Review of regulatory initiatives is urgently needed

MORE rules are added to the corporate governance landscape every year. As a non-executive director (NED) at two businesses, it is down to me to ensure compliance with these new initiatives. But I do sometimes wonder who is regulating the regulators themselves, as showering business with new regulations seems counter-productive to me.

Each regulatory change needs to be sense-checked. This is vital, not only to guarantee that the change prevents a reoccurrence of the issue that led to its introduction, but also to ensure the cost of compliance is proportionate. What’s more, the change must not lead to unintended consequences that could be as damaging as the problem that prompted the regulation in the first place.

A report by BDO published earlier this year, Transitions: the new regulatory environment, suggested that the form of regulation based on principles rather than detailed rules will prevail. I hope this turns out to be the case. We need an honest, open debate on the effectiveness of recent regulatory initiatives. We also need an objective review of the current framework to determine whether the problem lies in regulation itself or the way in which these principles are conducted in practice.

Effective governance comes from having the right kind of culture, one that ensures the appropriate approach to risk. But the importance of culture to the good running of a company is an idea that seems to be missing from this debate, perhaps because it is difficult to define. It is not just a series of words, from openness and integrity to loyalty. It is a sense of doing what is right and having a common cause throughout the organisation where the company’s interests trump personal ambition. It is about accepting that mistakes will be made.

I have heard it said that where culture and strategy come into conflict, culture will eat strategy for breakfast. So culture needs to emanate from the board. But while many companies, particularly the larger ones, claim to have a culture, its directors are not necessarily part of it. Bad governance has been blamed for the corporate mishaps of the past two to three years, yet the reasons many of these companies’ strategies went awry was not a lack of regulation, but rather that the balance between the non-executive and executive directors was ineffective.

NEDs are there to act as a check-and-balance on risk taking by the board, something that the regulators try to enforce from above more and more. Last May, a new edition of the Corporate Governance Code was issued which increased the focus on risk and risk appetite. Risk appetite is an absurd concept: risk can only be assessed in the context of related opportunities.

Notwithstanding, business must embrace risk, and indeed one might argue that the biggest risk facing any company is the opportunities they miss. In this context, risk is something that good executives do constantly as part of their job. By making it a fundamental part of the strategic planning process, risk will be identified throughout all layers of the organisation. This is clearly beneficial as it will ensure that the final strategy is properly considered and subjected to a realistic assessment of success.

It is my experience that well-run companies with an appropriate approach to risk integrated throughout the business are the ones that have a culture where the voice of the NEDs is heeded and respected. So my plea to all those in a regulatory position would be to leave it to the NEDs. And I would urge businesses to ensure that there is a correct balance between executive and non-executive directors. The longer I serve, the more I see this: a good group of NEDs is the most constructive means to influence and encourage the executive – not just to do the right thing, but also to be bold where boldness is required and play a defensive game when circumstances demand it.

Ross Graham is non-executive director and audit chairman at Wolfson Microelectro and Psion