Time for one last bite of the Canadian apple. My last governance column featured some of the findings of bulky report ‘Beyond Compliance: building Governance Culture’.
The report was issued in May this year by joint committee on corporate governance established by the Canadian Institute of Chartered Accountants, the Canadian Venture Exchange and the Toronto Stock Exchange. It contains so much relevant information that it’s worth examining further.
But just to back up: ‘Beyond Compliance’ dismissed board box-ticking and canvassed the rapid changes affecting governance worldwide. It found that:
* few boards have clearly articulated statement of what competencies they expect from directors;
* adequate resourcing and meaningful flow of information are crucial;
* intellectual capital is now recognised as key corporate asset;
* boards need their own charters.
The report’s recommended charter helps establish formal, agreed set of responsibilities for boards. Among them:
* selecting, appointing, evaluating and (if necessary) dismissing the CEO;
* succession planning, including appointing, training and monitoring the performance of senior management;
* approving the compensation of the senior management team;
* adoption of strategic planning process, approval of strategic plans, and monitoring performance against plans;
* policies and processes to identify business risks, to address what risks are acceptable to the corporation and ensure that systems and actions are in place to monitor them.
But the report also goes way beyond the formality of these areas and delves into somewhat murkier areas involving relationships and personalities. It points to extensive literature to show that directors are agents of shareholders. Accordingly, the effectiveness of governance is impeded when the interests of shareholders and directors are not properly aligned.
Very often the nature of incentives facing directors – tangible and intangible – suggests that they may act in ways that are inconsistent with shareholders’ interests, says the report. In so doing they may become aligned with management to degree that is unhealthy, or they may in some instances, be putting their own interests above those of shareholders.
Tangible incentives include, obviously, money. Intangibles include the nature of social and professional relationships that are inevitably established between directors and company executives “… relationships that may make it more difficult for some directors in some circumstances to take appropriate action when the interests of owners and managers diverge”.
This foray by the committee into unstructured, lesser known aspects of governance, leads to the heart of another critical issue: the need for boards to maintain “robust” independence – while also monitoring and working with management.
The report emphasises the need for this professional detachment, saying that the independence of the board is crucial to effective governance. It says the issue remains open for debate but offers some suggestions. “We believe, based on our experience, that it is necessary for the board to develop strong and cohesive culture that facilitates independent action. There are in our judgement, two prime contributors to the development of such culture. First is the capacity for independent members of board to meet on regular basis by themselves, without management. Second is strong and effective leadership within the board.”
The report backs up its views with strong and practical reasons for directors to meet alone.
“Such meetings can be useful in providing feedback about board processes, including the adequacy and timeliness of information being provided to the board. At times, such meetings might also focus on the substantive issues that may be more difficult for some board members to discuss with management present.”
The report says these sessions are worthwhile in helping to build relationships and confidence – part of healthy governance culture. Like exercise, they should be regular and recognised as part of the governance process.
Meeting alone does not however mean meeting secretively. The report suggests that if there are any issues bearing on the relationship between the board and management, then the chair of these meetings should tell the CEO.
All of this indicates the need for necessary and healthy creative tensions between boards and management. It also underlines point made by Boardworks International magazine, that governing and managing require quite different modes of thought. Managers use ‘convergent’ style of thinking which reduces uncertainties and narrows the range of options to enable decisions to be made. Applied in boardrooms this could mean that ideas are cut off too early.
By comparison, governing involves ‘divergent’, open-ended thinking which explores the different dimensions and possibilities of an issue or idea.
“An open-mindedness and willingness to get all the ideas possible out and on the table first is critical,” the magazine suggests. For all this to happen both board and management need those most prized governance tools – mutual respect, and independence.
Paul Smith confesses to being journalist and company director.