The art of building an appropriate governance framework
Financier Worldwide Magazine, October 2021 Issue
Peter Swabey, Policy and research director, The Chartered Governance Institute UK & Ireland.
Today’s businesses are held to incredibly high standards, subject to intense scrutiny by investors, regulators, the media and the general public about the way they operate and the impact they have on society. With big societal issues such as climate change and social injustice now regularly front-page news, businesses are being held to account for such a wide scope of issues that having an appropriate governance framework in place has become an essential part of the business toolkit.
An important basic tool for effective board oversight, a governance framework provides a mechanism for board directors and senior management to have a clear understanding and oversight of expectations, objectives, performance, risk appetite and reporting requirements. By setting objectives, policies, values, culture, accountabilities and performance, it ensures that board members receive the information they need to be assured that a company is being run properly and is meeting its strategic goals.
A good governance framework helps to clarify who has a voice, who makes decisions and who has accountability. Accountability, fairness and transparency are the central tenets of good governance, and the board is the ultimate governing body. While the role of the board is to focus on strategic matters, compliance and oversight requires a certain amount of insight into operational matters. Directors have a duty to promote the success of a company and, in fulfilling their legal duties, they must seek information from the senior management team to assure themselves that the company is being run in a sustainable, professional and intended manner.
In doing so, it is important to remember that assurance is not the same thing as reassurance. Assurance generally comes from independent and validated evidence. Within the boardroom, it requires board members to be given evidence that decisions are being implemented and strategic aims are having the intended outcome. Reassurance, on the other hand, is the act of confirming someone’s opinion or impression and restoring confidence. Board members need assurance rather than reassurance as they have a legal duty to provide challenge and stewardship.
Boards usually comprise a chair, several non-executive directors and a senior independent director. Depending on the type of organisation, they might also include the chief executive and a few other executive directors. Regardless of the size of the company, all directors have duties under section 172 of the UK Companies Act 2006. These duties mean that, in promoting the success of the company for the benefit of its members as a whole, a director must have regard, among other matters, to the likely consequences of any decision in the long term, the interests of the company’s employees, the need to foster the company’s business relationships with suppliers, customers and others, the impact of the company’s operations on the community and the environment, the desirability of the company maintaining a reputation for high standards of business conduct and the need to act fairly as between members of the company.
In the health sector, a board assurance framework (BAF) has been used for many years to provide non-executive directors with triangulated information to support management assertions that an organisation is well run. It is a structured approach for ensuring that boards get accurate and relevant information, at the right time and with a level of assurance attributed to each source of data. It pulls together all relevant data pertaining to an organisation’s strategic goals and the risks it faces.
BAFs are useful tools in that they identify and map the main sources of information available and can highlight any gaps that might require addressing. They provide a clear and comprehensive overview of an organisation’s risks, including the management and mitigation of those risks, help to identify where there is insufficient assurance available, highlight areas of overlap, duplication or disproportionate control mechanism, flag up where control mechanisms are ineffective or inefficient, focus limited resources at those areas of greatest need, and provide evidence to support formal governance statements.
In building a BAF, the board will need to answer several questions to inform the degree of assurance required, such as where the assurance comes from, be it internal, external or independent, if there is assurance from more than one source, if the information and the assurance it seeks to offer is relevant, timely, accurate and reliable, and if the level of assurance is proportionate.
The role of management is to review and implement the mechanisms that will provide assurance that processes and controls are in place, followed and are effective in achieving the organisation’s objectives. The audit committee will give advice to the board on the status of governance arrangements, including risks and internal controls and sources of assurance. The board, however, is collectively responsible for the direction, management and control of the company and ensuring oversight for the proper use of company resources.
The BAF should be aligned to a company’s strategic plan and key outcomes detailed therein. Assurances should be available and sought for each strategic aim. The BAF should cover those areas that impact on the achievement of those aims, alongside the more fundamental delivery and control systems in place. Reviewing the governance arrangements of the organisation will help the board to decide whether policies, procedures, internal controls, management supervision and assurance mechanisms are effective and proportionate.
Assurance could come in the form of internal reviews and checks, customer feedback, internal audit reports, external audits, benchmarking, externally facilitated governance reviews and regulatory inspections.
The design and implementation of the BAF should offer something of value to both the senior management team and the board. A strong governance framework will include clear links between strategic aims, the risks that could hinder the achievement of each strategic goal, a clear format that mixes both verbal and visual data, a long-term overview of trends, an appropriate level of detail and a rationale for the risk score attributed to each strategic aim.
A governance framework involves looking at matters reserved for the board – those issues on which board members will want direct feedback and those issues on which they are happy to rely on the chief executive’s report. The governance architecture will therefore consist of key documents and policies building out from the articles of association, which are likely to include matters reserved to the board, as well as schemes of delegation, terms of reference for committees and core board policies. These could be seen as the backbone of the company’s governance with the BAF providing additional structure and support.
Appropriate board support in the form of a governance professional is essential. Having a corporate calendar in place will assist the governance professional and chair in terms of deciding items to be placed on the agenda of each meeting. A corporate calendar can help the board identify those issues that need to be addressed ahead of key external dates (public disclosures) and achieve a balance in board packs that has the right amount of historical data, strategic issues and other development needs. The calendar is also useful to align and maximise communication flows between the board and its committees and the operational activities of the company.
Finally, it is important to remember that having the right boardroom behaviours in place is just as important as building an appropriate governance framework. While a governance framework will help to build assurance, creating a culture where decisions are made with greater consideration for the wider impact of the organisation beyond the traditional emphasis on just financial performance and strategic objectives is crucial in the modern business world.
Peter Swabey is policy and research director at The Chartered Governance Institute UK & Ireland. He can be contacted on +44 (0)20 7612 7014 or by email: [email protected].
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