10 months ago

Board effectiveness: UK perspective and applicability in Bangladesh  

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Effectiveness of Board is an integral part of corporate governance especially when the corporate board needs to be more engaged, more knowledgeable and effective. An effective board defines the company's purpose and then sets a strategy to deliver it, underpinned by the values and behaviour that shape its culture and the way it conducts its business (Guidance on Board Effectiveness, July 2018, Financial Reporting Council, UK). In broad sense the board collectively directs the affairs of the company and ensures the company's prosperity, while meeting the interests of its shareholders and relevant stakeholders.
Limiting our understanding on constituting a corporate board with a certain number of directors - executive and non-executive, and company secretary -- falls short of taking into account the inherent importance of an effective board which largely implies how a board could be effective in defining the company's purpose clearly, setting the right strategy to deliver the purpose, developing the culture of values and behaviour for promoting compliance, integrity, ethical practice and social responsiveness in conducting the business.
BOARD STRUCTURE AND COMPOSITION: Board composition is fundamental to an effective board; its members must have the right skill and experience to ensure corporate governance which is essential for a company to succeed. Board members of requisite skills and from diverse backgrounds can contribute more effectively in the board activities; they can be reliable friends and critics of the CEO and the executive management team. Gender balance or ethnicity is another key features being evaluated by the regulator for board effectiveness. Special recruiting firms who have list of potential candidates of requisite skills and experience are appointed to search for the right candidates. Even candidates being sourced from personal network need to be hired through the recruiting firm for maintaining the impartiality of selection process and quality control. Proper due diligence on candidate's experience, skills, track-record, checking the references of past employers-- all are carefully done by the recruiting agency. In the process, the committee makes best efforts to select the most preferred candidates to be appointed as the board member have the right skills and experience. For an effective board the directors must:
• Know how a board works
• Have the sectoral skills to grow as a business
• Have courage to challenge groupthink in the boardroom
• Be capable in providing strategic inputs for improvement and development
• Understand the importance of a good company culture
BOARD COMMITTEES: The board alone cannot handle all activities. Therefore, different committees are constituted to delegate the work. Committee members are selected from the board based on their experience and skills. Preferably, one board member should not serve on more than one committee. Committees focus on areas such as governance, internal and external affairs, and provide expert advice or counselling to the board. However, the committee's suggestions need to be approved by the board. Committees are an essential part of the corporate governance process. An effective board committee should
• have a clear purpose and goals, and a chairperson,
• be aligned with the main board,
• play mostly the advisory role, and
• an evaluation process.
Time commitment of board committee members are important. Nomination committee, Audit, Risk and Compliance Committee, Remuneration Committee are the examples of board committees. In general, the committees contribute to deeper engagement of board members with board activities and improve board performance by opinions, viewpoints, and close communication among themselves.
INDEPENDENT DIRECTOR: An independent non-executive director (iNED), in corporate governance, refers to a member of a board of directors who does not have a material relationship with a company and is neither part of its executive team nor involved in the day-to-day operations of the company. A non-executive director (NED) represents a major shareholder but an iNED will generally have no other links with the company other than sitting on the board. The iNED's role is to provide independent oversight and constructive challenge to the executive directors. Non-executive directors (NEDs) of listed companies and in particular, the independent NEDs have distinct roles and responsibilities in the corporate governance arena. For the interest of corporate governance, the appointment of independent directors on the board is important for public companies or companies with a significant public interest.
ROLE OF THE CHAIR (LEADERSHIP): The chair's role is pivotal for board effectiveness. The chair must have a deep knowledge of the organisation, willing to commit sufficient time and attention, and the ability to navigate the crisis time prudently. The Chair will make sure that all members are fully aware of their responsibilities and feel free to air their views. The Chair's experience in the sector, knowledge of the organisation, good understanding of the rules and regulations and better communication with the key stakeholders such as regulator, shareholders, management and workforce can give a kind of feeling of being open and inspired to get engaged with full potential.
