The Resilient Director

Hawick.

Preface

The three authors have designed this book as a guide to the complexities of governing and directing companies, enterprises and a variety of other organisations, including NGOs, not-for-profits, charities, and mutual and social enterprises. It is intended for the use of newly appointed and aspiring executive and non-executive directors (NXDs) and for experienced trustees and governors, to enhance their personal contributions and improve whole board effectiveness and outcomes. Equally, it can be used as a valuable resource for those who are studying corporate governance, corporate social responsibility, corporate strategy and sustainability at postgraduate or continuing professional development levels.

In our book Faith in Governance (2004) we provided a wake-up call for directors when we wrote that,

‘being a director is more than making a profit; more than complying with governance rules and more than conformity to the latest regulatory fad. Individuals who are directors play a vital role in creating the kind of society we want; directors are called to act justly, provide leadership and to fulfil duty……being a director is a worthy calling that requires much dedication, reflection, learning and practice’

(Willis and Fass, 2004).

At that time, we wished the book to contribute to the realisation of these attributes. More than ten years later, it seems that this wake-up call has gone largely unnoticed, as the economy has lurched from crisis to crisis and a conveyor belt of corporate scandals have occurred. It often appears as if the proper role of the individual director to act justly has been forgotten or is in danger of being removed by regulators who by their actions risk driving out individual conscience and the desire by individuals to act in ‘good faith’.

However, acting in good faith alone will not be sufficient for the individual director to make a difference and change the culture of the boardroom when this is needed. The direction of travel of the board system can often seem so powerful that the role of directors appears to focus on what they can get away with, compared to seeking to do the right thing. The individual director is also part of a social system called the board which, rather than encouraging directors to act justly and fulfil their duties, can seem to discourage them from doing so. Hence the title of this book: The Resilient Director – Building an Effective Board.

The authors believe that it is qualities such as resilience, perseverance and ‘stickability’ that are the missing ingredients for board effectiveness. The book is therefore a counter-cultural guide for directors and trustees in the governance of organisations. The book seeks to close the gap between the theory of how organisations ought to be directed and the practice of how they are actually directed. It seeks to achieve this through encouraging a resilient, can-do attitude whilst emphasising the responsibility of individual directors to act in good faith, to use independent judgement, to act honestly and to place the long-term interests of the organisation before their own self-interest.

The book is intended to be a roadmap to help directors learn about their responsibilities; to guide them through the maze of governance theory and to help them to fulfil their roles in directing companies and other enterprises. The book is therefore intended to enhance and improve the contribution that individuals can make to the life and work of a board. It can also be a valuable resource for those who are studying at postgraduate or continuing professional development levels who require a text that bridges theory and practice.

The book provides a fresh analysis of corporate governance that places the individual director and the board at the centre of governance activity, as an alternative that would allow legislators, regulators and society in general to dictate the ethos and future direction of corporate governance policy in private, public and third sector institutions.

The following situations reflect the urgent requirement for the resilient director within a boardroom:

The book seeks to move away from a mechanistic, outputs-based, box-ticking governance approach, and is designed instead to help the busy director adopt an outcomes-based approach that builds shareholder value and takes into account the interests of the company’s stakeholders over the long term.

The book asks questions about ways that an individual director and the board as a whole can contribute to adding value and building loyalty amongst stakeholders. The authors propose that it is the behaviour of individual directors and the ways that they interact with each other as a board that will ensure that board outcomes are effective.

The ability of individual directors and the board as a whole to recognise dysfunction within the boardroom and for individuals to speak out with candour and honesty will always be the right starting point.

In a series of reflections, real-life cases and readings, the authors and contributors tackle key board issues that are designed to help the reader to enhance and improve their present performance as a director, trustee or governor, or help them to prepare for these appointments.

The book weaves together the challenges that confront all those leading and directing organisations, whether within the private, public or third sector, in the United Kingdom and internationally with experience-led practical guidance.

This book is designed for directors who wish to:

The raw material for this book is drawn from the collective experience of the authors working with directors on director development programmes in this country and overseas. In addition, the authors have been privileged to act as directors and trustees themselves and to have both participated in and been observers at board meetings at first hand, as advisors and evaluators. We have sought to add learning points as we too needed to learn in our time and to direct our readers towards key issues of resilience and effectiveness.

In conclusion, this book is designed to be a guide to responsible and sustainable corporate governance practice and to offer executive directors, NXDs and chairs of limited companies, trusts, charities and other organisations the opportunity to reflect on their roles as resilient, professional, dynamic, developmental and effective individuals.

Michael Willis

Tony O’Rourke

Michael Fass

Introduction

This book is about governance – that is the way that individuals and organisations govern themselves. The word points towards equity, stability and order in human affairs, as well as a defence against chaos.

It is a word used widely and in many different contexts. In this book it is used to explore issues of governance that arise in the organisation and management of companies, businesses, non-governmental agencies, charities and in other similar places where individuals join together to carry out a corporate activity. This activity can be for profit or for the public good and is known as corporate governance.

