James Beck 29 July 2012 2012 Pathways to Good Governance Success Failure Todays topics What is good governance What does good governance look like How do you know you have it How do you monitor improvements ID: 427660
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Slide1
What Does Good Governance Look Like?
James Beck
29 July 2012
2012 – Pathways to Good GovernanceSlide2
Success
Failure
Today’s topics
What is good governance?
What does good governance look like?
How do you know you have it?
How do you monitor improvements?
2Slide3
What is good governance?Slide4
This topic is akin to the definition of hard-core pornography offered by Justice Potter Stewart:
we cannot define it, but we “know
it when we see it”
4
What does good governance look like?Slide5
What do these companies have in common?
5Slide6
Poor governance attributes
From the outside:
A non-independent chairMajority of the board of directors are not independent
Negative media reportsPoor or no surplusOrganisation extinction
6Slide7
Poor governance attributes (cont’d)
On the inside:
Directors have considerable conflicts of interest and are all friends of the chair or CEODysfunctional board
No CEO key performance indicators No formal CEO annual review process
Board review conducted by the chair as a one-on-one chat
Non-ethical decision making
No agreement between the board and management on the organisation’s risk appetite
Board meetings that spend more time on operations than on strategic thinking and development
7Slide8
Good governance – good performance
Better governed firms outperform poorer governed firms in a number of performance areasSource: R. Brown & T. Gørgens
, 2009, “corporate governance and financial performance in an Australian context (Treasury Working Paper 2009-02)8Slide9
The benefit of good governance
Companies with good governance practices
clearly outperform those withoutSecond only to financial reporting,
board structure and board responsibilities are considered as high in importance for stakeholdersProvides assurance to
regulators and financial institutions
Employee satisfaction, transparency, accountability and organisational culture
are enhanced
9Slide10
Good governance
It makes good business sense...
10
...but it relies on board performanceSlide11
Board performance focus
Corporate failuresASX Corporate Governance Principles and Recommendations
Australian Charities and Not-for-profit Commission (ACNC)NFP financial and governance information will be readily accessible by the general public
NFPs will need to review and assess whether their internal governance and financial processes are in order
11Slide12
Organisational success
Board Performance
Management Performance
Organisational Performance
12
History
Legal
Framework
Constitution
Strategy Slide13
13
The board must be a high performing team...
... always reflecting on
performanceSlide14
ORGANISATIONAL ENVIRONMENT
THE BOARD ENVIRONMENT
BOARD INTELLECTUAL CAPITAL
Board Competencies
Knowledge
Skills
Abilities
Contacts
Board Structures
Policies
Processes
Procedures
Committees
Board
Dynamics
Board Behaviours
Personality
Values
Norms
Board-management relations
BOARD ROLES
Monitoring
Risk Management
Compliance
Policy Framework
Networking
Stakeholder Communication
Effective Governance
CEO Selection, Monitoring and Evaluation
Strategy
Decision Making
ORGANISATIONAL PERFORMANCE
WORK WITH AND THROUGH THE CEO AND SMT
Adapted from Nicholson & Kiel, 2004
INPUTS
Organisation Type
History
Legal Framework
Constitution
Strategy
High performance board framework
14Slide15
Directors fulfil their duties and responsibilities to the best of their abilities
Duties and responsibilities
Board considers the needs of stakeholders
Stakeholder needs
The board facilitates the achievement of organisational goals
Goals and objectives
Board develops and evaluates the CEO and fosters the development of human capital throughout the organisation
Human capital
What is board effectiveness?
Board monitors legal and ethical performance
Monitoring
Board prevents and manages crises
Crisis control
Resources
Directors can procure resources vital to the organisation
15Slide16
Board performance evaluationSlide17
So the chair said,
“I want a board review
that’s rigorous...but softly-softly,
Thorough...but inexpensive,
Independent...but in-house,
Different...but similar
...and
by next week
!”Slide18
Benefits of board reviews
18
Transparency
Builds confidence and trust
Accountability
Role clarity
Feedback
Validation/gap analysis
Improved utilisation
Board performance
Board structure
Time for reflection
Group development
Role
Processes
Transparency
Communication
Leadership/culture
Role clarity
Organisation
Board
Owners/ shareholders
Individual directors
BENEFITSSlide19
19
Design Questions
Summary
What are the objectives of our evaluation?
Clearly identified objectives enable the board to set specific goals for the evaluation and make decisions about the scope of the review, e.g. the approach the board will take, how many people will be involved, how much time and money will be allocated.
Who will we evaluate?
Depending on the objectives, the board may, for example, evaluate the:
Board as a whole
Board and committees
Board, chair
and individual directors
Board and company secretary
What will we evaluate?
