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Corporate governance

It’s Not Easy Being a NED

I suspect that many people have no idea what a big impact non-executive directors (NEDs) can have on an organisation.

If anything, the man on the Clapham omnibus probably thinks of non-execs – if he’s heard of them at all – as white men with grey hair who get together every so often for a quick meeting and a decent lunch, in exchange for a sizeable chunk of change.

Although Boards are struggling with many issues – and diversity is one of them – this is a very outdated view of a NED. A good NED can be an extremely valuable (if often unsung) resource for the Board and for the business as a whole, and the role of the NED has become increasingly significant in recent years.

NED responsibilities include contributing to developing the corporate strategy, ensuring that reporting is accurate, and checking that the risk management system for the company is robust and comprehensive. They also work on remuneration and succession planning for the executive team. They have a role in assuring compliance with governance codes, ethical standards and best practice, as well in protecting shareholders’ interests. And because (if independent) they have no financial stake in the business other than salary, they should be able to provide an objective view.

NEDs should be able to contribute their expertise in other companies and other industries, enabling the Board to see different perspectives. Because of their experience ‘from elsewhere’ they may be able to see risks and opportunities that the executive team has overlooked. But they need to understand this business well enough that their advice doesn’t have a negative impact…

And while the Board should function as a team, executives and non-executives together, the NEDs are also expected to monitor the behaviour of the executives, and to challenge them on their decisions.

All this is a difficult balancing act; the executive team probably hold their roles because they are highly competent, strong-minded and forceful characters, with a great deal of expertise in their areas. A good NED will be able to provide a counterpoint to the existing team, while not being drowned out by it.

Why mention this? Well, the NED awards are coming up again, with awards available in 5 different categories: FTSE 100; Not-for-Profit or Public service; Quoted; AIM companies; and unquoted companies. And there’s an overall winner too: last year this was Mary Francis, Senior Independent Director (SID) at Centrica, who was commended for her role as SID and as Chair of the company’s Corporate Responsibility committee.

There are just over 3 weeks left to nominate before the October 21 deadline; is there a NED you feel has excelled this year?

He got paid how much?

Signet Directors Remuneration
Signet

We recommend that for transparency and openness, information about the remuneration of management and their share options, should be drawn out and specified explicitly on the site, not left buried in the annual report.

Ideally, this would also be linked to information about the remuneration policy, and to information about the directors’ dealings in the company shares.
[Read more…] about He got paid how much?

Corporate Reputation in the Financial Sector

Rebuilding TrustIn the financial sector, the trust stakeholders have placed in companies has been damaged both at industry and company level whether due to failures in governance, risk management or ethics, or due to excessive reward structures.

Companies need to take this issue seriously to rebuild their reputations. So what should they do?

There are three key groups of actions.

Demonstrate good practice and compliance

To start with:

  • Given the visibility, dissection and discussion of the various problems that occurred in the sector, companies need to demonstrate good practice in all these problem areas even if during the crisis some or all of the issues did not impact them.
  • If the company have been affected by issues, they should show how those areas have been addressed and verify that the actions have been done.
  • They should be among the first to address new recommended industry practices (e.g. the Walker recommendations) and to communicate their compliance with them – and how they have met them.

Apply crisis management techniques

The second group of actions is related to standard crisis management techniques.

Few companies responded to the financial crisis by applying crisis management techniques to their online communications, for instance by:

  • business leaders acknowledging mistakes
  • empathising with stakeholders and indicating how seriously they take the issue
  • describing the root causes of the problems
  • stating the lessons learned
  • providing their action plan to address the issues.

Even now, as we wonder if the storm has passed or if there is another to come, there is still an opportunity for companies to take a leadership position by communicating what their sector has learned from this.

Show – not tell – trustworthiness

The last area is for companies to outwardly demonstrate trustworthy behaviours in their actions and communications:

  • better transparency means more explicit information on how you ensure effective oversight of the company, how you manage risk and how you incentivise your senior people
  • better ethics means going beyond the standard code of ethics – and talking about how you embed ethics in your business through your training and compliance processes
  • better listening means demonstratively providing the means to listen to – and interact better with – stakeholders through the channels you use – including the website.
Reputation in Financial Services
June 22, 2010, London”The past year has seen tremendous change in the financial services sector…

It is time, however, to look forward, to put the lessons from the past in context and look to see how communications professionals can focus on their reputation and position their companies, their products and their brands.”

