on your Board who does not understand the financials and risk management. Do not assume that everyone in a senior position has such understanding, as recent cases are proving that this is not the case.
- The confidence and ability to say what no-one else is prepared to say – and keep saying it and ensure it is documented (and acted upon). Of course, this may cost a Board Director or NED their job; so be it, it goes with the role.
- Board Director’s and NED’s should be trained to an appropriate level in corporate governance, risk, financials
- They should be more in touch with the people in the business as this is where early signals of trouble are seen. No doubt in Carillion some of the the staff will have seen the writing on the wall long ago, unfortunately, they have been ignored
- The NED’s have a responsibility to stress test the recommendations of the Board about the future direction of the business. NEDs must ask the right questions about the viability of plans, as often strategic plans are not given enough attention.
Also, think about the following when appointing your Board Members and NED’s:
- Do not appoint your Board Members and Non-Executive Directors just because they have had some flashy job titles and well known Brand’s on their CV. Undertake a thorough search and do your due diligence
- We come back to the usual issue of promoting from within or bringing in fresh talent. Promoting from within has many benefits, however….
- Do not assume capability. Undertake a thorough appointment process including using appropriate aptitude and psychometric tests. Do not be swayed by the view that you cannot ask a senior person to complete assessments. That is nonsense!
We have a long way to go until Boards and NED’s are operating at a level that reflects their responsibilities for the organisation and not just for the shareholders. CEO’s, Chairs and Human Resources Directors have the ultimate responsibility to ensure there is a step change … and that we have no more failures due to lack of Board and NED capability.
No doubt over the next few days we will all be blinded by many excuses (again)! When will we learn that we need to professionalise our Boards and NED’s to protect businesses and the society that depends on them.