Once a stately figurehead, the chair now faces the glare of publicity, and has become the potential focus of public anger at corporate governance failures.
Since the financial crisis the chair has increasingly been held to account, along with the CEO, when organisations fail to perform. Shareholders, regulators, legislators and the media now have little patience with narrow definitions of the chair’s role when problems arise: as a leading chair stated baldly in recent research by board formation consultancy Fidelio Partners: “The buck stops here.”
Pressure on the chair is compounded by disruption and accelerating change in the business environment, and against this backdrop judging the performance and success of the chair is a challenge. To whom—and how—is the chair accountable?
Challenges for board leaders
Fidelio has been conducting structured interviews across a broad range of sectors to understand leading chairs’ perspectives on the challenges they face. Based on this work we offer the following action points for chairs, and those who aspire to the role.
1. Prepare for disruption
The possibility of disruption to existing business models is clearly near the top of most boards’ agendas, and the sources of disruption mentioned by our interviewees are as follows:
Technology is clearly the leader here, and there’s no shortage of companies which have been radically changed or even made obsolete by its march.
But the political environment is also very unstable, especially in the UK and US, making capital allocation decisions difficult.
Consumer behaviour is also shifting, in part also driven by technology: the impact of online shopping on the retail landscape is a case in point.
Lastly, the impact of mass and social media makes rapid shifts in social norms much more common— #MeToo and the growing awareness of environmental issues, for example.
In our view, the key to dealing with disruption is for the chair to ensure the right board composition including the skills and diversity to deal with change, and also to drive the right board process to ensure the strategic context gets the time and focus it needs.
It’s vitally important that the organisation’s antennae are tuned with sufficient sensitivity to pick up signals of change that may be weak today but can rapidly grow into a real threat to the status quo.
Climate change is the one to watch here: though there is still denial in some quarters, stringent decarbonisation legislation is sure to follow eventually, with major impacts on many sectors.
2. Deal with the governance environment
The volume of governance, regulation and guidance for boards both public and private has grown to a point where it requires discipline on the part of the chair to stay on top of the detail, but also to ensure the board retains its long-term strategic focus.
The formal obligations of the chair in major jurisdictions typically have a statutory basis. This is often light on detail, while corporate governance codes offer more guidance:
“The chair leads the board and is responsible for its overall effectiveness in directing the company. They should demonstrate objective judgement throughout their tenure and promote a culture of openness and debate.”
(UK Corporate Governance Code, Financial Reporting Council, 2018)
There are international nuances. While the UK governance remains an international benchmark, there are important differences in emphasis between the UK’s unitary board structure and the two-tier governance structure in Germany:
“The supervisory board chair is elected by the supervisory board from among its members. The chair coordinates the activities of the supervisory board, chairs its meetings and safeguards the matters of the supervisory board externally.”
(German Corporate Governance Code, 2017)
The difference is still more pronounced in the US, where there is no single generally accepted governance code and no consensus that the role of the chair is separate from that of the CEO.
Corporate governance, including the requirements of the chair, is typically less onerous for smaller privately held companies. For public companies, especially those that are highly regulated, the expectations of the chair increase substantially.
The chair of a systemically important financial institution could well be devoting four days a week to this role. And while chairs in other sectors will not be subject to the same level of scrutiny, there is a clear trend towards more oversight, even for private companies.
3. Balance stakeholders
While economic purists may claim that the sole purpose of a company is to generate returns for shareholders, back in the real world companies must also deal with other stakeholders. These include employees, customers, suppliers and regulators, as well as governments local and national.
Employee representation on the board—long a feature of the corporate landscape in mainland Europe—is also on the agenda in the UK due to new provisions in the 2018 Corporate Governance Code.
All stakeholders presumably want the long-term, sustainable health of the company, but in practice there are many instances of conflicting interests. Shareholders, especially those of an activist bent, are frequently accused of putting short-term financial gain ahead of the longer-term interests of others, while internal stakeholders will typically be focused on changes to staffing or work patterns.
In extremis the chair becomes the arbiter of competing interests, and in order to do so it’s clear there needs to be a regular and well-structured programme of communication and engagement in place. A proactive approach pays dividends here: no chair wants a shareholder revolt resulting, for example, from a poorly communicated remuneration report.
4. Focus on performance and accountability
What does success look like for the chair, and how can their performance best be evaluated? Much has been written about board evaluation and guidance is typically also provided on evaluation of the chair:
“There should be a formal and rigorous annual evaluation of the performance of the board, its committees, the chair and individual directors. The chair should consider having a regular externally facilitated board evaluation.”
(UK Corporate Governance Code, Financial Reporting Council, 2018)
Provision is also increasingly being made in most corporate governance codes for a deputy chair or senior independent director to lead the process of evaluating the chair. Given that it is often the chair who initiates and mandates evaluation, it is key to ensure the review of the chair receives the attention it deserves.
Closely linked to evaluation is the question of accountability. The role of the chair is clearly no longer ceremonial: for example in financial services the role is directly accountable to the regulator and chair and board-level engagement with the regulator is required.
Institutional investors are also demanding greater accountability from and access to the chair, even in the two-tier German board system where supervisory boards have traditionally felt legally constrained from engaging with shareholders.
In the UK the Companies Act provides a broad range of responsibility for the chair, as for all directors, who must promote the success of the company with regard 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”.
(Section 172, Companies Act 2006)
In short, it’s tough to envisage something for which the chair is not responsible, or a constituency to whom they do not have to answer for the actions of their company.
This article has been prepared in collaboration with Fidelio, a supporter of Board Agenda.