Are boards spreading themselves too thin?

Posted by Aura Toader on 24 July 2019
Aura Toader

Boards are expected to manage an ever-evolving list of responsibilities. Growing numbers of regulatory developments, including the latest UK Corporate Governance Code, gives boards increased responsibility for issues concerning stakeholders other than shareowners, such as customers and employees. In the financial sector, the Senior Managers and Certification Regime created a framework for holding directors with key positions (including the Chair and audit committee Chair) more accountable for corporate failures. Other sources of increased workload such as the public pressure following corporate scandals, and technological advances have put more pressure on boards to oversee a wider range of risks, including reputational and cyber risk. By way of illustration of this increase in workload, board packs of large companies have increased in size by 20% since 2017 to 300 pages on average in 2018. Getting into the weeds of compliance may come with the cost of neglecting issues such as defining the organisation's long-term strategy, which should be at the core of the board’s agenda.

Having boards more immersed in different areas of concern is very much welcomed but the challenge of staying focused on their core responsibilities must be addressed. 

This article will address some of the key questions concerning the challenges posed by the ever-increasing workload of the board, and will offer recommendations for dealing with these challenges.

The challenge of increased board workload was central to the discussions that took place at the ICSA 2019 Conference in London, concerning "The Future Board"Their report raised many important questions and sought different solutions to the challenges posed by  ever-increasing board workloads. 

Getting input from different interest groups in decision-making 

One of the possible actions identified in the report for refocusing the board is broadening the pool of people involved in decision making. In practice, this can translate into representatives from management and/or shareholders bringing their input to board or committee meetings.  Aktis' data shows that 70% of the largest UK banks have regular invitees from senior management attending risk committee meetings. This may bring a diversity of perspectives and interests in decision making at board or committee level. 

Should boards consider moving away from unitary structures?

Another idea presented entailed considering board structures other than unitary, in order to separate some or all of the board functions.  Whether other structures are more efficient ultimately depends  on the directors' ability to navigate through that structure. Governance is more about people, the individuals in the boardroom, than it is about the structures around them. A cultural shift by UK boardrooms might pose some problems, as an individual who has spent most of his or her corporate life in a unitary board structure may find it much harder to be an effective director on a two-tier board. 

Increasing NEDs' time commitment 

Increasing their time commitment would allow NEDs to take on more responsibilities. According to Aktis data and methodology for estimating workload, which was used in the ICSA report, in 2018 the Chairs of some of the largest UK banks devoted 64 days preparing and participating in board and committee meetings, which is over 20% more than in 2016.  Additionally, in 2018 the average number of board meetings within the same group increased to 15, a 20% increase compared to 2016. At the extreme end, one bank had 24 board meetings in 2018 alone. The rise in expectations we place on NEDs has been accompanied by an increase in fees. 38% of FTSE 100 companies increased the fees paid to their Non-Executive Chair and 48% increased the fees paid to other non-executive directors. Further to this, more companies started paying additional fees to directors who are members of or chair board committees. 

 

Figure 1. Average number of board meetings at UK banks

Figure 2. Estimated workload of board Chairs at UK banks  (in days)

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Source: Aktis, 2019

 

Improving board effectiveness by adding the right skills 

However, more time does not necessarily translate into increased effectiveness if the board does not have the required skills to deal with the new issues on their agenda. Boards can either appoint directors with new and different skills (see our post on cyber experts on US boards) or agree that certain decisions are better taken elsewhere in the organisation. The best boards regularly ask themselves what should fall under their remit and what should be delegated elsewhere, weaker boards only worry about making the right decisions. Having this conversation is perhaps the best way to address the question of boards spreading themselves too thin. 

Another challenge with NEDs increasing their time commitment is that they can get too involved in the organisation's business and operations, which would compromise their independence. This is a difficult balance, as the number of outside directorships should also be kept to a minimum to avoid a “merry-go-round” of the usual directors and to ensure that NEDs have enough time to dedicate to issues corresponding to the specific circumstances  of a company.

Delegating more responsibilities to the board should be encouraged, as it can be accompanied by increased accountability. However, they should  be able to maintain control of their agenda and remain focused on their main role. Conversations need to take place in the boardroom about possible solutions going forward, be it involving different interest groups in decision making, finding the balance between increasing NEDs' time commitment and fees without affecting their independence, or appointing NEDs with new skills. 

 

Endnotes:

[i] ICSA The Governance Institute (2019). The Future Board- Getting in Shape for Tomorrow’s Challenges. Available at: https://www.icsa.org.uk/assets/files/free-guidance-notes/the-future-board-report.pdf 

[ii] Financial Reporting Council (2018). The UK Corporate Governance Code. Available at: https://www.frc.org.uk/getattachment/88bd8c45-50ea-4841-95b0-d2f4f48069a2/2018-UK-Corporate-Governance-Code-FINAL.pdf 

[iii] Bank of England (2018). Quarterly Bulletin Q3, Strengthening the link between seniority and accountability: the Senior Managers and Certification Regime. Available at: https://www.bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/2018/senior-managers-certification-regime 

[IV] KPMG (2018). Guide to Directors’ Remuneration. Available at: http://kpmg.co.uk.s3.amazonaws.com/creategraphics/2018/12_2018/CRT106973/CRT106973_FTSE_350_SURVEY.pdf 

 


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