Private Sector Boards: Why Governance Requirements Will Become Mandatory
Justin Moran, Governance, Risk and Internal Controls Director in Mazars, explores why recent calls for the reform of executive pay and the awarding of public sector contracts to companies are the early warning signs for mandatory corporate governance requirements in the private sector.
Justin also provides six steps to improved corporate governance for private sector business.
Recent calls for the reform of how executive pay is set and requests for companies awarded public contracts to publish more details on pay and bonuses should serve as a wakeup call to private sector boards. Indeed, the recent controversies surrounding IBRC and Siteserv and NAMA’s Project Eagle have led to politicians calling for a tougher corporate governance regime to also apply to private sector companies. In particular, where public interest benefit is at stake.
Traditionally, our corporate governance environment has followed developments in the UK and it is no co-incidence that calls for reform come at a time when our near neighbours have launched a green paper on Corporate Governance Reform. The green paper “focuses on ensuring that executive pay is properly aligned to long term performance, giving greater voice to employees and consumers in the boardroom, and raising the bar for governance standards in the largest privately held companies.”
The focus on large privately held companies is of particular interest and will lead to greater calls for the introduction of mandatory governance requirements for large private companies or private companies where there is public interest benefit at stake. Indeed, the recently introduced compliance statement obligation for the directors of large companies is potentially a sign post towards a more mandatory regime.
When asked how best to describe their approach to corporate governance, a recent Mazars survey revealed that 60% of private sector businesses did not have formal or well-structured corporate governance processes. Of more concern, 20% of private sector businesses stated that they “just do it”.
Recognising these survey findings, I recommend the following six steps to improved corporate governance for private sector business:
1. Aligning the governance structure with the growth of the company
Identifying where the company is positioned within the corporate lifecycle is key to determining its governance needs. It is imperative that companies strike a balance between what has been effective in achieving their success so far, and what strategies can sustain longer term success.
2. Identify and promote the intangible asset of culture
One of the significant challenges facing boards is identifying how to strike the right balance when seeking to understand and develop the intangible asset of culture.
Boards can start by asking: what are the vision, mission and values of the organisation and how well are these articulated? What behaviours are desired and undesired within the organisation? How is the ‘tone at the top’ set and is it permeating throughout the organisation?
3. Board composition and structure
It is well recognised that not having the correct people with the necessary skills is a huge impediment to development as a board. A key step is to invite external directors (non-executive directors) onto the board. More diverse board composition generates a significant impetus towards better governance and is likely to have a significant impact on the culture of boardroom decision-making.
4. Maintaining the appropriate balance of formal processes
It is important that the board implement a combination of both formal and informal processes, which are reflective of the maturity and culture of the organisation.
Board meetings should be adequately chaired, engaging and ultimately add value to the organisation. It is hugely counterproductive if meetings evolve into ‘talking shops’ without effective decision making processes.
High quality and up-to-date management information, which helps the board understand and analyse key performance data and indicators, should be used.
A clear understanding and focus upon performance data can underpin the board’s role in setting and monitoring CEO and executive level performance objectives and the approach to remuneration.
5. The importance of informal processes
Many boards often overlook what may be considered ‘informal processes’ when seeking to improve board effectiveness. It should be remembered that board conduct, decision-making and effectiveness are dependent on a combination of factors including relationships, teamwork and communication. Investment of time and commitment in building strong relationships among board members will normally lead to improved outputs and performance.
6. Focus on risk management
Boards (including non-executive directors) need to ensure that there is an open and honest discussion on key risks impacting the business. Private sector businesses, in particular, need to allow sufficient time to clearly articulate the risks facing the business and to ensure regular communication amongst the Board and senior management on the changing nature of such risks and how they are being actioned. Owing to the increasing complexity of such risks (whether strategic, financial, operational, legal, IT or human resources), Directors are also seeking independent assurance in the form of technical and advisory based internal audit skills to help Boards and senior management navigate such challenges.
Justin Moran is a Director in the governance, risk and internal controls practice in Mazars. He is a fellow of the Institute of Chartered Accountants in Ireland and a Certified Information Systems Auditor. He has over 14 years’ experience in advising organisations in the specialist areas of corporate governance, risk management and internal audit. Justin has led a large number of governance reviews across a range of sectors to help organisations improve their governance structures, processes and performance. He has significant knowledge and experience of implementing governance frameworks within the private sector and also advises public sector, not for profit and regulated entities on governance, risk and compliance frameworks.
Justin Moran can be contacted at: Tel: 01 449 4461 or Email: firstname.lastname@example.org
This first appeared on the Institute of Directors website in April 2017 at iodireland.ie