ROLES AND RESPONSIBILITIES: Well-defined roles and responsibilities of management and governing bodies are crucially important for high-functioning boards and leadership teams. A clearly outlined roles and responsibilities document or job description for board members and clear charter for each committee, outlining the responsibilities, are vital for the proper functioning of the board and committees. Mature boards prosper on constructive challenge and thus promote consensus and shared accountability. Regulatory frameworks cannot foster constructive challenge rather active participation by all board members, executive and non-executive is essential for constructive challenge.
RELATIONSHIPS: The culture of the board should promote trust, collaboration, transparency, and openness. A board should equally be effective while dealing with issues beyond the boardroom. Visibility of the board to the staff through holding town hall meeting, staff survey etc. is important to build the confidence of staff particularly for expressing their feeling about the organization. It promotes staff loyalty to the organization. Staffs regardless their positions should feel comfort to raise any concerns whether it is a bullying behaviour, breach of rule, corrupt practice, or workplace risk that affects the employees. Well defined board processes must include various remedial measures and policies to uphold staff moral such as code of conduct, grievance redressal system, whistle blowing policy, anti-bullying policy, anti-corruption policy etc.
Relationship with key stakeholders such as shareholders, regulators, workforce, government, banks, creditors, trade unions and community groups are important, and the board will hold dialogue with the stakeholders on regular basis for the feedback which will be considered in board's decision-making.
DECISION-MAKING: Well-informed and high-quality decision-making is the ultimate goal of an effective board. Directors have a legal duty to promote the success of the company which will benefit the shareholders, but not disregarding the interests of other key stakeholders including the workforce. In addition, social and environmental considerations must be considered if the decision would have any impact on the community and society in general. The board should be aware of the risk factors for poor decision-making. For example, influential directors inhibiting contributions from others, lack of requisite skills and experience, inability to challenge effectively, inadequate information or analysis, poor quality papers, failure to understand regulator's expectation and complacent or intransigent attitudes of some board members may also frustrate the quality decision-making process.
ROLE OF EXECUTIVE DIRECTORS: In unitary board the executive directors have the same duties as the non-executive directors. Whether it is chief executive officer or his or her team members, they cannot limit their duties to their individual roles only, it would extend to the whole of the business. They must take a wider stand of offering greater knowledge, deep engagement, and commitment at the point of decision. The chief executive as the senior executive director of the board is responsible to propose the company strategy and the delivery of the strategy as approved by the board. The relationship between the chair and chief executive is instrumental for the board's effectiveness; chief executive officer is in between the board and the workforce to communicate the purpose of the company, expectations of the board, and to ensure that proper operational policies and practices are in place for the appropriate behaviour of the workforce aligning with good governance. The chief executive will alert the board if there is any divergent view of the management on any business issue prior to a final decision with a view to facilitating the boardroom discussion and convergence of the standpoints of the board and management. The chief executive is responsible that the management provides the board directors with:
• 'accurate, timely and clear information in a form and of a quality and comprehensiveness that will enable it to discharge its duties;
• the necessary resources for developing and updating their knowledge and capabilities; and
• appropriate knowledge of the company, including access to company operations and members of the workforce' (Guidance on Board Effectiveness, July 2018, Financial Reporting Council, UK)
ROLE OF THE COMPANY SECRETARY: A wide range of activities fall in the performance of the company secretary; he will advise the board on governance matters, provide support to the chair in setting the policies and processes for the board, help the board and its committees function properly. Ensuring good information flows within the board and its committees, facilitating the induction of new members, arranging board training, assisting with necessary resources for developing and updating the directors' knowledge and capabilities for enhancing their competence, assisting the chair to periodically reviewing the board and the company's governance processes whether these are 'fit for purpose' or require improvements are other core duties of the company secretary.