There are essentially three main aspects to consider when evaluating board performance:
The role of the board;
Board processes and procedures;
and
Director contribution.
Who will conduct the evaluation?
There are a variety of options including the chairman-lead evaluation, a board committee or external consultant.
What methodology will be used?
Boards may choose between qualitative and quantitative techniques, or a mix of both.
Who will we ask to participate?
Most board and/or director evaluations concentrate exclusively on the board (and perhaps the CEO). However, there are other sources of feedback to be considered, e.g. internally, senior managers and, in some cases, other employees may be asked to provide feedback.
What will we do with the results?
A board evaluation will only be effective if there are tangible outcomes, i.e. discussion of the results and changes or improvements, if required.
Designing a board evaluationSlide20
Currently offered board review processes
Gather data
Survey InterviewsCollate data
Report data
Discuss results
20Slide21
Board review framework example
21
Director Protection
Board Evaluation
Director Remuneration
Director Selection
Director Induction
Director Development
Strategy
CEO
Monitoring
Compliance
Risk Management
Policy Framework
Networking
Stakeholder Communication
Decision Making
Role of the Board
Board Structure
Role of Individual Directors
Role of the Chair
Role of the Company Secretary
Role of the CEO
Board Meetings
Board Meeting Agenda
Board Papers
Board Minutes
Board Calendar
Committees
Defining
Governance Roles
Improving Board
Processes
Key Board
Functions
Board
Effectiveness
Board Behavioural
Dynamics
®
Source:
G. Kiel, G. Nicholson, J.A. Tunny & J. Beck 2012,
Directors at Work: A Practical Guide for Boards,
Thomson Reuters, Sydney.Slide22
Presenting the results – eG format
22
Question as per survey
2. The level of understanding by directors of their roles and responsibilities is:
Directors
' duties arise from three sources:
1) the power relationship between the director and the company, which gives rise to fiduciary duties;
2) from the tort of negligence, which gives rise to the duty of care and diligence; and
3) From community expectations, which have given rise to a range of statutory provisions. Directors can be held personally, legally responsible for the way in which a company conducts its affairs
.
No comments provided
Min
Mean
Max
eG
Rating
4
4.50
5
Green
Graphical representation of mean
Explanation of question
Comments from participants (if any)
eG
Rating based on results
Maximum rating from results
Mean of results
Minimum rating from results
Graphical representation of results
Don’t Know results not collated into these fieldsSlide23
Performance against other boards
But ... what about benchmarking?
23Slide24
Example of benchmarking
24
Excellent
Grand Mean = 7.53
Extremely Poor
Overall Performance (1 - 10)
Previously evaluated companies
Board evaluated
Previous evaluation resultsSlide25
Benchmarking – The future
25
Governance practices are recognised by others to be of the highest standard. No further
changes are required.
5. Leading practice
Advanced governance practices are in place. They exceed minimum performance and compliance requirements. Only minor improvements are required to achieve and
be recognised as leading practice.
4. Advanced
The minimum performance and compliance requirements in governance practices are in place. There is still room for improvement.
3. Acceptable
Shortfalls in governance practices may have
been identified and initial steps may have been taken to rectify them. The changes that have been made are still quite basic leaving
significant room for improvement.
2. Developing
Governance practices are either non-existent or in the very early stages of development.
1. Rudimentary
The Board Maturity Model
© Effective GovernanceSlide26
Stage
1
Baseline
2
Developing
3
Consistent
4
Continuous learning
5
Leading practice
Key area
: CEO evaluation
CEO evaluation does not occur.
An informal CEO evaluation occurs annually.
There are no mid-term or periodic reviews of the CEO’s progress.
A formal CEO evaluation occurs annually.
There are no mid-term or periodic reviews of the CEO’s progress.
A formal annual CEO evaluation occurs
annually.
Mid-term and periodic reviews of the CEO’s progress are being trialled.
A formal annual CEO evaluation occurs annually.
Mid-term and periodic reviews of the CEO’s progress take place.
Performance concerns are not addressed by the board.
Unsatisfactory performance is addressed by the board.
There is no formal annual performance exchange between the CEO and the board.
Unsatisfactory performance is addressed by the board.
An informal annual performance exchange occurs between the CEO and the remuneration committee.
Unsatisfactory performance is addressed by the board.
A formal annual performance exchange between the CEO and the full board is being trialled.
Unsatisfactory performance is addressed by the board.
A formal annual performance exchange occurs between the CEO and the full board.
The Chair provides regular informal feedback to the CEO.
The majority of the following documents do not exist: CEO evaluation policy; CEO evaluation procedures; CEO’s position description; CEO’s performance agreement; and organisational values.
