The government’s planned changes to the UK Corporate Governance Code have stirred up more than just a few critics recently, but while the rules and regulations may force further corporate navel-gazing, there may be opportunity amid the red tape.
The emphasis of the changes to the Code will still be on ensuring that staff of listed companies are better represented at board level, as well as increased transparency on executive pay (although more watered-down than previously stated). These, like any other changes, can transform how boardrooms think—that is the intention of course—but also how they are evaluated.
Criteria for evaluating boards can and probably should change to reflect not just the regulatory requirements set down by the Code but also external factors such as technology developments or economic shifts.
Since 2012, FTSE350 companies have had to undergo external board evaluations (once every three years) to independently assess the make-up of a board. The aim is to add another layer of governance, to ensure boards are behaving the way they say they are—a bit like an independent audit.
Most, if not all, of these external evaluations are undertaken by big consultancies. In many ways, it has been understandable. New rules come in and it’s imperative that those rules are met and the box is ticked.
Consultancies can take the pain away, often for a considerable fee and ensure the business has at least met the demands of the Code. Nothing wrong with that, of course, if that’s what the business wants.
But what if company secretaries could use these mandatory evaluations as a source of strategic analysis and planning, to actually improve the business? Surely greater intelligence and understanding of where the board sits in terms of skills, diversity and even pay compared with peers and sectors could have distinct benefits?
Technology could surely have the answer to this. Tools that can collect the data and anonymise it in a database can offer benchmarks by which businesses can evaluate their own position. It would be a valuable tool for a company to perhaps understand its own shortcomings in terms of board member numbers, skills mix, diversity or pay. It would help generate expected levels of performance within specific sectors, and provide a guide for board development as much as compliance.
An external evaluation tool could also ensure a consistent level of quality; after all, it’s not as if consultants have certification saying they are equipped to provide thoroughly good analysis of the composition of the board or the quality of the directors. There are lots of providers, but no standard by which they can be measured. While one may offer good analysis, others may not, and then it just feels a bit isolated, or “old-school”.
The real value is in the data. Board evaluation usually begins with a questionnaire and evolves from there, but there is generally little analysis of the resulting data. Company secretaries can rarely take external evaluations and use them strategically. Why not? Surely the time and money spent on creating those evaluations warrants a more strategic return?
Company secretaries need to be able to draw intelligent conclusions from these reports, to understand where there is a greater need for transparency or where there are skills gaps, or where the business would benefit from a change in recruitment policy, for example.
For many company secretaries though, doing this every three years could mean that the boardroom rapidly goes out of date.
A technology tool, which would inevitably be cheaper and quicker to use, would enable businesses to be nimbler and more geared to change because they could afford to run evaluations more regularly, for strategic and not just compliance reasons.
The advantages are that boards would be so much more dynamic. There would be greater, more current intelligence on board competencies, which would also help with succession-planning. Skills gaps could be filled more quickly and the company secretary could more effectively manage transparency. Ultimately, there would be greater control.
During any strategy work, a business would want to identify external challenges and how its board and company can meet those challenge. If it’s a bank with huge regulatory risk on the horizon, you want knowledge of the area. If it’s getting to grips with new technology such as artificial intelligence or coping with cyber-risk, you want those mindsets on the board too. Without someone on the board who is a visionary, how are you going to create a business that is leading-edge?
Does the technology exist to help company secretaries meet these challenges and use evaluations to develop strategic thinking? Certainly there are elements. Tools can provide not just the fundamental features expected of external evaluations, but they can also harvest key data and help secretaries analyse the data.
Developing a benchmarking database is another step altogether but certainly not an insurmountable one. The value of benchmarking through anonymised data would be a leap forward for boardroom development and ease the burden for company secretaries.
We have the technology: we just need the collective thinking to make it happen.
This article has been prepared in collaboration with Nasdaq Corporate Solutions, a supporter of Board Agenda.