The absence of an effective board of directors, which is adequately and regularly challenged, can have far reaching implications for financial services firms. Board effectiveness is essential in driving forward a firm’s strategy, performance and culture.
![Business Collegues 497602744](/media/yrjl3qeu/https-smithandwilliamsoncom-media-1976-business-collegues_497602744.jpg-anchor-centermode-cropwidth-1093height-350rnd-131986016820000000)
When boards are dominated by a small number of individuals who are not robustly challenged on what they are doing, executives can take a business down a route that is not optimal for shareholders. Boards that consist of people that simply nod and listen can not only miss opportunities but, for the financial services industry specifically, it can mean that regulatory requirements are not met.
What, therefore, are the important factors firms should consider for boards to be most effective?
1. Adherence to regulatory and other rules and guidance – The forthcoming Senior Managers and Certification Regime will require firms to consider the roles and responsibilities of individuals within the business. This, together with the new Corporate Governance Code (where applicable), could result in changes to board composition and/or operation.
2. Appoint people who have an eye on growth opportunities – While achieving compliance with regulation is essential there is a danger that boards which focus entirely on satisfying specific rules miss out on opportunities for business growth. Boards should have members who can challenge management on all aspects of strategy and their success in implementing it.
3. Bring in relevant experience – Boards are most effective when they have executives and non-executive directors (NEDs) who have experienced similar challenges to those the business is facing. Start-ups should consider bringing onto the board individuals with experience in the industry who can mentor them through their early stages or the execution of the business strategy. Search organisations can help find NEDs, but recommendations from other people in your network can be just as valuable.
4. Make sure specialist functions are challenged – With areas such as IT, businesses are very dependent on a small number of individuals to tell them that everything is OK. Whilst some activity can be monitored through internal audit, it is important that boards also have the skills to constructively challenge multiple departments in a business. If a major new project is in the offing, this could be the right time to bring relevant experience onto a board.
5. Set member tenures – There are specific limits on the tenure of board members for listed companies, but for any business having a well-thought through succession plan is good practice and enables smooth transition. Individuals need to be given time to set and achieve objectives, which tenure limits can help with.
6. Realise there’s no magic number – People often ask how many executive and non-executive directors there should be on a board. Whilst guidance is available, there is not necessarily a right or wrong answer. Most financial services firms will bring in representatives with compliance and regulatory risk, operations, finance and legal experience, as well as executives who can present on the business and strategy. The important thing is ensuring the right level of governance and that a business is challenged across its entire operations.
Even the most enthusiastic executives with bright ideas will need reeling back at times. With effective board composition, firms’ strategies can be robustly challenged.
DISCLAIMER
By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. This briefing does not constitute advice nor a recommendation relating to the acquisition or disposal of investments. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of writing.
Disclaimer
This article was previously published on Smith & Williamson prior to the launch of Evelyn Partners.