October 2, 2015 Promoting Firm Governance
“Along with capital and liquidity, firm governance is one of the most crucial aspects for a regulator.” This remark by Paul Fisher, Deputy Head of the Prudential Regulation Authority, may have been aimed at the financial sector but it could equally apply to companies across the business spectrum.
Paul Fisher went on to comment that “It has long been recognised that most firm failures can be traced back to governance issues,” citing the way in which boards are constituted, how they operate and the conduct of individuals as being of particular importance. However, he also stressed that those tasked with external regulation can only go so far or they risk becoming shadow managers, denying the opportunity for businesses to set their own agenda.
Where does that leave board regulation and constitution? In reality, irrespective of external regulation or potential sanctions for non-compliance, the majority of board directors are simply looking to do the best that they can for their company. But that doesn’t mean they should be complacent. The world of business is ever-changing and as new technologies or business models come into play is the responsibility of board directors to ensure that their business is ready to meet the challenges thrown up by the marketplace.
So whilst a duty to act within powers is the first general duty of a director according to the Companies Act, it is other powers such as promoting the success of the company, exercising independent judgement and exercising reasonable care, skill and diligence which are more important to the day to day operation of a company.
It can be a fine line to draw. For example, boards are not there to control but they are there to exercise control. In other words it is not the job of boards to set down every task and process to be followed within the company, but it is the job of boards to set the conditions which will ensure that people act in accordance with the company culture, ethos and vision.
Just as regulators shouldn’t become shadow managers, company board members shouldn’t take over day to day tasks. What distinguishes those looking to promote firm governance from those who simply direct is the way in which strong boards ensure that the processes, procedures, attitudes and values of the organisation are all directed towards acting fairly and ethically in the pursuit of company success.