Communicate Magazine

I could go on – indeed we’ve written a whole strategy piece on it (do contact us if you’d like to discuss it) – but I’m sure you get the idea.

The Communicate Magazine’s conference next week on Reputation in Financial Services explores strategies for managing corporate reputation, and will bring together industry experts and advisors to share best practice; there’s a strong programme, and many expert speakers lined up.

Do read the programme, and consider attending – it looks good.

Xstrata — Communicating Corporate Ethics

Xstrata is a major global diversified mining group, based in Switzerland and the UK, that knows how to communicate via its website. Take a look at the Homepage —
Xstrata

First the abstract image at the top changes; I had to mention this since I like abstracts. The Home page is loaded with information links, but is not overwhelming. The navigation on the upper left is good, the company prominently displays updates on its merger, the About quickly describes the company to new visitors. Finally, stock price and links to reports are available Nicely done.

The company also does a good job communicating the nature of the industries in which they compete. On the Commodity Businesses section you can use the links to more information–

Once Again It’s Leadership Integrity

Despite Sarbanes/Oxley, business schools ramping up Business Ethics courses and lofty Corporate Codes Of Ethics, the Mortgage Market crisis indicates that we still have problems with integrity and ethics. While the mortgage crisis focuses on financial services companies, it is yet another wake-up call.

Leadership integrity and ethics continue to be lacking. For example in The 2007 ETHICS RESOURCE CENTER’S NATIONAL BUSINESS ETHICS SURVEY® (registration needed but worth it) indicates —

  • Ethical misconduct in general is very high and back at pre-Enron levels – during the past year, more than half of employees saw ethical misconduct of some kind.
  • The number of companies that are successful in incorporating a strong enterprisewide ethical culture into their business has declined since 2005. Only nine percent of companies have strong ethical cultures.
  • Many employees do not report what they observe – they are fearful about retaliation and skeptical that their reporting will make a difference. In fact, one in eight employees experiences some form of retaliation for reporting misconduct.

In the report the Center indicates “The Ethics Landscape Is Treacherous – Corporate America Is at Great Risk.” This is very sobering, however since 2002 and Sarbanes-Oxley, there have been similar cautionary tales apparently with little effect. Some may indicate a need for more regulation. But this is not the answer since rogues will always find ways to get around these. The solution must be a serious effort from senior leadership tobuild an organization wide ethical culture.

The Ethics Resource Center offers some useful suggestions.

Consider these additional suggestions as you build integrity within your leadership team. They are aimed at integrating Integrity within the organizational culture. You must address “the way we do things here in company x”, or the norms governing how people make decisions each day.

  • Integrity starts with the Board of Directors who develops an ethical practices statement and demand adherence. Violators must be publicly admonished similar to what Jack Welch did at GE
  • Ensure these practices flow easily throughout the culture and embedded in the formal and informal company practices
  • Stop the scoundrels at the gate – when recruiting leadership positions, use new approaches to reviews and assessments designed to surface integrity issues. Bristol-Myers, Pfizer and smaller companies such as Spartan Stores are using innovative approaches to filter out candidates with Integrity issues. Yes it is possible to interview for integrity see “Can You Interview For Integrity?”
  • Put Integrity components in compensation/incentives programs for all not just executives.
  • Communication between leaders and people in the organization deteriorated despite polished multimedia techniques. Your message may be lost in the technology. Tell stories about authentic leaders at company meetings, publish them in company newsletters. Tell them about company performance. Avoid fancy slides, just tell them the facts.
  • Leader development programs must include a first course/seminar in Integrity.
  • Be seen by your people. Let them see and talk with you in a relaxed place. If you “hide” in your office, it’s difficult to build Integrity.
  • Turn bureaucracy on its head.
  • Tough decisions always challenge Integrity. Such times require courage to do the right things. Don’t waste time over analyzing. Embrace integrity and you’ll know what to do.
  • No more “yes men/women”. Surround yourself with trusted people with diverse viewpoints who tell you what they really think about your ideas. Building Integrity takes time and continuous vigilance to maintain.

