Sharan Gill, writer, lawyer and contributor to CSj, reviews a paper published earlier this year by the Thought Leadership Committee of The Chartered Governance Institute, which looks at one of the most debated and controversial areas in governance – the accountability deficit on modern boards.
Enhancing Individual Director Accountability grapples with the perennial governance debate on form versus substance – highlighting the growing inadequacy of relying on regulation or the intervention of legislation alone. Many recommended or required board governance practices exist because they reflect legislative requirements or the results of studies, reviews or updates, and are often not due to any impetus from within. The paper argues that the very preponderance of these regulations might have led boards of directors to be fixated on adhering to the minutiae of form, for example how the board is organised, to process matters, such as how the board delivers its oversight responsibilities. This focus extends to board reviews, where again lip service adherence to structure and processes can lead to a lack of any real enforcement of accountability.
The paper does recognise that structural matters and process considerations are undoubtedly crucial starting points. The argument, however, is that the effectiveness of these same processes can be compromised without a real understanding of the relationship and behavioural dynamics within the board.
This challenge can become particularly critical when there is a tussle for influence or balance of control between the board and management, or between board members themselves. Difficulties can also arise in adopting the Western model of board governance, with its emphasis on moving away from ‘static hierarchical accountability structures’ towards ‘corporate teamwork’. The paper makes the blunt observation that ‘individualism may be too hardwired into our psyches for corporate teamwork to function effectively within the boardroom’. Instead the inverse is more likely to be true, with powerful personalities dominating the boardroom, leaving other board members in meek acquiescence. Many boards simply ignore the presence of these relationship factors, with the excuse that they are ill-equipped to do otherwise. The hard reality is that the bottom line takes priority and any progress on enhancing boardroom efficiency ‘has hardly reflected the same rigour and commitment often applied to the pursuit of organisational results’, the paper states.
Double standards in the boardroom
The paper also highlights the lack of mechanisms for aligning directors’ conduct with an organisation’s values. This inevitably leads to a double standard between board members and management, whereby the latter is held to account and the former is tolerated. ‘Breaches in appropriate boardroom behaviour go beyond mere slip-ups to blatant examples of poor performance and conduct, for example, refusing to acknowledge procedures or impatience with agenda items’, the paper states.
The paper goes on to lay bare the inherent irony that would result if the board became increasingly demanding in their oversight of managers and their behaviours, while steering clear of setting complementary expectations of their own behaviours. A particularly pertinent example is the significant time and resources spent by boards in assessing a CEO’s performance, with little in the way of board self-reflection or weighing up the performance of individual board colleagues.
Attempts, however, to call out inappropriate behaviour or addressing gaps in the trust and confidence between boards and those they oversee tend to be ill-defined and stymied by flat-footed responses. One would think that it would be logical to expect that if organisations require employees to undergo regular performance assessments, then directors themselves should be the first to run the gauntlet of the evaluation process to demonstrate its value, relevance and commitment to it.
A lack of meaningful personal accountability
Despite the growing emphasis on individual accountability globally and in Hong Kong – both the Securities and Futures Commission and Hong Kong Exchanges and Clearing Ltd (HKEX) have made this a key focus of their advocacy and enforcement work – it would appear that much of the work over the past several decades to help boards increase their effectiveness has overlooked or sidestepped the implications for individual board members. The paper takes this bull by the horns and highlights the prevalent lack of personal accountability on the board, pointing out that it occurs even where there is a focus on culture and behaviours. It suggests that the focus on directors’ skills, knowledge and experience in the nomination process is not complemented by consideration of nominee behaviours and their individual ability to contribute in meaningful and constructive ways in a group or team environment. ‘As a result, boards get what they ask for, highly successful individuals who may or may not have the temperament to function well in the boardroom,’ the paper states.
The adoption of a process to assess individual director performance and contribution has received slow uptake on the part of the board, despite similar processes being the norm for management. Board performance reviews are generally a review of the board as whole. Where there is a review of individual directors, it tends to be perfunctory. When we look at the majority of board questionnaires or workshop scripts, there is a heavy focus on process or effectiveness as a collective group. Even though there may be the occasional questionnaire on individual performance, the actual responses in rating fellow board members are far more likely to be polite than searching. And where there is an issue involving feedback about an individual director’s performance, this again tends to involve a process with little visibility on the individual level and is often dealt with one-on-one between the chair and the person concerned. Many other directors would often have no knowledge of the process involved, hence having little chance to contribute in a meaningful way.
There is the oft-quoted argument that there is a certain logic applied to this reluctance to hold directors to account for their meeting attendance etc, the argument being that this might disrupt collegiality within the board. One might ask how collegiality contributes in any meaningful way to governing well and performing the oversight role expected of the board on fellow members who are executives in the business.
