Don’t wait until something really bad happens before you find out
Careers and reputations of the pillars of the banking industry have been very publicly shredded in recent months. Their fate provides a timely reminder to all directors of the risks if they do not ensure their own houses are in order.
There are some particular challenges for board members in the public sector. There are now 1,200 public boards with 19,000 directors. They have a combined spending power of £37bn, more than total government expenditure in Scotland. In today’s financial climate they are likely to face more questions about how effective they are as stewards of organisations responsible for spending so much taxpayers’ money.
The composition and structure of boards needs to support two different functions. The first is to determine and deliver a strategy to achieve the aims of the organisation. The second is to provide a check and challenge to the executive members to ensure they have put the measures in place to manage and mitigate risks and threats to the organisation.
The particular features of some public sector boards can make their task harder in fulfilling these roles. They are often too big to act as efficient decision makers or to respond rapidly and cohesively to a crisis. Cabinet Office figures suggest that the average size of public sector boards is 21 or more. They are further hampered by the lack of clarity over the lines of accountability. Knowing the buck stops with you concentrates minds, but many public bodies are accountable to parliament through a senior responsible officer, meaning the board has no direct accountability for its action.
On public sector boards, non-executive directors (NEDs) usually outnumber executive directors by as much as four or five to one. They tend to be assembled from the great and the good, some of whom bring specific expertise while others represent particular stakeholder groups. As a result, NEDs’ roles are often unclear. In contrast, in listed companies NEDs essentially represent the interests of shareholders and wield real power through the chairmanship of key committees.
In both the public and private sector, the board needs to be clear about the type, quantity and timing of information it requires. A focus on structures means the people management aspects of boards are often overlooked. Yet unless the board members possess the correct range of capabilities and work as a team they will be unable to operate effectively, however good the governance structures.
A particular challenge for public sector boards is recognising that the ability to represent a stakeholder or customer group does not mean an individual will be an effective director. So training for new members is especially important. Unfortunately for some public sector appointments, political considerations tend to outweigh the individual’s practical skills.
One way to improve board effectiveness is to commission an independent review that will provide a health check and consequently reinvigorate the board.
It is clear that those taking on board roles assuming they are quiet backwaters may be in for a shock. The risks of being grilled by select committees, or being in the path of a media pack in full cry are increasing. It is all the more important to ensure boards are operating effectively in calmer times so they are equipped to meet the challenges when they encounter stormier waters.