With increased attention from regulators and increased focus on risk by insurers, how can non-executive directors use e-board technologies to enhance the Corporate Governance of the investing institutions on whose boards they sit?
Practical problems for directors
Carrying out a director’s duties requires being sufficiently well-informed to make proper judgements. Even within a management board where all the directors work in the business, this can present problems. Thus the Finance Director will always know more about the financial accounts than the Marketing Director and will be unlikely to accept criticism of the numbers from the marketing quarter. Similarly, the director responsible for Marketing will privately regard the Finance people as having only a relatively shallow understanding of the marketing side of the business. How much more difficult, therefore, it must be for the Non-Executive Directors (NEDs) when they sit alongside the executives on a board. Yet the responsibilities and legal liabilities of all directors are the same and the obligations of NEDs to ensure good corporate governance are, if anything, deemed to be greater than those of the executives. NEDs are presumed to bring independence of both thought and motivation to their role. It is therefore vital both from the company’s point of view and their own that they can demonstrate a proper knowledge of the company’s affairs and that of the environment within which the company is operating.
How can NEDs cross swords with incumbent managers when they know so much less about the business?
Now consider the role of directors of investing institutions and the practicalities of NEDs achieving good corporate governance. If their task is difficult in a single business, how much more so it must be when NEDs are in a trustee role in relation to the managers of a fund which may be investing in hundreds of businesses. It is surely dangerously simplistic in these days just to concentrate on the way the managers focus on their responsibilities to their investors to achieve their promised investment returns and stay within the prescribed regulations. We hardly need reminding that the NEDs on the boards of RBS and Lloyds Bank didn’t escape criticism by endorsing the “bet the farm” strategies adopted by managements which stayed within the regulations of the time.
Ensuring effective board meetings
NEDs will generally be subject to a usual routine of periodic board meetings – say four to six during the course of a year, plus AGMs and the occasional EGM. Also there will be meetings of the main sub-committees, Audit, Nominations and Remuneration. Board papers will typically be sent out in the few days before a board meeting, often accompanied by emailed PDF versions.
Depending on the effectiveness of the chairman, significant time may be spent in meetings bringing everyone up to date, discussing contentious issues arising from the minutes of the previous meeting, resolving misunderstandings in the board papers etc., most of which could and should have been dealt with before the meeting.
Effective meetings require that NEDs arrive at the board meeting fully briefed, having resolved as many issues as possible before the meeting. They should be clearly ready to focus on decision making and policy discussions, having ensured before the meeting through the chairman, that all important matters have been included in the agenda and all directors have been properly briefed about them.
In guaranteeing an effective meeting, the role of the chairman is key in setting the agenda. However, the role of the company secretary is, if anything, even more vital in providing an appropriate system to serve the board and ensure the administration works efficiently. An efficient system should deliver board papers to directors in good time to allow for interaction and further briefing. It should also provide for flexibility of the agenda to include late items and the communication of this late material to directors before the meeting.
Here we see the emergence of the “e-board” and the role of on-line systems with the ability to access board material through tablets for mobile access by directors away from home or their offices. Beyond this, a further extension of an efficient service for boards lies in the provision of a facility for private, interactive communication between directors and between managers and directors. Such a secure internal messaging service should also offer the ability to search and retrieve in these communications.
Beyond board meetings
However, a truly effective e-board service for investing institutions (as for other boards, of course) must address the need for NEDs to be briefed and to be able to brief themselves between formal board meeting events. A suitable system would provide up to date information in four broad categories: constitutional, regulatory, operational performance and market matters. Where there may be hundreds of investment situations to monitor, it is clearly desirable for broad and detailed regular briefing by managers between meetings. The only effective way to provide this service is through the use of on-line systems and provision of a secure Document Library and carefully controlled access.
Clearly tomorrow’s NEDs will need to be thoroughly familiar with these technologies and to be demanding the very latest services from the managers who run these funds.
Straws in the wind
There are some trends emerging which have implications for all NEDs:
- an increasingly widespread use of iPad apps by boards big and small providing directors with mobile access to board papers and the ability to annotate the documents
- an increasing focus by regulators on Corporate Governance performance leading to the increasing need to be seen as good at Corporate Governance in practice and in spirit
- an increasing focus by insurers on compliance in relation to risk management suggesting an increasing likelihood of problems enforcing claims.
The goal of an effective e-board service should not be simply to provide a means of directors reading board papers on their iPads while on the move. We could summarise the vision as follows:
Make the Investment Group a stand-out leader as a well governed investment institution as well as a top performer and demonstrate this excellence in governance to potential investors to enhance the brand. Display to regulatory authorities a system which implements both the letter of compliance and the spirit of good stewardship. Demonstrate the beneficial effect on risk management to insurers and boards. Organise this in a way which maximises the efficiency of recording key information, and delivering it to boards, compliance departments, lawyers, auditors etc.
Introducing and implementing the e-board system to enhance corporate governance
The success of introducing and developing such a system will be helped by following some practical guidelines:
- plan a positive and powerful launch to demonstrate backing at the highest level
- provide proper introductory training for both existing directors and managers and all new board members
- set up a formal programme for managers to issue both regular and occasional briefings to directors geared specifically to improving corporate governance
- devise clearly defined metrics to measure corporate governance and focus on improving governance performance by boards to achieve best of breed corporate governance performance for regulatory authorities and the investing public
- incorporate measures to track improvements in risk management through improved corporate governance and seek a consequential potential reduction in insurance premiums
- arrange for access by “guest users” allowing lawyers, auditors and bankers to be given selective access to the system.
Specific failings to watch out for
Typical failings in a first roll-out include:
- a low key introduction, which carries with it an implied lack of a strong justification for change
- inadequate central support meaning little or no training is offered to directors
- a lack of active input from managers leading to a failure to engage directors with the system
- board meetings continuing to be run in the traditional way with no attempt being made to take advantage of the new facilities
- consequently no significant attempt being made to wean directors off the use of physical Board Packs and dealing with resulting issues
- no concerted focus being made to achieve potential admin savings.
Pluses to look out for
Useful achievements in a first roll-out might include:
- enthusiastic use by a few “early adopters” and their desire to encourage further development which can inspire and encourage the less supportive
- advantages seen by advisers such as lawyers and accountants wanting to use the system to facilitate their work with their client
- advantages seen by compliance departments in improving transparency and efficiency for their operations.
Importance of this approach
Launching a system of this kind will provide benefits of increasing importance to an investment institution and its board.. Specific benefits include:
- providing visible evidence of improving corporate governance performance to the regulator
- similar use in relation to investors and the beneficial impact on the brand
- saving in costs for management regarding Board Pack preparation and briefing of directors
- similar savings in dealings with lawyers, auditors etc
- improving efficiency and potentially tightening standards in company secretarial practice
- convenience and efficiency of use by compliance departments
- use in risk management and a potential impact on insurance premiums.
The bottom line
The role of the NEDs and the board is to ensure good corporate governance and then rely on management to provide them with the necessary information to fulfil this role. So, at a personal level, we could perhaps sum up the ultimate benefit of the board service we describe above as being insurance against bad things happening in the relationship between boards and management and bad consequences for all concerned as a result.
Corporate Governance and Investing Institutions Part 1: assessing and mapping the corporate governance of investment companies.
Matt Harris, Fund Accountant at Foresight Group talks about the importance of systems and processes in corporate governance.
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