How you interact with your board
Even if you’re not in financial services, your board and management team need to talk about how they work together after the 2018 Financial Services Royal Commission.
There has been a large volume of reporting on Royal Commission recommendations, but less about the implications for how executive leadership teams and boards work together.
While the 2018 Royal Commission focused only on the Banking, Superannuation and Financial Services sector, all good boards are seeking to apply the lessons learned from it.
One of the ‘unintended consequences’ of the Royal Commission is that in many cases relationships between boards and management teams, which are so pivotal to the successful performance of both, have experienced more tension than previously.
This is due to both parties feeling the effects of a higher level of scrutiny and a lower level of trust in business and institutions from external stakeholders – including regulators – and thus, while challenging to navigate, is entirely understandable in the circumstances.
The CBA review by APRA referred to boards needing to apply a ‘healthy cynicism’; boards are likely now applying this to a greater degree than previously, which is also altering the dynamic between them and Executive leadership teams.
What will be helpful is dialogue between the two parties about this change in approach. It’s a bit like starting a game of football playing AFL rules, and at half time switching to union rules.
Good boards are aware of the need to hold discussions about this change in ‘modus operandi’ to arrive at a shared understanding. Ideally, there will be an exchange of views and perspectives between boards and leadership teams as both adapt to an altered way of working and interacting with each other.
Research tells us that high performing boards consistently demonstrate high levels of trust and respect in their interaction with Executive leadership teams, which facilitates openness and disclosure in the boardroom.
At the same time, it is critical that all boards apply the appropriate degree of rigour and challenge to management reporting and thinking. For many in the RoyalCommission’s wake, this means an acceleration in the breadth and depth of their enquiries.
The test for boards is to minimise any potential deterioration in the relationships and dialogue between the two parties while doing so.
When done thoughtfully this reduces the potential to negatively impact the quality of interaction and the degree of transparency which each enjoys with the other.
Good leadership teams are sufficiently aware of the context and understand the board’s role and accountabilities such that they have an objective perspective in the face of the greater level of probing and questioning which they now experience.
These approaches will assist boards and leadership teams to move into a new, more rigorous, way of working together with minimal loss of goodwill and maximum benefit. It will also be helpful for leadership teams to be aware of the likely expectations of boards for incorporating recommendations from the Royal Commission into practice. For more information see below:
10 Areas Executives Should Review Following the Royal Commission
Our work with board clients indicates that these are
- Rigorous reporting on non-financial and financial performance, with leading and lagging indicators. Customer and culture performance metrics are particularly emphasised to identify where practice can or should be strengthened.
- Insistence on appropriate timeliness and quality of all performance reporting provided to the board. Periodic independent (external) validation of management reporting by the board.
- A greater degree of rigour in the challenge boards provide to management – “don’t tell me, show me”.
- Regular, appropriately skilled and experienced, board renewal.
- Rigorous and independent reviews of the quality of governance, the board, and organisational culture; these to consider ‘cultural drivers of misconduct’.
- Risk management and mitigation plans with clear accountabilities and timelines to address any gaps or issues identified in assessments.
- Greater clarity in organisational structures and design to facilitate management and employee accountability – APRA may seek to obtain an ‘accountability map’ containing the names of all accountable persons, their responsibilities, and details of their reporting lines.
- Regular monitoring and reporting on remuneration practices and the behaviours they drive.
- Timely reporting and interventions on all significant issues to ensure appropriate, responsive remediation where required.
- Regular reviews of interventions to determine whether changes made have been effective.
Further Food for Thought: Quotes from the 2018 Royal Commission
” The nature of challenge (from the board) is changing over time.”
“I wish the board had pushed management harder to resolve an issue more quickly.”
“We seem, as an organisation, not to be comfortable with setting expectations for people and holding them to ‘account’.”
“Rather than just telling someone to fix a problem, the request would be made in terms on of ‘I would encourage you to…”
” The business too often failed to put the customers first.”
” The board was too trusting of management.”
“Saying sorry and promising not to do it again has not prevented recurrence.”
“We took too long to fix problems.”
“The board was too willing to hand out bonuses despite issues.”
“There is a tendency to rationalise why actions have not been taken.”
“Rather than just telling someone to fix a problem, the request would be made in terms on of ‘I would encourage you to…”
If you have any queries about how to apply the Royal Commission recommendations in your organisation, or how your board and Executive team interacts, we are happy to assist.