Pathways To Good Governance

Report
2012 – Pathways to Good Governance
What Does Good Governance Look Like?
James Beck
29 July 2012
Effective Governance
Tel: (07) 3510 8111
Fax: (07) 3510 8181
[email protected]
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?
2
What is good governance?
What does good governance look like?
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 do these companies have in common?
5
Poor governance attributes
From the outside:
 A non-independent chair
 Majority of the board of directors are not independent
 Negative media reports
 Poor or no surplus
 Organisation extinction
6
Poor governance attributes (cont’d)
On the inside:
 Directors have considerable conflicts of interest and are all
friends of the chair or CEO
 Dysfunctional 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
7
Good governance – good performance
 Better governed firms outperform poorer
governed firms in a number of performance
areas
Source: R. Brown & T. Gørgens, 2009, “corporate governance and financial performance in an
Australian context (Treasury Working Paper 2009-02)
8
The benefit of good governance
 Companies with good governance practices clearly outperform
those without
 Second only to financial reporting, board structure and board
responsibilities are considered as high in importance for
stakeholders
 Provides assurance to regulators and financial institutions
 Employee satisfaction, transparency, accountability and
organisational culture are enhanced
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Good governance
It makes good business sense...
...but it relies on board performance
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Board performance focus
 Corporate failures
 ASX 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
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Organisational success
History
Board
Performance
Legal
Framework
Organisational
Performance
Constitution
Management
Performance
Strategy
12
The board must be a high performing
team...
... always reflecting on
performance
13
High performance board framework
ORGANISATIONAL ENVIRONMENT
INPUTS
THE BOARD ENVIRONMENT
Organisation
Type
BOARD INTELLECTUAL CAPITAL
•
•
•
•
Strategy
Board
Behaviours
Board
Competencies
Legal
Framework
BOARD ROLES
Knowledge
Skills
Abilities
Contacts
•
•
•
•
Board
Dynamics
CEO Selection, Monitoring
and Evaluation
Personality
Values
Norms
Boardmanagement
relations
Monitoring
Risk Management
Compliance
Constitution
Policy Framework
Board
Structures
Strategy
•
•
•
•
Networking
Stakeholder Communication
Policies
Processes
Procedures
Committees
Decision Making
Effective Governance
History
WORK WITH AND THROUGH THE CEO AND SMT
ORGANISATIONAL PERFORMANCE
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Adapted from Nicholson & Kiel, 2004
Goals and
objectives
The board facilitates the
achievement of
organisational goals
Directors fulfil their duties and
responsibilities to the best of
their abilities
What is board
effectiveness?
Stakeholder
needs
Board prevents and
manages crises
Human
capital
Board develops and
evaluates the CEO
and fosters the
development of human
capital throughout
the organisation
Board monitors legal and
ethical performance
Board considers the
needs of stakeholders
Directors can procure
resources vital to the
organisation
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Board performance evaluation
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!”
Benefits of board reviews
•
•
•
•
•
•
•
•
Transparency
Communication
Leadership/culture
Role clarity
Organisation
Board performance
Board structure
Time for reflection
Group development
– Role
– Processes
Board
BENEFITS
Individual
directors
Owners/
shareholders
• Role clarity
• Feedback
• Validation/gap
analysis
• Improved utilisation
• Transparency
• Builds confidence
and trust
• Accountability
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Designing a board evaluation
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:
1. The role of the board;
2. Board processes and procedures; and
3. 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 Boards may choose between qualitative and quantitative techniques, or a mix of
will be used?
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.
19
Currently offered board review processes
1. Gather data

