Positioning boards in challenging times – Ensuring directors are effectively briefed
Few would question the value of director training – least of all Dr Grant Kirkpatrick, corporate governance consultant and economist, who will be speaking on this subject at this month’s CGC 2012. However, in this article he shifts the focus from general director training, something which all directors should already have, to the company’s in-house briefing of its directors on company specific challenges – a process with a particular relevance for the company secretarial function.
Around the world one of the most heard calls in almost every field is for training – or at least re-training. However, when applied to board members, company secretaries will need to be more diplomatic and specific: surely board members are there because they are already ‘trained’ in the sense of having appropriate business and professional experience? So what is intended and how to do it? It is argued here that business conditions such as technology developments are much as before, and are the stock in trade of a professional board member. However, there are new challenges that are more company specific and for which the board and board members need to be properly prepared – call it ‘positioning’, ‘briefing’ or even ‘board training’. Thus, rather than taking the board as exogenous or given by shareholders, company secretaries must seek to prepare the board so that it represents what the company really needs. It is a two-way street.
What are the new company-specific challenges?
Amongst the key services board members should rightly expect is to be appropriately inducted into the company when they first join the board. This is quite rightly not termed, or thought of, as ‘training’. The same applies to having board meetings in different locations and perhaps operating divisions. But companies are highly specific in many other ways and boards need to be well prepared to deal with them. However, to call it ‘training’ is to miss the nature of the challenge.
Company boards must oversee management as they respond to external market challenges such as new technology, or new markets as a result of market opening or deregulation. This is their stock in trade even though board nomination and election is sometimes deeply flawed and the best or most suitable candidate is not always nominated. What is new and quite firm-specific are other softer external conditions loosely termed ‘social’ or ‘environmental’ in the true sense of the word as external conditions.
Four factors stand out.
1. Environmental issues.
Though poorly specified by law and regulation, there is the quite general demand for companies to take environmental issues into account, such as liability for residues, rising energy prices, etc. This has now found form in the even looser concept of ‘sustainability’ that more investors are said to be taking seriously. There is also the Global Reporting Initiative and sustainability reports, and now demands for integrated reporting which pushes the already overloaded disclosure demands to their limit. It is easy to dismiss these demands as sectional and as fads, but there are potential risks for a company and not just reputational. Boards need to be positioned to deal with these challenges. It will not come easily to demand of boards to sign off on, say, integrated reports when the question of liability has not been thoroughly discussed. Boiler plating reports, as already happens with MD&A reports, will only raise suspicions that the board is trying to hide something.
2. Worker health and safety standards.
Around the world, worker health and safety standards are steadily rising and infractions are more frequently specified as criminal offences. This often means that board members might face criminal liability or at least the threat of it. They must therefore be assured that monitoring and control mechanisms are in place and be able to show (that is, prove) that they have undertaken their own due diligence.
3. Human rights.
Like it or not, human rights also represent a significant liability for a company about which the board must be fully aware. This goes even further now to the need to demonstrate that the company’s raw materials are not sourced from conflict zones, and perhaps even still further to the need to demonstrate that the company’s suppliers have not sourced from such zones. Thus the boundaries of company liability have steadily widened, as risk management professionals understand.
4. Product liability.
Product liability has tended to widen, demanding more attention by companies and their boards. The long-term toxicity of the product, for example, must also be considered and not just the danger to the actual user.
In these four areas it will be important for the board and its members to be fully informed or briefed in order to perform their monitoring and oversight role. They must be well positioned. Call it ‘training’ if you wish, the outcome should be the same. By their very nature these new challenges are highly firm-specific so that general training, which board members should already have, is not a useful approach. What is needed is full briefing of the board about these issues by the full-time staff, foremost among them in terms of coordination will be the company secretarial function.
Of course, other issues do arise that will require careful board preparation. To give an example, when Enron imploded ‘special purpose vehicles’ suddenly entered the popular and board vocabularies. To position its board, General Electric immediately organised a weekend meeting of board members to inform them about the issues and about exactly how GE was, or might be, affected. This brought together many company specialists with the task to brief or position the board.
What are the consequences for corporate secretaries?
Clearly, the corporate secretarial function has a major coordinating role to play, first in understanding the issues and then in being able to bring together the internal and, where necessary, external resources to prepare the board to fulfil its duties effectively.
As noted above, one aspect will be to enable board members to fulfil their duty of due diligence with respect to internal controls and risk management procedures. This goes well beyond the normal functioning of the audit committee. Business life and societal expectations have gone much further. A company might have excellent and sound financial statements but still fail important standards and expectations.
This does not take away from the importance of institutes of directors and others in preparing potential board members early in their careers. Imparting broad knowledge and experience really is something that can be termed training. Raising general awareness about issues such as corporate governance and health and safety issues is much the same. Once a director joins a specific board, however, the challenges will be companyspecific and much less general requiring a different approach by company secretaries.
Dr Grant Kirkpatrick
Dr Grant Kirkpatrick is a corporate governance consultant and economist, and was formerly the Deputy Head of the Corporate Affairs Division of the OECD. He will be a speaker and panellist in session five of the CGC 2012.