SUCCESSION PLANNING: A good succession plan is basically the task of the nomination committee to be developed by reviewing the skill gaps, outlining transparent appointment criteria, and informing the succession plan. The succession plan should consider all possible scenario like replacement for sudden and unforeseen departures; the orderly replacement of board members after their tenure or senior executives on their retirement; and long-term planning for hiring skills or developing internal talent and capability needed on the board now and in the future to deliver the company strategy.
BOARD DEVELOPMENT: The board members who begin their service without deep knowledge of the industry or the organisation have an obligation to engage in development offerings and ask for information or clarification as needed. A formal development plan, incorporating on boarding and continuing education, is an integral part of the board processes.
EVALUATION THE PERFORMANCE OF THE BOARD AND DIRECTORS: For an effective board, an evaluation system must be in place with a view to monitoring and improving its performance continually. Externally facilitated board evaluation can provide powerful and valuable feedback for assessing board effectiveness by identifying its strengths and weaknesses and highlighting the areas for further improvement. The evaluation process will obtain feedback from the workforce and other stakeholders (e.g., auditors) on performance of the board and board committees, processes, policies, and more importantly skills and competency of individual directors. The external evaluators will contact with the board and individual directors to do a deep dive to understand the culture of the board as questionnaire-based external evaluations may not be enough to get the dynamics of the boardroom. The external evaluator should meet the executive team for their views on board performance. The most considered areas of board evaluation as discussed by the Financial Reporting Council, UK (Guidance on Board Effectiveness, July 2018), albeit these are neither prescriptive nor exhaustive, include:
• experience, knowledge, and skills on the board in developing and delivering the strategy, overseeing the challenges, harnessing opportunities, and managing risks
• leadership quality in directing the board towards the purpose as set out with clarity
• succession and development plans
• board's work pattern- whether working together as a unit or fragmentedly, and how the chair and chief executive set the tone
• Key board relationship particularly between the chair and chief executive, chair and company secretary, chair and independent directors, and executive and non-executive directors
• effectiveness of individual directors (e.g., participation in decision making process particularly making constructive criticism on proposals, which require the board members of having adequate experience, knowledge and skills.
• effectiveness of board committees and their relationship with the main board
• quality and timing of papers and presentations to the board
• quality of discussion around individual proposals and time allowed
• process the chair uses to ensure sufficient debate for major decisions or contentious issues
• effectiveness of the company secretary/secretariat
• clarity of the decision-making processes and authorities
• processes for identifying and reviewing risks
• how the board communicates with shareholders and other key stakeholders
For selecting the external evaluators, the following criteria may be taken into considerations:
• Method of evaluation,
• Experience, competency, and reputation of the evaluators,
• Cost
• A specification agreed with the board against which the evaluation will be done
• Commercial relationships and other conflicts of interests of the evaluators
• Ability to exercise independent judgement
• Objectives and scope of the evaluation, expected quality, value and longevity of service
The chair will ensure full cooperation between the company and the evaluator allowing them full access to the board and committee papers and information.
The outcome of the externally facilitated evaluation should be constructive, meaningful and forward-looking. Along with the recommendations a clear set of time-bound actions and review of progress against the outcomes should be agreed by the evaluator with the board. The evaluation process should include peer reviews of directors and the chair plus feedback on each director, interaction between directors and between the chief executive and chair, analysis of the quality of information provided to the board, feedback on each individual board member and constructive challenge on board composition, diversity, skills gaps, and succession.
CONCLUSION: Above discussion is in the UK context. The revised 2018 UK Corporate Governance Code ("The Code") details out the core elements of board effectiveness. Though the emphasis of the Code is on FTSE listed companies, the principles have applicability for all organisations on a voluntary basis. Good corporate governance is urgently needed for the stability and growth of financial sector of Bangladesh. It is about effective supervision of the management of a company to defend company's integrity, achieve more open and rigorous procedures and make sure the compliance of legal requirements.


Md Ashadul Islam is former Senior Secretary, Financial Institutions Division


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