Don’t leave it too late to get your governance right

25 July 2019

Governance can often be seen as an administrative burden - agenda setting, minute taking, cross referencing between committees. It can be seen as a ‘need to do’ rather than something that helps an organisation achieve success. In the worst cases, it can be seen as something that needs to be circumvented to actually get things done in an organisation. That is, until something goes wrong. At that point, lots of questions about governance are asked. How was a decision taken? Were the right people involved in making- and being informed of - the decision? Did they have the right information? Is there adequate evidence to demonstrate these matters? This is particularly so when there has been a regulatory issue. With the personal accountability placed on senior managers under the Senior Managers Regime, the focus on reviewing governance when something has gone wrong has never been greater; but why can some organisations wait until the point of failure to take action?

The fundamentals of good governance are straightforward. There is a need to have a governance framework so that decisions can be taken in an appropriate manner to allow an organisation to meet its objectives and act in line with its values. This means that there should be a clearly defined purpose and scope of responsibility for each governance committee (or function), which is understood by all stakeholders. Each committee needs to have the right membership, with appropriate skills and diversity of thought to ensure that issues and options are debated and challenged properly before decisions are made. Escalation routes need to ensure that issues are brought to the attention of those who need to know, in sufficient time so that they can intervene as necessary and appropriate. The culture needs to ensure that formal committee structures aren’t ignored or replaced by informal decision making. There needs to be clear documentation to evidence all of the above and a strong Company Secretary function to support the governance processes.

This all sounds easy but, over time, these fundamentals can be lost. Consider the questions below:

  • Does your organisation understand and respect its governance structure? Or do people try and ‘work around it’?
  • Does your governance structure allow legal entities within your organisation to meet their obligations? Or do the legal entity boards feel like a rubber stamping forum?
  • How ‘independent’ is your Board to be able to exercise scrutiny and challenge over management’s actions?
  • Do you feel that your time spent in committee meetings is valuable? Or do you tend to delegate attendance?
  • Is the management information (MI) you receive in committee meetings telling you what you need to know? Or is it a lot of data that lacks insight? Do you ultimately find yourself creating your own MI to fill any information gaps?
  • Do decisions really get debated and made at the committees you attend? Or does the real decision making happen outside these meetings?
  • Do you think that your governance arrangements would withstand external scrutiny and challenge?

If these questions make you feel uncomfortable about the governance framework you have in place, in my experience, you’re not alone. Governance frameworks evolve over time and each individual change may be sensible and explainable but the resulting framework may not make a lot of sense. Governance frameworks may not keep up with good industry practice or regulatory expectations. In a global organisation, the need to meet global governance standards may mean that local regulatory governance requirements are not embedded in the frameworks. The framework may also not match what is written down in the governance documentation, making it difficult for newcomers to understand how decisions should be made. All of these points can lead to poor governance and decisions being taken which, in hindsight, shouldn’t have been.

Whilst the fundamentals are straightforward, identifying and addressing weaknesses in governance frameworks is not. The process can generate strong emotions. This is particularly the case if it’s done when something has gone wrong as the situation is often stressful, even more so if the regulators are involved.

This is driven by the fact that often the changes that need to be made involve people. When you are asking someone to no longer be part of a committee, for example, this can impact their sense of self worth and status in an organisation. Conversely, if you ask someone to join a committee, it can add to their responsibilities and workload, which they may not be keen on. So, changes to governance frameworks often need time - to spend with individuals to engage them in the thought process and to get their buy in to the decisions. Trying to do this at speed, as happens in a crisis situation, rarely delivers the right outcome and often results in a lot of subsequent work to resolve the problems it causes.

In our view, therefore, organisations should review their governance framework on a regular basis. They should consider:

  • Is the right committee structure in place within the organisation?
  • Is the purpose of each committee clear and understood within the organisation?
  • Does the membership of the committees align to the purpose and allow for diversity of thought and challenge?
  • Do the escalation and delegation routes enable effective and appropriate decision making?
  • Is there appropriate support in place to drive the governance agenda throughout the organisation and provide dedicated and experienced support to the Board and committees?
  • Will the resultant governance framework help the organisation achieve success?

By doing this, they will ensure that their governance framework remains appropriate for their current business and, if changes need to be made, they can take the time to make them in a way that engages the people who are impacted. Ultimately, this should allow an organisation to have a governance framework that helps it to achieve success.

Sarah Isted

Sarah Isted | Partner, UK Financial Services Risk and Regulation leader
Profile | Email | +44 (0)7834 251 939

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