Why effective governance is critical in a recession
It is widely expected that there will be a global economic downturn over the next 12 months, with western countries, particularly those in Europe and North America, being the worst hit.
This is being caused by a number of factors – war in Ukraine, high inflation, the economic distortions caused by the pandemic and issues with the global supply chain. These issues have created volatility that could tip a number of countries into recession.
During this challenging time it’s more important than ever that there’s good governance on the board. Having effective governance not only acts as a protector and an enabler to help boards navigate through uncertainty, but it provides a source of competitive advantage at a time of significant change.
However, too many boards solely focus on compliance and process driven statutory duties when it comes to governance; such as ensuring the business complies with company law, and makes the necessary filings, including annual returns and financial statements. Boards need to understand that delivering effective governance is so much more than that. It’s about having four lines of sight, role clarity, regular board and governance reviews, an enabling culture and diversity on the board.
Enabling four lines of sight
For effective decision making in today’s volatile world boards must have the ability to focus on four lines of sight: hindsight, insight, foresight and oversight.
- Oversights: Boards have a fundamental legal responsibility to provide oversight and accountability, so they must have the right processes in place to achieve this. Referred to as the board’s ‘fiduciary’ responsibility, directors need to make sure that the business is appropriately stewarding the resources entrusted to it and following all legal and ethical standards.
- Insight: Effective boards understand the company, the drivers of financial performance and the organisation’s competitive advantage, including the context of the external business environment and the marketplaces where the company sells its products and services. This insight drives a more objective and enabling assessment of performance and strategy.
- Foresight: The ability to anticipate, to see what is coming and the future forces that will impact on the competitiveness and sustainability of the business is essential to effective understanding of risk and development of strategy.
- Hindsight: Most boards have significant company knowledge, the hindsight to remember previous initiatives and reflect on the good, bad and ugly learnings from the past. Tapping into this helps to create effective boards.
To support successful decision making these four lines of sight must be live in the boardroom.
Ensuring role clarity on the board
One of the most important foundations for good governance, and an effective board, is role clarity amongst directors on their responsibilities in contributing to the value creation by the board. Any ambiguity and confusion over roles, particularly in an uncertain world, will have a negative impact on board effectiveness and decision making. It’s the role of the chairman to ensure directors have absolute clarity about what their role entails and the value they are expected to bring to the board.
Regular board, CEO and governance reviews
The pandemic revealed that some leaders under enormous pressure were ‘leading lights’ by spotting new opportunities for their organisation, and operating with agility and competence, while others were exposed as ‘simply light’.
For instance, some CEOs recognised the importance of identifying a ‘once in a lifetime’ opportunity to transform their organisation during the crisis, to shape the business for the future to ensure it thrives. Whereas others under the burden of the Covid emergency shut down dialogue with the board and presented ‘oven ready’ decisions; or experienced uncertainty paralysis, delaying decisions. Then there were those who focused too much on the ‘present’ and took their eye off the future direction of the business.
This is why boards need processes in place that ensure CEOs, and in fact all directors, are regularly reviewed – to provide an objective assessment of performance and identify development opportunities to enable the board to be fit to lead the business to future success.
Unfortunately, undertaking reviews of those on the board was not a priority for many organisations during the Covid health emergency. The focus on navigating the pandemic overwhelmed the importance of objective, regular performance reviews. Now is the time to restart them, if not already.
Those on boards gain significantly from a structured and systematic performance review, at least annually, with clear accountability and follow up to help ensure they are ‘fit for the future’ and deliver governance that is effective and creates value. Once concluded, these assessments might prompt the board to consider the development needs of the CEO and individual directors, as well as highlight opportunities to improve board and individual director effectiveness to drive business success.
When it comes to evaluating CEOs and directors it is important to realise that boards require resilient leaders, along with a wider resilient workforce, in a world where volatility is the new normal. It’s worth bearing in mind that resilience is not just about the ability to bounce back from setbacks, but is the innate capacity to grow better and stronger when things don’t go to plan.
Also, it’s not just important to review directors, but also governance processes. Particularly when business failures during the global financial crash, and the more recent pandemic, have led to corporate compliance facing increased scrutiny. For the board to achieve its purpose it’s best practice for governance reviews to take place at least annually.
Nurture a good culture
Those boards with good governance recognise that they are responsible as custodians of culture – maintaining, protecting and nurturing the good things, the ‘assets’, in company culture. If they are not already doing so in a time of economic slowdown, boards need to foster a culture of agility and adaptability both on the board and throughout the organisation. This releases the potential of directors and employees to provide new ideas to help take the business forward. It also requires that boards generate a curiosity and fearlessness to inspire creativity, innovation and continuous improvement.
To achieve this boards must lead by example in demonstrating diversity of thought and ideas in the boardroom, as this will provide confidence to the rest of the business to follow suit.
Additionally, the board needs to foster an open culture where bad news travels to directors faster than good, so any challenges can be resolved before they potentially become big issues. To do this the board must engender a culture of psychological safety to encourage employees to speak up and approach them with any bad news, and protect those that do.
Diversity on boards
It is widely recognised that diverse boards are more effective than those that aren’t. Therefore, to ensure they deliver good governance and decision making boards must consider whether their current composition is appropriate to take the organisation forward. To accomplish this they should look at the board through the prism of the five drivers of diversity™ – demographics, skills, experience, thinking styles and circles of influence – and contemplate how well the current line up matches up.
It’s important to highlight that diversity without inclusion is an illusion. Therefore, a key task of the chairman and directors is to enable the culture on the board to be one of inclusion, to gain the benefit of the different perspectives brought to decision making by a diverse board.
With every organisation facing great uncertainty due to high inflation, the war in Ukraine and issues with the global supply chain, it’s time for boards to urgently consider these factors to deliver effective governance and decision making if they are serious about their business not only surviving but thriving in these recessionary times. Doing so will also provide a competitive advantage during this period of great change.
For more information on how we can support your board with your boardroom and governance challenges, please contact one of our highly experienced governance consultants.