I will be interested to see what, if anything, will happen to improve corporate ethics after this latest scandal.

Corporate Governance Issues in 2009

(image from Hera Grupo Italy a good website)

Recent developments in the world economy and the financial markets are placing a sharper focus on Corporate Governance in 2009. I see headlines such as “Corporate Governance Hot Topic in 2009”,  “Poor corporate governance makes business headlines” and “Time to kill Sarbanes-Oxley”. Then there is Directorship magazine that says in “A New Era–From the NACD”

Never before has the need for vigilance and attention to corporate governance been so imperative.

Indeed!

Well I thought it might be useful to look a some surveys and forecasts about what are the top issues for Corporate Governance. First,  The 2008 What Directors Think study (PDF), cosponsored by PricewaterhouseCoopers LLP and Corporate Board Member, and available on the CFODirect network, indicates that Boards are focusing on

  • Risk management
  • Strategic planning
  • Succession planning
  • Recruiting of new members to enhance board strength and skills.

Next, Directorship magazine in the “Pre-empting Future Shock: How Boards Can Address the Economic Crisis Now” article, December 18, 2008, indicates five critical areas–

  • Strategy Boards should …consider whether their companies’ foundational assumptions regarding the nature of their markets, customers, and business economics are changing and, if so, the implications for strategy.
  • Operations/Organization Boards can make sure that scenarios have been tested under several different assumptions of sharp volume and pricing changes of, for example, 10, 15, and 20 percent drops in volume and a pricing decrease of 5 percent.
  • Balance sheet/liquidity The consideration of various operational scenarios should also look at whether the liquidity of the company is sufficient under each set of assumptions.
  • Compensation Because the current environment presents compensation committees with unique problems and will continue to do so for some time, they will have to consider whether and how to modify the compensation system.
  • Enterprise Risk Management (ERM) Now is certainly the time for boards and management teams to think about how to integrate ERM into the short- and long-term planning processes.

Then I found an interesting article “Ten Areas For Enhanced Board Focus In 2009” on a less well known but informative website —The Metropolitan Corporate Counsel. The areas are —

  • Apply judgment in tailoring governance structures and processes to the current needs of the company.
  • Take a fresh look at board composition and director competency.
  • Consider implementing some form of independent board leadership..
  • Ensure that risk oversight is on the board’s agenda, as a matter of substance and process.
  • Understand the impact of risk on strategic aspects of operations.
  • Reemphasize (and review) disclosure controls and procedures to ensure timely and accurate disclosures, as well as effective internal controls, compliance and ethics systems generally.
  • Scrutinize compensation incentives through a risk-focused lens.
  • Build risk management into CEO and senior executive evaluations.
  • Exercise caution in adjusting previous equity compensation grants (for example, repricings or exchanges) or in otherwise adjusting compensation with respect to missed performance goals.
  • Ensure the vitality of the tone at the top and its alignment with risk profile, strategic direction, compensation incentives and financial reporting and controls.

Now let’s see what Corporate Governance experts are saying.

Writing in Compliance Week on January 21st, Rick Steinberg, founder and principal of Steinberg Governance Advisors and the author of Corporate Governance and the Board — What Works Best and Audit Committee Effectiveness — What Works Best indicates–

Risk management and corporate culture — are two of the areas that Steinberg believes need to be focused on by boards to help reverse the frightening trend that as manifested itself recently. Additionally, strategy and implementation need to be monitored by boards, as well as an analysis of whether performance measures are in alignment with strategy and compensation.

Common themes seem to be Risk Management, Compensation, Succession Planning and Strategy. Boards are beginning to learn that they must not abnegate this vital function to management. Strategic Planning touches all corporate areas and requires the active involvement of the Board.

Strategy will be covered in more depth in future posts.