The “tone set at the top” has become a byword for a company’s moral compass and cultural commitment to executing the best standards of stewardship and compliance across its operations. But where does the oversight and defence of that culture rest? It is here that a company’s board is critical, both as a guardian of a corporate culture and in shaping the dialogue with the market and stakeholders.
As markets and their demands have grown in complexity, the range of issues that today’s boards have to tackle has steadily expanded. They must address areas ranging from internal controls, executive remuneration and employee board representation to the evolution of corporate governance and regulation. There has been a clear effort by regulators to ensure board members provide the right level of oversight to protect and enhance the financial soundness of the business.
The development of corporate governance standards and the role of the board was given great impetus by reforms introduced in the wake of several high-profile corporate failures in the 1990s. Those reforms reforms – particularly around the role and composition of the board and board committees; the appointment of, and rules of operation for, external auditors; the distribution of rights and powers between management, shareholders, and other stakeholders; and the protection of whistle blowers and penalty enhancement of corporate fraud – boosted accountability and sought to ensure the board could provide robust stewardship of the company it served on behalf of shareholders.
Board structures vary considerably by jurisdiction. In the US and UK, for example, companies generally have a single board with specialist sub-groups for areas such as audit and compensation. In other markets, it is not uncommon to have an executive board overseeing a company’s ordinary operations and a supervisory board which provides guidance on high-level and strategic issues. Whatever the format of the board structure, it holds a fiduciary duty to protect the company’s profitability in setting the tone of its dealings with management.
The past few years have brought home very clearly the vital importance of clarity around corporate culture, ethics, values and purpose at the top of an organisation. It is also the board’s role to ensure that these are reflected in corporate behaviour and drive longer term strategy. Reputational risk management rests on being clear about the importance of this task and the impact it has on the health and profitability of the business.
The second plank of this renewed focus is to ensure that management and the board are fully briefed on the financial, technology and operational risks at the highest level and that these are being handled appropriately.
Finally, boards should look to align values and incentives and ensure management is responsive to the intensifying focus on social values from the wider society.
Today’s exceptionally volatile markets and global uncertainty have injected a new element into the mix. This is an area where the board, with its more diverse set of backgrounds and experience, can bring a wider perspective on future challenges. This includes ensuring management is fully prepared for a range of business outcomes and potential crises that reflect the changing dynamics of modern markets. It is in this area where boards can – by opening a wide dialogue with senior management – bring the greatest value to the company.
Finally, boards are under pressure to become more representative of the communities in which they are based. The rather slender representation of women and minorities on executive boards remains a challenge, and highlights the reality that in the boardroom and the C-suite, the demands of a changing world require sharp attention. Diversity strengthens the resilience of both companies and boards to the profit of both.
THIS ARTICLE WAS PRODUCED IN PARTNERSHIP WITH THE FINANCIAL TIMES