How to Avoid a Scandal: Prioritising Quality Governance

“Poor governance and controls” are still being flagged by the FCA as key drivers in causing consumer harm.[1]  But given there are several governance regulations in place aiming to prevent this, such as the Corporate Governance Code, the UK Stewardship Code, and the Wates Principles; why is consumer harm still occurring?

Consumer harm is still occurring as many firms adopt mindsets which focus on handling the immediate problem rather than fixing its underlying causes. This was explored in our recent blog on Purposeful Cultures. This short-term mindset is also seen in how firms respond to governance regulation.

A new reporting requirement in the Companies Act (Section 172) means that large companies must include a separate governance statement in their Annual Report. This statement must detail how the company complied to section 172 of the Companies Act, which requires directors to promote the long-term success of the company for all its stakeholders not just its shareholders. Despite stakeholder consideration and long-term decision making being crucial for the longevity of a firm, too many firms viewed the requirement as a short-term box-ticking exercise.[2] Often, organisations were looking for examples of where decision making did consider stakeholders and long-term impacts rather than challenging the many meetings where this did not occur. The former approach typifies focusing on the immediate regulatory problem, at the expense of the underlying risk of consumer harm.

Firms can only be confident that good governance is taking place, and that regulatory expectations are being met, by focusing on the overall quality of governance, rather than the granularity of compliance to regulation.

Organisations should focus on the following three keys areas to drive a higher standard of governance overall and reduce the likelihood of consumer harm: stakeholder engagement, good-quality meeting materials, and regular governance structure reviews.

1. Stakeholder engagement

Organisations must identify their stakeholders to ensure there is an engagement model in place which captures potential stakeholder impacts. This is the backbone of good-quality stakeholder engagement and without this, good governance cannot take place. Some firms may already have engagement programmes in place, but less established firms must take action to identify key relationships and highlight dependencies between different parts of the business and different stakeholders. This should then be used to identify the most appropriate engagement channels to ensure frequent, meaningful and in-depth engagement with all company stakeholders.

Once a good quality engagement model is in place, the outputs must be leveraged in the boardroom and other governance for a to ensure informed decision making. This can only be achieved through devoting time and materials to stakeholder considerations across every step of the governance process, from agenda planning to high-quality meeting minutes. It is crucial that organisations ensure enough meeting time is allocated to decision items to allow for full and challenging discussion, as true collective agreement is harder to reach when rushed. Shorter agendas with more time allocated for each item should be prioritised, rather than having “busier” agendas with less time for challenge and debate.

2. Good-quality meeting materials and debate

Good-quality governance is built on high-quality meeting papers, and appropriate debate and discussion. These can both be improved by prioritising the following two areas:

a. High-quality meeting papers are crucial as if meetings are not getting the correct information or where matters are omitted, it is impossible to have good governance. Papers must be of sufficient quality to allow meeting members to engage and drive the challenge and debate needed. It is through challenge and debate that the value of a governance meeting can be realised, as the discussion allows the skills and experiences of meeting members to be leveraged thus ensuring the best decision is reached. This is also why it’s important to have a diverse group of members on senior governance meetings to prevent “group think” and the likelihood of poor decision making.

b. Recurring questions relating to a company’s purpose, stakeholder implications, and long-term effects of a decision. Standard questions must occur in every paper which focus on how a decision affects the company and its stakeholders in both the short and long term. Responses should be supported by metrics which reflect the implications and potential results of a decision in the long term, rather than focusing on the immediate “good news” results.

Any changes to the governance approach must be accompanied by specific training for all governance participants including paper authors who do not attend the meeting. This is to ensure genuine understanding of the importance of stakeholder consideration, long-term impacts and how they are crucial to a company’s purpose and longevity.

3. Governance structure reviews

Inefficient governance is a common problem for firms, with new committees being set up as the firm grows, changes priorities or responds to regulatory rulings. But this growth of meetings prevents good governance rather than encourages it, as overlapping committees and unclear escalation paths prevent good decision-making and drain management time.

Organisations must regularly challenge its governance structures and approach to ensure they are fit for purpose. This can be done in several ways. Firstly, through in-depth reviews of both meeting materials and Terms of Reference to assess an organisation’s governance structure. This review must identify any overlaps or gaps in decision-making authority, the effectiveness of escalation paths, and whether meetings are operating in line with a firm’s culture, strategic and regulatory priorities.

This approach is best suited to smaller organisations and is unsuitable for large organisations as the scope will be too narrow and it will not identify duplicative or inefficient meetings. In these cases, a different type of governance review should be used, where firms identify all meetings taking place before analysing against requirements and streamlining where required. This approach is particularly useful for global organisations working across geographies and regions with multiple business lines.

To reap the full benefits, a governance structure review covering both approaches should take place regularly, at least once every two years.

Governance quality is key
In order to reduce the risk of consumer harm, firms must focus on their overall governance quality rather than finding examples of regulatory compliance. Through focussing on three key items: stakeholder engagement, good quality of meeting materials, and regular governance reviews, firms can improve the overall quality of their governance and thereby improve decision making and reduce the likelihood of consumer harm.

BCS has helped a wide variety of firms build high-quality governance structures and practices. We are experienced in all areas of governance including material reviews, governance effectiveness assessments, and governance design analysis and improvement.

[1] https://www.fca.org.uk/publication/correspondence/general-insurance-portfolio-letter.pdf 4 September 2020

[2] https://www.icsa.org.uk/assets/files/free-guidance-notes/the-stakeholder-voice-in-Board-Decision-Making-09-2017.pdf