Some CEO evaluation policies and procedures are documented but are out of date.
Existing CEO evaluation policies and procedures are being updated and missing policies and procedures are in course of development.
An updated suite of CEO evaluation policies and procedures is being trialled.
CEO evaluation policies and procedures are fully documented, updated as required and reviewed at least annually.
Board Maturity Model: CEO EvaluationSlide27
Future of board evaluations ‒ Observation
Researchers argue that the future research on boards should focus on the actual behaviours demonstrated in the boardroom This should be explored by being there and observing
This will further help to understand what directors actually do and how decisions are made 27Slide28
Board evaluation outcomesSlide29
After the board evaluation...
29
Is it forgotten until next year?
Does the board review the process?
Are the review findings acted upon?
How would your board answer these questions?Slide30
Implementation process
When finalising the implementation process boards generally consider:
The effectiveness of the evaluation How often they should perform such assessments
The impact of the evaluation will often be apparent from the outset, e.g.
“Quick wins” from an evaluation may include a revised agenda or restructured board papers
Longer-term outcomes might necessitate a board paper prepared by a committee, for example, recommending a new process or policy to the board for approval
30
The key to moving beyond “feel-good” discussions to tangible governance improvements lies in follow-upSlide31
We recommend a “Governance Road Map”Slide32
Governance road map example
32
Priority Legend
Status Legend
P1
= immediate (within the next 3 months)
= In Progress
P2
= 3-6 months
= Behind Schedule
P3
= 6-12 months
= Not Yet Commenced
P4
= 12+ months
= Now Complete
Goal -> Activities -> Tasks
Priority
Current Status
Previous Status
Lead Person / Group
2012
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Monitoring
M
The board's monitoring processes (financial and non-financial) are rated by all directors as at least 4 (good) out of 5 (very good).
M1
The board and management undertake a review of the financial reporting to the board.
M1.1
The board discuss expectations and oversee a review that includes the level of detail and accuracy of the financial reports requirements.
P1
Finance and Audit Committee
M1.2
The board to approve and communicate to management the new format for financial reporting.
P1
Finance and Audit Committee
M1.3
Schedule annual review of financial reporting into the board's annual calendar of activities.
P1
Finance and Audit CommitteeSlide33
“Quick wins” for boards from evaluations
Introducing leading practice: Board agendas
Board papersBoard calendar
33Slide34
Sample Board Meeting Agenda
1. In-camera Session
30 mins
2. Meeting Opening
2.1 Apologies
2.2 Director Conflict of Interest Disclosures
2.3 Previous Minutes
2.3.1 Confirmation
2.3.2 Matters Arising/Action List
30 mins
3. Matters for Decision
3.1 Major strategy decisions (always have board paper and recommendations)
3.2 Routine decisions including capital equipment approval and expenditure (discussed only if requested by a director)
60 – 120 mins
4. Matters for Discussion
4.1
CEO’s
Report
4.1.1 Current Significant Issues
4.1.2 Matters for Approval
4.1.3 Update on Strategic Plan Implementation
4.1.4 Major Key Performance Indicators
4.1.5 Risk and Compliance Update
4.1.6 Environmental, Social and Governance (ESG) Update
4. Matters for Discussion (cont’d)
4.1.7 Innovation Update
4.1.8 Environmental (PEST) Update
4.1.9 Matters for Noting
4.2
CFO’s
Report
4.3 Discussions concerning forthcoming strategic decisions
4.4 Committee Minutes
4.4.1 Audit
4.4.2 Other
4.5 Other matters for discussion
4.6 Chairman’s Update
4.7 Presentation by Management (if required)
60 – 120 mins
Matters for Noting
[discussed only on exception basis]
5.1 Major Correspondence
5.2 Company Seal
5.3 Updated Board Calendar
5.4 Other Matters for Noting
10 mins
6. Meeting Finalisation
6.1 Review Actions to be Taken
6.2 Meeting Evaluation
6.3 Next Meeting
6.4 Meeting Close
10 mins
COMPANY NAME
ABN XXXXXXXXXX
BOARD MEETING AGENDA
Board Meeting Date: XXXX
Location: XXXX
Commencement Time: XXXX
34Slide35
Sample Board Paper Cover Sheet
BOARD PAPER
Agenda Item:
#
Agenda Item:
[
Insert Title]
Sponsor:
[Insert Name and Title]Draft Resolution
[Insert exact wording of proposed board resolution that the Board is asked to pass.
The
draft resolution must be clear, concise and unambiguous.]
Executive Summary:
Explain in no more than four lines what the paper is about and what it is endeavouring to achieve. The paragraph should be clear and concise and should state whether the paper is being submitted for the Board’s information or is seeking the Board’s approval for a contract, action, etc.