At the foundation of corporate governance lies the idea of trust, or the fiduciary duty of directors and trustees that is owed to the organisation to which they have been appointed and for which they are responsible. This is an old idea revived in the nineteenth century when the first of a series of Companies Acts was passed into law.

At the same time as the owners of a company – its shareholders – were made responsible only for the sums of money that they had subscribed to the company, the directors that these owners appointed to manage it on their behalf were made responsible for the company, i.e. the way that it would be run.

In order to protect the value of the money – or share capital – that these owners had placed into the company, a way was needed to be found to drive home to its directors this duty of responsibility that they had taken on; this was called their fiduciary duty – their duty of faithfulness, of trusted-ness, to the company, its present condition and its future prospects.

That was how it was meant to be; but, over 150 years later, we are well aware that it has not always worked out like that!

There have always been corporate scandals, whether they have been in the field of business or of public service, and, over recent years, trust has often been in short supply. There are too many recorded examples of trust being either abused or broken. Some of these are seared in our memories and include, for example, the Bristol Infirmary scandal, the parliamentary expenses and banking scandals and, most recently, police enquiries into abuse by the newspapers and at the BBC. All around us, we are witnesses to acts of breach of trust in contemporary culture.

Has there been an increase in these kinds of events in recent years or is it that we are simply better informed and more critical of them; or is there a decline in standards related to what people think that they can get away with?

Some of the great financial scandals have been straightforward matters of fraud or of mendacity on a grand scale, and to neglect and ignore the idea of faithfulness is as old as humankind itself. As a result, when we are dealing with human nature that can include an explosive cocktail of vanity, ambition and opportunity, some protection is needed, not only for owners and shareholders, but also for wider society.

The originators of the Companies Acts understood the risk of such frailty and their inclusion of the idea of a fiduciary duty into the law has, on the whole, stood the test of time and still informs much of our private behaviour and public service. The duty serves as a bulwark against greed and self-interested behaviour – what can be got away with – and reminds us that beyond self-interest lies a duty of faithfulness to the institutions for which we are individually and collectively responsible to each other and to society.

Who this book is for

This book has been designed to be a ready-to-hand guide to some of the basic facts and complexities of what has become known as corporate governance. It is not the last word on governance and does not contain every item of the law about governance. It is intended to be useful for all those who are engaged in any kind of corporate governance activity or who wish to learn more about it. This can be as a director in the field of profit-making business, as a trustee of a charitable activity, or as a student of corporate governance.

The contents are aimed principally at those responsible for the direction of medium-sized and family-owned enterprises, local and national charities and all other individuals who have the responsibility for directing an organisation that can include the local school, golf club or food bank. It will also be useful to those who are learning about corporate governance and the experience of others who are associated with it.

The three authors intend that the book will be useful to all these individuals who feel that they would like to know more about their duties as a director or trustee and, as a result, increase their capacity to make a positive contribution in the organisation to which they are appointed.

Being a director or trustee is not just about signing up for the role and attending meetings – it can be so much more rewarding than that – but, in the experience of the authors, all too often this is not the case.

A knowledgeable and well-prepared director or trustee around the boardroom table can make a very significant contribution to the progress of the organisation and vice-versa. We have all been the victims of meetings of the board that have been interminable, un-business-like and have been driven by a lack of preparation, ignorance and power-plays.

If individuals are going to dedicate time and effort to governance activity, it needs to be productive and progressive or it is simply a waste of their time.

The authors have therefore sought to find ways to provide richness in the examples used in the book; variety in the application of governance to different corporate settings and to convey a sense of excitement in what it is possible to achieve as a governor.

Key themes of the book

This book proposes four key themes in the development of an individual who serves as a director:

The role of the NXD

Many of the recent failures in governance are attributable to a breakdown within the unitary system of governance which places executive directors alongside NXDs. Too often the executives do not appreciate or understand the role of their NXDs and the value that such individuals can bring to the board. NXDs in their turn often fail to provide real added value. NXDs perform the role of guardians of good governance and it is important that they learn this and seek to communicate with the executive how the two roles can complement each other. Throughout the book, the authors encourage executives to start learning as early as possible about what serving on boards entails. An early appointment as an NXD in the public, private or charitable sector is one way for an executive director to appreciate the complexities and nuances of the role. This book also helps directors to prepare for their appointment to a board and outlines the duties and responsibilities of the role.

An effective board

The ability to visualise what an effective board should look like and how this can be achieved is the second theme of the book. Creating an effective board, which has a clear and defined role, needs the following questions to be addressed:

Alternative governance cultures

There are universal lessons to be learned about the way that boards are governed across different sectors and geographies, and in different countries and cultures, including the financial sector. This includes an understanding of:

•The failure of regulation and the regulators

•The inability of NXDs to test executive thinking

•The cavalier behaviour of many directors and how their boards became disconnected with the realities of the market and stakeholders

The development of directors and boards

Explores the way that individual directors take on their fiduciary duties and develop these as a guide to how they should think and behave in order to influence the dynamics of the boardroom. This includes the methods available for directors to help develop themselves and the board to develop their resilience. The importance of board behaviours is often the most neglected aspect of the board’s activities, but it is also the area that can provide the greatest long-term additional value to the organisation.

