January 9, 2015 Governance by any other name
The Bank of England has released the minutes of its governing body, the Court, covering the period from 2007 to 2009. As an insight into the shifting attitudes which characterised the Bank’s response to the banking crisis they make interesting reading but they also act as a warning to those who believe that governance and oversight are empty titles.
Before we go on let us stress that the regulatory system has received a substantial overhaul in the years following the crisis and lessons learnt have resulted in changes not only to oversight procedures but also to attitudes and expectations. These changes have been well documented but there are still lessons contained within the minutes which could benefit individual organisations.
Perhaps one of the most important lessons is the role which non-executive directors should play in challenging the executive. As the Treasury Select Committee Chairman, Andrew Tyrie, commented “Even when questions were asked by individual non-executive directors, the executive usually presented a unified front to the Court, apparently rendering it of little or no use as a forum for creative discussion and constructive challenge.”
Non-executive directors should be appointed to increase the diversity of the board, to bring outside industry experience thereby boosting board effectiveness and to add an impartial questioning voice to strategic decision making. Unfortunately in too many instances in the past non-executive directorships were seen as more of a sinecure with positions awarded to friends or ‘nice chaps’ or those whose name would add prestige to the headed paper.
Whilst organisations are gradually turning their non-executive directorships around, there is still a danger that the weight of past history prevails and that non-executive directors may not step up to their responsibilities in challenging executive decisions or effectively overseeing performance and risk. But failure to challenge could now be seen to be a breach of directorial duties and as the IoD points out, the Stock Exchange Code “advises that the balance of executive and non-executive directors should be such that no individual or small group of individuals can dominate the board’s decision-taking.”
Those who accept directorial positions, both executive and non-executive, have a responsibility to oversee, to question and to challenge. Only through this process can an organisation benefit from effective and robust governance which guides the long term development of the business. Whenever one individual, or a group of individuals, holds sway the balance of the organisation can be jeopardised and whenever individuals believe their directorial role is to simply agree with the strongest voice on the committee then they are failing in their duty as board members.
As Andrew Tyrie said “The minutes show that during the crisis the Bank of England did not have a board worthy of the name. This mattered. And it still matters.”