As the dust settles following the collapse of Carillion, questions are being asked as to how effective the corporate governance arrangements were at the building and services giant. Quite clearly the checks and balances that should exist in boardrooms in order to mitigate risk were not in place, many observers have commented.
Failure to create a boardroom environment in which executive decision-making is carefully scrutinised and the CEO’s powers are kept in check by the chairman, is something many finance directors may have experienced. It’s a big issue for FDs, who usually have to deal with the financial consequences of corporate overreach.
Peter Williams, chairman of online fashion group Boohoo.com, who has held a number of high profile positions including CFO of department store group Selfridges, says: “What’s important is the relationship between the chairman and CEO, and between the chairman and rest of the non-executive directors.”
Williams, who is also currently Senior Independent Director of listed property website Rightmove, says he has experienced at first hand a dysfunctional board and its consequences. “I once worked in a company where the chairman and CEO were too close, having spent many years together working in two public companies.
“There wasn’t really a check on what the CEO was doing and the rest of the NEDs weren’t really being listened to- so it became a very difficult situation. It’s worth stating how important it is to get these relationships right,” says Williams.
The Financial Reporting Council’s (FRC) 2011 Board Effectiveness Guidance defines the board’s role as ‘to provide entrepreneurial leadership of the company within a framework of prudent and effective controls which enables risk to be assessed and managed’.
To be able to fulfill this purpose, a company’s board must understand the drivers of success in its chosen market, says Julia Graham, Deputy CEO and Technical Director of risk managers’ body Airmic.
“A natural tendency when people don’t understand the internal and external context of an organization is to operate and take decisions in ignorance with a tendency to say no, potentially stifling opportunities, or OK, without a true understanding of why,” she says.
Graham says risk management, resilience and viability are inherently linked. “The need to achieve resilience is not new, what is new is the scale of the challenge that boards face due to three factors:
Change and the speed of change and how this is likely to escalate, complexity and increased levels of connectivity and communication and working in the spot light where social media changes transparency rules.”
On this basis, Graham says the primary threat to companies is behavior and culture. “Rising awareness levels that culture is more important than ever in the complex and connected world encourages a corporate environment that can nurture and stimulate change,” says Graham.
Graham defines behavior and culture as a primary threat to organisations. She says: “Rising awareness levels that culture is more important than ever in the complex and connected world encourages a corporate environment that can nurture and stimulate change,” she says.
The new Governance proposals from the FRC, which is seeking comments for a revised version focusing on corporate culture, reflect a “better understanding of why some corporations fail as set out in the 2011 research report published by Airmic Roads to Ruin,” adds Graham.