Where does oversight end and interference begin?
This was a question that kept recurring at recent round table meetings for directors hosted by Board Intelligence to discuss issues raised by the Financial Reporting Council’s draft revised UK Corporate Governance Code.
The main prompt was the FRC’s proposal that remuneration committees should “oversee remuneration and workforce policies and practices”. Some participants raised practical concerns — that this would be beyond the capacity of already very stretched committees. Others objected in principle, arguing that it was an intrusion into matters that were rightly the responsibility of management.
Elsewhere in the revised Code, the FRC suggests that the nomination committee should “oversee the development of a diverse pipeline for future succession to board and senior management appointments”, which arguably raises the same issues.
Determining the extent to which the board needs to know about, and get involved in the detailed operations of the organisation they lead, is something that is genuinely difficult to get right. Directors find themselves being pulled in opposite directions.
On the one hand, directors have a legal duty to be diligent, and there is a trend in regulation increasingly to treat them as quasi-managers, especially in the financial services sector. In addition, there is an unrealistic belief that boards should be capable of being all-seeing and all-knowing, which leaves them feeling exposed to the court of political and public opinion. All these factors can make directors want to dig deeper and deeper.
On the other hand, directors commonly complain that they spend far too much time in board and committee meetings on compliance and operational matters at the expense of strategy and risk, and this is borne out by looking at the papers they receive. A survey carried out by Board Intelligence and ICSA: The Governance Institute found that over two-thirds of company secretaries think that the board pack is too focused on operational rather than strategic issues.
Boards cannot afford to allow themselves to become too bogged down in detail or succumb to the temptation to micro-manage. That encroaches on the board’s ability to provide the leadership and vision that is required and can damage the relationship with management.
However, directors’ ability to do their job effectively has to be underpinned by a fair amount of knowledge about and involvement in the organisation. Not just understanding the business model, strategy and drivers of future success, but also being able to identify and deal with the things that can derail that success. That involves a degree of digging around, to identity potential problems.
For what it is worth, I think the FRC has got it about right with its proposals to extend the remit of the nomination and remuneration committees.
If the job of the board is to secure the long-term future of the organisation, then it needs to be satisfied that the future leaders are being developed.
If the job of the board is to secure the long-term future of the organisation, then it needs to be satisfied that the future leaders are being developed. The public debate about pay is increasingly about fairness as well as greed — as witnessed by the new gender pay gap reports and the forthcoming requirement for companies to publish their CEO: workforce pay ratio. So it seems right that the board should take a view on pay across the organisation as part of its responsibility for promoting a positive corporate culture.
Of course, boards and their committees should not be setting pay rates at all levels of the organisation or determining the career paths and development programmes of middle managers. But I don’t believe that is what the FRC is suggesting.
There are many positions on the spectrum between utter indifference and unnecessary interference that boards can choose. Each organisation needs to identify the approach to oversight that is right for them. As with everything the board does, the appropriate degree of intervention in operational issues is a matter of judgement and may change depending on the circumstances.
There is no such thing as hard line between oversight and operational management that cannot be crossed. Directors should not be confined to the boardroom, either literally or metaphorically, but must be free to walk the floor to the extent they feel necessary.
We host a number of roundtable dinners throughout the year for chairs, CEOs and Company Secretaries. If you would like to challenge the board status quo, and stimulate fresh thinking around good governance, get in touch and request a seat.