12 Jul Conduct and Culture versus Profit and Shareholder Values
In an ever changing world of responsibilities and regulation, Andrew Bird looks at the the skills needed by a 21st century Director.
Being on the Board of Directors of any business is always a challenging role, particularly in financial services where the regulators and the media are always keeping watch. It’s a delicate balancing act between the commercial role and their duties to share holders and the expectations of the customer and, increasingly, the regulator. And with the Senior Managers and Certification regime now in full swing, the personal stakes are higher than ever.
In addition, the very nature of business – and therefore the type of risk inherent in that business – is changing rapidly. Whereas traditionally, for example, the impact of operational failures could be contained internally with few repercussions or external stakeholder impact, in today’s connected world, such events can become instant headline news and can lead to rapid and sustained contagion, with huge reputational impact. A 24 hour news cycle means no down time for news desks and heads can roll hours only hours after the first seemingly innocuous tweet hits people’s timelines.
Boards are required, therefore, to demonstrate a level of speed, agility and clarity of response that has not been required before. This in turn requires the Board to possess a broader, more diverse skill set, empowered with an appropriate mandate and an objective view, to successfully identify and deal with such issues.
The Role of the Non Executive Director
Non-Executive Directors (NEDs) are a critical part of any firm’s governance regime. The Board must ensure Executive and Non-Executive appointments are fit for purpose, but this is no longer the ‘tick-box’ administrative exercise of previous decades. The non-executives should bring complementary skills, from diversified backgrounds, covering all areas of the business. This is vital to developing and sustaining a positive culture which enables a business to better identify and manage risks to the firm and its customers.
The Financial Conduct Authority has demonstrated its willingness to sanction firms who are not able to demonstrate sufficient governance, oversight and challenge. In addition, they have made it abundantly clear that those individuals who hold positions of influence are responsible and personally accountable for the conduct and culture of the business. A Non-Executive Directorship is no longer something for Sir Humphrey’s to collect and offer to their friends: it is the mainstay of a company’s governance.
Those in the role need to fully understand their increased level of accountability, and be prepared to influence their Executive colleagues accordingly.
CHALLENGES FOR THE BOARD:
The Customers: The Board needs to be clear in its understanding of what does and doesn’t constitute an appropriate approach to the treatment of customers and how its services and products are designed with the interests of the customer, and the integrity of the market, in mind;
The Regulators: Ignorantia juris non excusat. The Board must understand regulatory expectation and requirements to identify and act on known deficiencies and to prioritise adequate resource against regulatory compliance / risk management. Increased reliance, for example, on the use of complex models in lieu of good old fashioned decision making, is not likely to meet the standards. Behavioural Economics might be part of the solution, but in isolation it provides no silver bullet.
The Decisions: The Board must demonstrate that sufficient independent challenge is provided to strategic decision making provided by non-executives with appropriate experience, skills and expertise and who are provided the scope to exercise such challenge
The Risk: The Board must ensure that the capability (and capacity) of the risk function matches the complexity of the business strategy – for example, data requirements and technological developments all require a level of technical knowledge and expertise to fully understand the potential risks;
The Structure: Management Information needs to be proportionate the firms size and complexity, and needs to be clear, accurate and timely – and equally importantly, recipients need to be clear on what they need to do with it when they receive it;
The Environment: The Board needs to understand the firms susceptibility to conduct and cultural issues – and it must do so, objectively, in both the forward looking, as well as reflective, ‘things we used to do’ sense. The Board needs to understand both its future business model and its legacy; and
The Constitution: On reflection of all of the above, the Board needs to consider the constitution, responsibilities and experience of its members and act quickly if there are any gaps.
But this isn’t all about the ‘downside’: Firms who understand that this is not simply an exercise in compliance and who genuinely embrace the regulation will enjoy closer, more collaborative relationships with their customers. The regulators aren’t the enemy; they are the conduit between companies and customers. Firms working in harmony with regulators will understand more clearly their customers’ needs, their aspirations, and what they really want from their financial services provider in the longer term.
And that relationship ultimately is going to keep you ahead of those firms who don’t.
Being on the Board of any institution is a position of trust and a reflection of the skills and expertise of the individuals concerned. Increasingly, this is being matched, by the increased level of responsibility and accountability. The challenges are tough, but the rewards are potentially great.
To paraphrase one of the world’s most famous orators, never in the field of financial services, has so much been expected, by so many, from so few.