Survey

Interviews
2. Collate data
3. Report data
4. Discuss results
20
Board review framework example
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
Defining
Governance Roles
Board
Effectiveness
Board
Behavioural
Dynamics®
Director Protection
Board Evaluation
Director Remuneration
Director Selection
Director Induction
Director Development
Key Board
Functions
Improving Board
Processes
Board Meetings
Board Meeting Agenda
Board Papers
Board Minutes
Board Calendar
Committees
Source: G. Kiel, G. Nicholson, J.A. Tunny & J. Beck 2012, Directors
at Work: A Practical Guide for Boards, Thomson Reuters, Sydney.
21
Presenting the results – eG format
Question as per
survey
Graphical
representation of mean
Explanation of
question
2. The level of understanding by directors of their roles and responsibilities is:
Directors' duties arise from three sources:
3
2) from the tort of negligence, which gives rise to the duty of
care and diligence; and
2
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.
1
Number of Responses
4
1) the power relationship between the director and the
company, which gives rise to fiduciary duties;
Graphical
representation of
results
0
•
Very Poor
1
Poor
2
Average
Good
3
4
Response
Very Good
5
Don't Know
9
Min
Mean
Max
eG Rating
4
4.50
5
Green
Minimum
rating from
results
Mean of
results
Maximum
rating from
results
No comments provided
eG Rating
based on
results
Don’t Know results not
collated into these fields
22
Comments from
participants (if any)
Performance against other boards
But ... what about benchmarking?
23
Example of benchmarking
Previous
evaluation
results
companies
Previsouly evaluated
companies
evaluated
Previously
Comparative overall board performance mean ratings
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29
28
27
26
25
24
23
22
21
20
19
18
17
16
15
14
13
12
11
10
9
8
7
6
5
4
3
2
1
1.00
8.80
8.30
8.29
8.17
8.14
8.00
8.00
8.00
7.88
7.86
7.86
7.83
7.71
7.71
7.67
7.57
7.56
7.50
7.38
7.23
7.20
7.20
7.11
7.10
7.00
Board
evaluated
6.64
6.64
6.57
6.40
6.33
2.00
Extremely
Poor
Extremely Poor
3.00
4.00
5.00
6.00
Overall Performance (1 - 10)
Overall Performance (1 - 10)
Grand Mean = 7.53
Grand Mean = 7.53
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7.00
8.00
9.00
10.00
Excellent
Excellent
Benchmarking – The future
The Board
Maturity Model
4. Advanced
3. Acceptable
2. Developing
1.
Rudimentary
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.
The minimum performance and compliance
requirements in governance practices are in
place. There is still room for improvement.
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.
Governance practices are either non-existent
or in the very early stages of development.
© Effective Governance
25
Board Maturity Model: CEO Evaluation
Stage
1
Baseline
2
Developing
3
Consistent
4
Continuous learning
5
Leading practice
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.
Key area:
CEO
evaluation
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
27
Board evaluation outcomes
After the board evaluation...
How would your board answer these questions?
Is it
forgotten
until next
year?
29
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-up
We recommend a
“Governance Road Map”
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.
The board discuss expectations and oversee a
M1.1 review that includes the level of detail and
accuracy of the financial reports requirements.
P1
Finance
and Audit
Committee
The board to approve and communicate to
M1.2 management the new format for financial
reporting.
P1
Finance
and Audit
Committee
P1
Finance
and Audit
Committee
M1.3
Schedule annual review of financial reporting
into the board's annual calendar of activities.
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
32
Dec
Nov
Oct
Sep
Aug
Jul
Jun
May
Apr
Mar
Feb
2012
Jan
Lead Person /
Group
Previous
Status
Current
Status
Goal -> Activities -> Tasks
Priority
Governance road map example
“Quick wins” for boards from evaluations
 Introducing leading practice:
– Board agendas
– Board papers
– Board calendar
33
Sample Board Meeting Agenda
Board Meeting Date:
Location:
Commencement Time:
XXXX
XXXX
XXXX
COMPANY NAME
ABN XXXXXXXXXX
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.
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
34
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
5. 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.
10 mins
Meeting Finalisation
6.1 Review Actions to be Taken
6.2 Meeting Evaluation
6.3 Next Meeting
6.4 Meeting Close
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 nonexecutive 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.
35
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.
Identified Risk
Risk Likelihood (H,M,L)
Impact of Risk (H,M,L)
Strategy to Manage Risk
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]
* This should take the form of an executive summary approach. If the issues are complex, include an attachment and provide further details.
36
Sample Annual Board Calendar
Jan
Feb
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
37
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Sample Annual Board Calendar (cont’d)
Jan
Feb
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
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Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Sample Annual Board Calendar (cont’d)
Jan
Feb
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
39
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Any questions?
[email protected]
Effective Governance
Tel: (07) 3510 8111
Mob: 0418 780 215
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.
For our free Governance Health Check go to
www.effectivegovernance.com.au/Products
42

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