Welcome to the NED Capital Podcast, where we explore the issues that matter to chairs, CEOs, investors and business owners when building effective boards.
Today, we're looking at one of the foundations of a successful board:
Corporate governance.
Corporate governance can sound like a dry or highly technical subject, but in reality it is about something very straightforward: how an organisation is directed, controlled and held accountable.
Good corporate governance helps establish who makes decisions, how those decisions are challenged, how risks are managed and how the interests of shareholders and other stakeholders are considered.
For companies of any significant size, governance becomes increasingly important as the organisation grows more complex.
We've produced a full guide to corporate governance that explores the subject in more detail, but there are several principles that every board should understand.
The first is accountability.
A board needs clear responsibility for the organisation's direction and performance. Directors need to understand their duties, the decisions they are responsible for and the information they require to make those decisions effectively.
The second is transparency.
Boards need reliable information. Directors cannot provide effective oversight if they receive incomplete, inaccurate or excessively filtered information.
The third is challenge.
A strong board should not simply approve whatever management proposes.
Constructive challenge is one of the most valuable functions of a board.
That is where Non-Executive Directors can play a particularly important role.
Because NEDs are not responsible for the day-to-day running of the organisation, they can bring a degree of independence and objectivity to board discussions.
But having NEDs on a board doesn't automatically create good governance.
The structure and composition of the board matter enormously.
We've also produced a detailed guide to Board Structure, Composition and Independence, which looks specifically at these issues.
So what makes an effective board structure?
Start with balance.
A board should collectively contain the skills and experience required to oversee the organisation.
That might include financial expertise, sector knowledge, operational experience, technology expertise, regulatory understanding, international experience or specific knowledge of mergers and acquisitions.
But it isn't simply about collecting as many skills as possible.
The board needs the right combination.
Imagine a business with five directors who have almost identical backgrounds.
They may all be highly experienced, but if they have similar professional histories, similar networks and similar assumptions about the business, the board may lack diversity of thought.
Sometimes the most valuable director is the person who asks the uncomfortable question that everyone else has overlooked.
This is one reason independence matters.
An independent NED should be able to challenge management without being unduly influenced by personal relationships, previous involvement with the company or other interests.
Independence provides an additional layer of objective scrutiny.
But independence isn't the same as being disconnected.
The best NEDs understand the business sufficiently well to challenge intelligently.
They don't simply oppose management for the sake of it.
Instead, they ask questions such as:
“Why are we making this assumption?”
“What happens if that forecast is wrong?”
“Have we considered the downside?”
“What evidence supports this strategy?”
And:
“Are we asking the right question?”
That is constructive challenge.
It can be particularly valuable when the company is entering a period of rapid growth or significant change.
Perhaps the organisation is raising capital.
Perhaps it is considering an acquisition.
Perhaps it is preparing for an IPO.
Perhaps the business is expanding internationally.
Or perhaps performance has deteriorated and the board needs to make difficult decisions.
These are precisely the circumstances in which governance becomes more important, not less.
Another important consideration is the role of the chair.
The chair has a critical responsibility for ensuring that the board operates effectively.
A good chair creates an environment where directors can disagree constructively, where difficult issues are discussed openly and where management is appropriately challenged.
The chair should also ensure that the board spends its time on the issues that genuinely require board-level attention.
This is particularly important because boards can easily become overwhelmed by operational detail.
If every board meeting becomes a review of individual operational issues, there may be insufficient time for strategy, risk, succession, capital allocation and long-term value creation.
Good governance therefore isn't simply about having policies and procedures.
It's about creating a board that actually works.
That includes having the right people around the table.
It includes having appropriate committees where necessary.
It includes clear reporting lines.
It includes effective board papers.
And it includes regular evaluation of board effectiveness.
One question every board should periodically ask is:
Do we still have the right board for the organisation we are today?
Because the answer can change.
A board that was perfectly suited to a £20 million company may not be the right board for a £100 million organisation.
The skills required during a founder-led growth phase may be different from those required when the company becomes PE-backed or prepares for a public listing.
This is why board composition should be reviewed periodically rather than treated as permanent.
If there is a skills gap, the answer may be to recruit a new NED.
But the starting point should be understanding what the board actually needs.
This is where a board skills audit can be particularly useful.
Identify the capabilities already present.
Identify the gaps.
Consider the company's strategy.
Then determine what additional experience would genuinely improve the board.
That creates a much stronger basis for NED recruitment.
Ultimately, corporate governance is not about creating bureaucracy for its own sake.
Good governance should help an organisation make better decisions.
It should provide accountability without preventing sensible risk-taking.
It should create challenge without creating unnecessary conflict.
And it should give shareholders and stakeholders confidence that the organisation is being properly directed and overseen.
For businesses reviewing their governance arrangements, our full guide to corporate governance provides a useful starting point.
And if you're specifically reviewing your board, our guide to Board Structure, Composition and Independence explores how the people around the board table can influence its effectiveness.
At NED Capital, we believe that the quality of a board ultimately depends on the quality of the people, structure and challenge around that table.
The right governance framework provides the foundation.
The right board provides the judgement.
And the right Non-Executive Directors can provide the independent perspective that helps a business make better decisions.
Thank you for listening to the NED Capital Podcast.
If you're reviewing your board structure, considering a new Non-Executive Director or simply want to understand how to strengthen your governance, visit NED Capital for more information.