Moreover, there is the perception that directors should be above the fray of personal performance assessments. The paper argues, however, that it is time that boards demonstrate the requisite leadership of their role and responsibility by example rather than by mere decree. The author believes that there clearly needs to be some sense that not only is the board being evaluated as a whole but that individual directors are as well. ‘Accountability must go beyond skills, knowledge and experience… adoption of processes to address individual director performance and contribution are critical.’
Globally, recognition that boardroom behaviour is a priority that needs to be addressed has taken root in emerging governance standards. The UK Financial Reporting Council in its Guidance on Board Effectiveness (2018) makes the pertinent point that directors ‘need to reinforce values through their own behaviour and decisions. To do this effectively, executive and non-executive directors may need to increase their visibility’. There have been similar initiatives in Australia, where there has been a focus on building a corporate culture that will mitigate the risk of misconduct.
Ultimately, accountability for corporate culture is within the purview of an organisation’s board of directors. To successfully develop a culture of openness and transparency, the behaviours of directors need to be commensurate with the stated values and principles of the organisation. As former US Securities Exchange Commission Chair, Mary Jo White, noted ‘Ensuring the “tone at the top” for a company is a critical responsibility for each director and the board collectively. Setting the standard in the boardroom that good governance and rigorous compliance are essential goes a long way in engendering a strong corporate culture throughout the organisation.’
The imperative going forward
The paper highlights the need for greater recognition of the importance and value of assessing a director’s effectiveness, and suggests the adoption of processes and practices that address this need.
- Poor behaviour needs to be called out when it manifests itself, ideally by the chair but, failing that, anyone who witnesses it.
- Complaints against any director should be reported to the full board and handled by a set procedure.
- Directors should self-police and either defer to the norms that are explicitly identified or remove themselves from the board.
- Diversity in any form, be it gender, race etc, goes beyond expanding board capability. It also serves as a preventative measure against an adverse culture becoming ingrained and acceptable.
- Rigour should be applied with the recruitment process of directors, and should include an assessment of whether a prospective director’s personality aligns with the board’s chosen culture and behaviours.
- To encourage accountability, disclosure of directors’ qualifications should include the particular qualities and capabilities for which board members have been nominated, as well as how they intend to contribute to the board.
- Directors should meet regularly outside the formal setting of the boardroom, providing an opportunity to raise matters in a low-key manner. Independent directors should be encouraged and expected to meet a cross-section of management and staff.
- The chair is a key figure in monitoring conduct and behaviour. This accountability should be supported by the company secretary or a respected senior director. They should be tasked with reminding the chair of these obligations.
- All policies and procedures, especially any code of conduct, must apply equally to directors as well as management or the broader employee group.
- Proactive adoption of individual director assessment facilitated by third parties will focus attention on the need for directors to deliver on their obligations. A third-party evaluation should ideally be proposed by the company secretary and approved by the full board. The process used should adopt maximum rigour, including observation at board and committee meetings, and interviews with each board member and members of management who have regular interaction with the board.
- To preserve independence and objectivity, no assessor should carry out more than two successive assessments. The assessor should be expected to suggest opportunities for improvement for each director. The findings should be discussed with each director and the chair, after which an overview should be prepared for consideration by the governance committee, prior to formal reporting to the whole board.
The Chartered Governance Institute (CGI)Thought Leadership Committee publishes both research papers and opinion papers – John Dinner’s Enhancing Individual Director Accountability is an example of the latter. It is a strongly argued piece by someone with a good deal of experience in board governance consulting. In an era when individuals are increasingly being held to account for their actions, and in the midst of a ruthless pandemic that has cut down even entities that are run well, the paper’s attempt to root out the causes of boardroom dysfunction could not have come at a more opportune time.
What remains unsaid, however, is the lack of suitability of the Western model in the Asian context of boards that are dominated by controlling shareholders. Unlike the West, the reality of Asian boards is that they are often dominated by controlling shareholders who run the business, with non-executives on the board often treated politely but not seen as experts in the area of operations. This conundrum would be a good theme for future CGI thought leadership papers – addressing the inherent difficulty of board members who are appointed by the same people whose conduct they are expected to oversee. The question naturally arise: what would be the incentive of board members to be challenging, rather than just be nominally independent when they are appointed to the board?
On the question of the accountability deficit on modern boards, however, John Dinner’s paper has thrown down the gauntlet – it is time for all parties to take up the challenge and initiate real change.
Sharan Gill is a writer and lawyer based in Hong Kong.
Enhancing Individual Director Accountability was authored by John Dinner, President of John T Dinner Board Governance Services, and a member of The Chartered Governance Institute’s Thought Leadership Committee. Published in April 2020, the paper is available on the CGI website: www.cgiglobal.org.