Why do competent directors lead companies into failure and make decisions that prove so costly and catastrophic to organisational success and reputation? And what can be done to rebuild trust in the director community? These were the themes of Changeboard’s latest Future Talent Forum masterclass, held under Chatham House rule, in association with the Institute of Directors (IoD).
Hosted at the Royal Geographical Society in Kensington, London, the event for HR leaders was opened by Oliver Parry, head of corporate governance at the IoD. He began by explaining that while corporate governance has come a long way since Sir Adrian Cadbury’s review into boardroom best practice in 1992, the UK market is still experiencing shocking lapses – evidenced by companies from HBOS through to Sports Direct. “We live in a compliance-driven culture. Boards can comply with all the principles of the Code, yet still experience governance problems,” he told delegates.
He argued that effective governance is as much about relationships, trust and transparency as it is about codes and regulations, yet most companies still see it in pure compliance terms. “The era of ‘it’s not my fault guv’ is over,” he said. “It’s no good saying you have ticked boxes; it’s about the behaviours that you demonstrate.”
Janhavi Dadarkar, team leader for governance and role of the director at the IoD, was keen to build on this idea and examine what corporate governance means in practice, and the behaviours and competencies directors need to have to ensure it happens. “Corporate governance should be about good business sense. That’s the hook,” she said.
Dadarkar then asked attendees to think of a company as a ‘baby’: it can get married, divorced, and have its own babies. Shareholders are the ‘parents’ of the baby, with the primary goal of caring for the baby; directors are the ‘guardians’.
“When we talk about directors’ duties, it’s the rules we put in place about looking after the baby and ensuring it survives after you’ve left,” she said. “Every decision you take should start with the guiding principle of what is good for the ‘baby’; then tailor that to your company situation,” she explained.
For Dadarkar, in many companies, there is a fundamental flaw in the appointment of directors – often when no one else will take on the role, or the incumbent has been with the business a while and is in need of promotion. “The criteria are often created around individuals rather than the skillset that is needed, but appointment of directors must be based on what you need for the business,” she urged.
Yet while directors are expected to fulfil their responsibilities with confidence, their own learning needs are often overlooked, particularly in terms of putting knowledge of finance and business strategy on the same level; encouraging diverse views and making decisions in uncertain times.
“Too many boards focus on the operational side of business, instead of on the future, to ensure innovation,” Dadarkar argued. “In this VUCA world, unforeseen events can result in scandal. Innovation must be a big part of what you do.”
Importance of diversity
Dadarkar was also keen to point out the importance of diversity. “Surrounding yourself with people who are, or think, the same as you is human nature. With a diverse group, you might arrive at the same solution but you’ll have been challenged, which means you will have had a broader discussion around contingency planning.”
To address capability gaps, the IoD has launched a Director Competency Framework, providing an accessible and measurable guide to the knowledge, skills and mindset required to lead an organisation to success (see diagram).
“A director is essentially a leader, and it’s important to get people to understand what that means from a practical perspective,” explained Dadarkar. “The earlier people can start thinking about it the better – for business, corporates and ultimately society.”