Background:
Outline in no more than twelve lines the background to what is being proposed to the Board, providing the information necessary for a non-executive director to understand the proposal who does not have the background knowledge of an executive who has been managing the day-to-day affairs of a particular matter.
Summarise any previous Board consideration of the specific proposal. If it is not possible to explain the background to a proposal in the space of two paragraphs, include an attachment and provide further details.
Identify any external advice/consultants/information involved in the preparation of the proposal.
Recommendation:
Outline the recommendation in no more than twelve lines. Do not repeat the statements made in the sections above.
Mention the options that were considered by management and explain why the preferred option was chosen.
Also detail the outcomes that management is seeking to achieve from the proposal. If the implications of the proposal are complex, include an attachment and provide further details.
Issues
Strategy Implications
Explain in no more than ten lines how this proposal is aligned to the agreed strategic and business plans.
35Slide36
Sample Board Paper Cover (cont’d)
Financial Implications
Explain in no more than twelve lines the expenditure implications of the proposal.* Once again this should take the form of an executive summary approach. If the expenditure implications are complex, include an attachment and provide further details.
This section should include comments on whether the expenditure is budgeted or unbudgeted, the proposed timing of the expenditure and cash flow implications. If a detailed business case has been prepared for a proposal, the major points of the case should be summarised here.
Risk Analysis
Analyse in no more than twelve lines
the major risks associated with the proposal and explain how these risks will be managed. This information may be presented using the following pro forma.
Corporate Governance and Compliance
Outline in no more than twelve lines
the corporate governance implications of the proposal, remembering that it is of considerable importance to the Board that contemporary corporate governance standards are achieved. Therefore, the adoption of appropriate internal risk management and compliance processes will be a condition precedent to the Board considering and approving a proposal.
Outline what KPIs and/or reporting to the board will occur during and after implementation.
Management Responsibility
Identify the manager who will have responsibility for the proposal as well as the executive who will deal with the matter on a day-to-day basis.
Signing of Board Paper
_____________________________ _____________________________
Chief Executive Officer Sponsor
The following people have been involved in the preparation of this board paper:
[Name and Title]
Identified Risk
Risk Likelihood (H,M,L)
Impact of Risk (H,M,L)
Strategy to Manage Risk
* This should take the form of an executive summary approach. If the issues are complex, include an attachment and provide further details.
36Slide37
Sample Annual Board Calendar
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
1. Meeting Schedule
General board meeting
[Name] Committee
meeting
[Name] Committee meeting
2. Strategy Formulation
Strategic planning workshop
Approve/Review strategic plans
Approve/Review business plans
Approve budgets
Concepts
Final
3. Strategy Implementation (Management Presentations)
Business unit, activity or function 1
Business unit, activity or function 2
Business unit, activity or function 3
Business unit, activity or function 4, etc.
4. CEO
Finalise/review contract
Approve performance KPIs
Assess performance (half yearly)
Assess performance (full year)
Review remuneration
Review succession planning
Review senior management with CEO
37Slide38
Sample Annual Board Calendar (cont’d)
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
5.
Accountability
Financial reports
approve half year
review substantially audited full year
approve full year
Full year results - commentary
Approve full year forecast
Annual report
concept/drafts
approved
6. Monitoring and Supervision
Review CEO report format
Review board reporting requirements
Whole of business risk review
7. Policy Making and Review
Review board charter
Review remuneration policy
Review risk management policy
Review delegated financial authority
Review delegations
Review compliance policy
Review corporate code of conduct
Review communication policy
38Slide39
Sample Annual Board Calendar (cont’d)
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
8. Corporate Governance
Review board performance, including board succession
Meeting with members or [Director Selection] Committee
Review committee meeting schedule
Review terms of reference and composition
[Name] Committee
[Name] Committee
Meetings without management
9. Stakeholder Communication
Meeting with members
Other key stakeholder events
39Slide40
Any questions? Slide41
James.Beck@effectivegovernance.com.au
Effective
Governance
Tel: (07) 3510
8111
Mob: 0418 780 215Slide42
Effective Governance
Effective Governance is an independent, privately-owned consulting firm that delivers advice on Corporate Governance to clients in Australia and New Zealand.
We combine research with practical methods developed in the field with clients over a twenty year period.
This covers the spectrum from small family companies, not-for-profits, government-owned corporations, statutory authorities, publicly listed companies and large multinationals.
We believe that in order for Governance to be effective it must be specifically tailored to the type of organisation and their industry dynamics.
That said, each will be at a different phase of their lifecycle and will have their individual challenges at a governance level.
42
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