The concept/term Corporate Governance has featured regularly in discussions both within the professional and academic community since the 1990s and has become even more prominent following significant cases of corporate failure which had overarching adverse effects on the global interconnected economy. The link between poor corporate governance practices and excessive risk-taking that led to the downfall or bail-out of significant financial institutions, necessitated a discussion on how to strengthen corporate governance and shield off future similar cases.
The success of a corporate governance framework is directly related to the effective functioning of the Board, that is ultimately responsible for securing the implementation of best corporate governance practices.
There are seven critical factors that define whether the functioning of a Board is effective and delivers the desired results. Analytically these factors are:
Role Clarity (defining the duties and responsibilities of the Board)
The legal duties of Directors can be divided into two categories, (1) those that have to do with the fiduciary duties of loyalty and good faith, and (2) those that focus on duty of care, skill and diligence. These two categories are outlined in the Figure below:
Composition of the Board & Committee Structure
For individuals that have been nominated to join a Board of Directors of a financial institution to be allowed to do so, they first need to be assessed and approved by the relevant Supervisory Authorities. The same applies for employees that hold key executive positions within a financial organisation.
The supervisory authorities set key criteria that need to be met and these include: Experience; Reputation and Honesty; Time Commitment; Collective Suitability; Competence and Capability; and Financial Soundness. Each regulator may choose to add more criteria or modify the above accordingly.
Regarding the committee structure, according to best practices and the prevailing norm, each Board of a financial institution should have at the least the following four Board Committees: (1) Audit, (2) Risk, (3) Remuneration and (4) Nomination. Additionally, the Board may decide to have additional Committees such as ‘Strategy’ or ‘Restructuring’, depending on the needs of the organisation.
Specifically, at the European level the EBA Guidelines on Internal Governance clarify that all significant institutions must establish risk, nomination and remuneration committees to advise the management body on its supervisory function and to prepare the decisions to be taken by this body. A separate Audit Committee needs to be formed by Public Interest Entities according to EU Legislation (Directive 2006/43/EC – Article 41).
Chair of the Board
The Chair of the Board is responsible for the leadership of the Board, ensuring effectiveness in all aspects of its role and setting the agenda. The Chair of the Board has ultimate responsibility for the board and so has a role distinct from that of the other Non-Executive Directors. In some companies this may be close to a full-time role. Consequently, there is typically a significant fee differential between the chairman and other Non-Executive Directors.
As a general principle, the Chair of the management body should be a non-executive member. Explicitly, reference is made to this in the relevant UK Code and EU Directive.
Relationships in the Board
Board members are bound together both legally (joint and several liability – i.e. when multiple parties can be held liable for the same event or act and be responsible for all restitution required) and reputationally. This creates the need for the Board to operate united and in a collaborative manner.
Nonetheless, one cannot guarantee that members of the Board will manage to work efficiently and built constructive relationships, even if the Board Members are the most competent, experienced and successful professionals.
In order to build efficient and effective teams, its members (i.e. the Directors of the Board) need to establish a relationship between them built on respect and trust.
Knowledge of Industry & Organization
The aim for each new board member is to be able to effectively contribute to the Organisation as quickly as possible. For this to be achieved, a well-structured and effective induction programme must be offered, while at the same time training courses that will fill any possible gaps and strengthen the relevant competencies of the board members must be offered throughout a director’s term.
Efficient Meetings
In highlighting the importance of Board Meetings and the need for them to be effective, Simone Joyaux (an expert consultant for fund development, board development and strategic planning) notes that: “The board does governance at its meetings. In fact, the only time that governance happens is when the board convenes at its meetings.”
The following factors help to secure the appropriate conditions for achieving effective meetings: Agenda Clarity and Timing; Supporting Information to Board Members; Time Management of Meetings; Prioritising Issues; Meeting Attendance; Meeting Duration; Documentation of Meetings; Implementation of Decisions; Maintaining focus; Meeting Procedures and Participation of Board Members
Evaluation & Continuous Development
Given governance failures, relevant stakeholders in financial institutions are more alert regarding the performance of Boards. As a result, they are seeking greater board effectiveness and accountability and are increasingly interested in board evaluation processes and results. Even more, regulators are now adamant in setting a structured timeframe indicating the frequency with which such evaluations must take place. Such evaluations should assist an organisation in further enhancing the continuous development/training programmes designed and offered to the board members.
In response boards that aim to boost their credibility are proactively seeking to enhance their own effectiveness and to address stakeholder interest more clearly by enhancing their board evaluation processes and disclosures.
In those cases where the Board manages to meet the above factors, through the adoption of the relevant practices, policies and procedures, then the possibilities of delivering successful results are greatly enhanced. Otherwise, the Board may be caught up in lengthy, non-productive and inefficient governance practices that will jeopardise the delivery of envisaged results and possibly raise concerns by the regulator and/or the shareholders.
At EIMF we appreciate the importance of having an effective Board having witnessed the success of those firms who have knowledgeable and efficient Board members, Directors, and management. Take the opportunity to enhance your knowledge and skills by considering some of the upcoming learning opportunities:
- Directors’ Roles and Responsibilities | 13 October | Limassol
- Post-Graduate Certificate in Corporate Governance | Commences 21 October
- Corporate Governance for Financial Institutions | 23 October
- Directors’ Development Programme | Commences 2 November | Nicosia or Live Online
- Directors’ Roles and Responsibilities | 3 December | Nicosia or Live Online