What every HRD should know about board governance
Helen Pitcher, April 21, 2015
A place at the boardroom table has long been seen as the ultimate goal for HR professionals. The reality is that they are less likely to do this in their own organisation, but have an increasing chance of achieving it as an NED elsewhere.
The numbers work against the HR director being appointed to the board of their own organisation. The executive membership of a board generally consists of the CEO and the CFO as the board members, occasionally with a plus one – often a COO or the MD of a significant business area.
The UK Governance Code, published by the Financial Reporting Council, the statutory body that ‘owns’ it, recommends that boards consist of at least 50% independent NEDs, after the executive members and any non-independent NEDs. The HR director is therefore in a highly competitive queue for board membership alongside their executive colleagues.
However, as an independent NED for another organisation, the HRD becomes part of the solution rather than the problem, and can bring to the board a sought-after set of diverse capabilities, skills and knowledge to meet the business and governance challenges companies are facing.
So what is good governance?
Good governance reads like an HR manifesto. It is regarded by the shareholder community and regulators as the hallmark of a high performance organisation. Good governance requires that everyone in the organisation, from the top down, knows what is expected of them, understands the standards of conduct and ethics with which they must comply, while articulating and overseeing the delivery of the business, within a strong strategic vision and a context of robust financial control.
Crucial to good governance is that the executive management secures buy-in to corporate values. An open and honest boardroom attitude towards shared ethics and how to implement them effectively is essential to ensuring that the rest of the organisation understands and acts according to those values.
The chairman and the board are specifically seen by the regulators as setting the tone for the rest of the organisation: "The board should set the company’s values and standards and ensure that its obligations to its shareholders and others are understood and met." (FRC, UK Corporate Governance Code, supporting principle A.1).
The Code and governance framework
The main principles of the UK Governance Code and the governance framework cover five key areas.
- Leadership – The board is collectively responsible for the long-term success of the company, with the chairman ensuring effectiveness and with NEDs providing constructive challenges and helping to develop proposals on strategy.
- Board effectiveness – The board should have a balance of skills, experience, independence and knowledge. With appropriate induction and refreshing of skills and knowledge, it should be provided with timely and accurate management information, and there should be a formal and rigorous annual evaluation of the board, the committees and individual directors.
- Accountability – Boards should present a fair, balanced and understandable assessment of the company’s position and prospects, determining its risk appetite for achieving its strategic objectives, while maintaining sound risk management and internal control systems.
- Remuneration – Levels of remuneration should be sufficient to attract, retain and motivate directors of the quality required to run the company successfully, but avoid paying more than is necessary. A significant proportion of executive directors’ remuneration should be structured so as to link rewards to corporate and individual performance.
- Relations with shareholders – There should be a dialogue with shareholders based on mutual understanding of objectives.
Good governance affects everything a company does, from policy to operation. As it informs and improves the HRD’s effectiveness in their day-to-day role so, in turn, the HRD’s areas of expertise can help colleagues to understand how best to implement the company’s overall strategic plan.
Helen Pitcher is chair of Advanced Boardroom Excellence, a consultancy that focuses on individual and collective director effectiveness