Board Books: Four Pillars rebuilt

The Institute of Directors’ relaunch, restoration, facelift – call it what you will – of its Four Pillars of Governance Best Practice text is welcome. It is, in its significantly modernised format, an excellent documentation of governance best practice, with some emphasis on compliance. But it is membership organisation’s view of best practice.
Governance is at an important point in its evolution. And the number of individuals wanting to become directors is steadily growing. Directors today must sustain and continually improve company and organisational performance through improving their own governance and collective board performance and the performance of the chief executive.
The continuing publicity generated by court cases against directors since the collapse of the finance company sector in particular, is having significant effect on the image and the scrutiny of directors and boards both at home and abroad. These are challenging times for directors and boards. So the revamped and much more accessible publication is grist to the Institute’s education mill.
“The loD believes that preoccupation with creating and adding value must underpin all governance practice… Corporate governance for boards and directors does not exist as an end in itself, it exists for purpose and that is to help the company achieve its fundamental purpose as articulated and subscribed to by its shareholders and stakeholders,” according to the book’s foreword.
The four pillars on which the IoD builds its case for best practice governance are:
• determining purpose
• effective governance culture
• holding to account
• effective compliance.
The case around each is systematically and logically constructed. The first pillar, purpose, covers the ground by explaining what corporate governance is, the role of directors, governance theory, law and compliance and so on through governance of SMEs, not-for-profits, family company boards, strategic planning and analysis and finally corporate social responsibility.
The construction of an effective governance culture starts with the board architecture and composition through key competencies, the role of the chair, reporting, succession planning, conflicts of interest, risk management and finally information technology and the board.
Holding to account, the third pillar, tackles accountability, setting CEO’s employment agreement, management incentive schemes, director appointments in other entities and the ticklish matter of board and director performance evaluation.
Finally pillar four, effective compliance. Compliance, financial reporting, board committees, director remuneration, insurance and indemnities, subsidiary companies and boards are all heaped into section that begins by warning that boards add value by “ensuring the company is, and remains, solvent”. Risk management, it says, is key figure of board capability.
IoD is membership organisation. Four Pillars is practice manual that focuses on just that. It does not address, understandably, the more important but also more contentious issues of governance responsibility and performance measurement.
To be effective in today’s world, governance requires directors and boards to perform to much higher standards than past practices have delivered. Like the book, governance in action needs dramatic make-over and re-think to comply with high codes of conduct.
Directors and chairs should retain their places on boards only if they perform satisfactorily, just as individuals in every other professional role do. The United Kingdom has faced the issues with the introduction of The UK Corporate Governance Code. New Zealand should do the same. Government sets the rules but there is case, as Adam Feeley of the Serious Fraud Office suggests in this issue’s cover story, for the IoD to take lead and become more than just membership organisation.
Board and director evaluation is developing practice, but it is not yet sufficiently focused on continuous performance improvement and seldom deals adequately with the indicators and impacts of poor performance.
Poor or non-performing CEOs, for example, are significant board problem. Directors, for some reason, find it difficult to deal effectively with poor CEO performance. They seldom handle the termination of CEO’s contract promptly and properly. And they seem unable to tackle the contentious issue of excessive executive remuneration which, more often than not, is made worse by the fact the high compensation is inadequately linked to performance measures.
Four Pillars does not, perhaps understandably, address these important executive leadership-linked governance matters. The manual’s third pillar, holding to account, addresses accountability in respect of management but it does not address the requirement for governance accountability.
There is prevailing reluctance to address the issue of director and chief executive performance despite the fact it is critical to organisational success. Four Pillars does not address the issue and yet it seems to be exactly the place in which the issue should be addressed and expectations set.
Good governance practice is well articulated in plethora of practice literature. But the consequences of non-performance are seldom addressed, not practised nor even considered part of governance culture. The courts every day deal with directors and boards for failing to perform their duties and meet their legal obligations. This increase in traffic to the court room is measure of failure to address non-performing governance. There is also an accompanying danger that governance is becoming overly focused on protecting itself.
And then there is the business of board composition. Chairs and directors must think more deeply about who joins the board. To perform effectively, boards must be free to consider independent and objective views and to make independent decisions.
Board actions are compromised by lack of independent membership. The culture and effectiveness of board’s management oversight is watered down when executives sit on board.
All this said, the reconstructed Four Pillars is vast improvement on what has gone before. It reflects some positive and equally overdue changes taking place at IoD.
Finally, the price of Four Pillars reflects its “house rules” and membership catchment role. Members get free copy. Additional copies cost $75 throw. Non-members will pay $545 – the price rationale presumably being that it’s better to become paying member of IoD.
The cost of joining the IoD is one-off joining fee of $129 and an annual subscription of $425.