The structure of the book

Following the Preface and Introduction, there are five main parts:

Part 1

The Resilient Director is the main theme of this book in which readers are introduced to the nature of resilience and how it applies to the role of the individual director.

Part 2

Creating an Effective Board takes a practical look inside the boardroom and proposes ways to handle risk, manage growth and measure performance. This is about an emphasis on board outcomes compared to outputs.

Part 3

The Director, Duty and Trust explores the glue that makes the whole governance system stick together. The origins of the company and related corporate formats, the duties which arise out of directing and governing these organisations, and the role of trust and the implications of a lack or failure of trust are each explored.

Part 4

The Developing Director examines the process of learning about the role of the director and developing within the role, with its emphasis on governance and strategy.

Part 5

Lessons from an International Perspective takes a wider view of governance, alternative governance models and lessons learnt from the recent banking crisis. In particular, it illuminates the role of shareholders and ‘high net worth’ individuals in shaping the way that boards govern and what they should embody.

The chapters in each of the parts are structured as follows:

At the end of each chapter or part there are:

How to use this book

This is a book that can be read either by dipping in and out of the most relevant parts of it that are of interest to the reader, or from cover to cover. The book seeks to emphasise the similarities between types of director or governor rather than the differences. The book is for those who seek to learn more about the role of director or trustee and are serious about understanding the duties and responsibilities which come with the position. If directors and governors are not continually learning, then problems can arise with the development, health and resilience of the organisation in which they serve. It is intended that readers will use this book as a route to further development and learning and, as a result, will become more resilient and effective individuals.

The authors have stressed the similarity of governance issues across the private, public and third sectors and have encouraged the transfer of learning across these sectors. For example, case study 3.4, The Keogh Report, is an extract from a report about governance failings in the NHS. The lessons from this case study can be equally useful for directors in the private sector and any board that is serious about effective governance and wishes to have a proper understanding of what is going on within their organisation. The Keogh Report represents an uncomfortable insight into ‘semi-detached’ boards who can repeat all the current governance ‘mantras’ but are not in control of their organisation. The North Staffs NHS organisation is another example of a ‘body’ completely disconnected from its ‘head’. The board appeared to have a life of its own, unrelated to the reality on the ground and with disastrous consequences for its users.

In addition, there are a number of boxes, which include extracts from the Burberry Annual Report for the financial year 2013/14. This is a stock exchange listed plc and, whilst the directors of plcs are not the main focus of this book, these extracts have much to offer any director or board considering how to timetable board decisions, how to evaluate board performance and how to define the role of the board. Readers are encouraged to examine other examples, but Burberry’s Annual Report is well laid out and there is much to commend in it. However, even Burberry has not escaped criticism for the way the board handled their new CEO’s remuneration package.

The authors have tried their best to be gender-neutral in their approach to both resilience and effectiveness and appreciate the significant contribution made by female directors in their roles as directors and to the production of this book. Whilst it is still predominantly males who are appointed to boards of directors, it is acknowledged throughout the profession of directors that the skills, knowledge and experience that women bring to the work of governance adds very significantly to a board’s prospects for success. An increasing number of women are now occupying senior positions on boards and this is testament to the contribution they make.

The book is designed to help the reader to reflect on the roles and responsibilities that go along with the title and its functions, and to develop not only the skills needed for the job, but also the ability to change and adapt as circumstances alter – as they always will. An excellent director is one who is able to learn and to share this learning with her or his peers and readers should be able to share their learning with their fellow directors to achieve an even better performance.

The authors wish to make clear that the book is not designed to be a substitute for the professional advice that directors should always seek when they are concerned about their roles and responsibilities as a director and this is usually available from their professional advisors.

Being a director is a worthy calling that requires much dedication, reflection, learning and practice, and it is the earnest wish of the three authors that this book should contribute to this process.

Definitions

A number of conventions, acronyms and abbreviations have been adopted, which are defined below for the ease of use of the reader.

In conclusion, there are a number of important issues that are about the development of directors:

•High performance in management does not necessarily equip individuals to perform well in the boardroom, and managers need to develop themselves further to become excellent directors and governors. Being a director requires resilience, wisdom, judgement, integrity and an ability to ensure that the organisation will be governed using principles of natural justice and the common good.

•The real test of a director is the way that he or she performs and interacts with others on the board and uses their experience to reflect on their current practice in association with the contributions of their colleagues.

•It is the attitudes, attributes and tools of corporate governance that directors need to sharpen in the crucible that is the activity of the boardroom.

•There is a long and honourable tradition of probity in corporate culture in the boardroom and it is every director’s responsibility to nurture these standards and to pass them on to succeeding generations.

Any framework for the practise of good governance should always be aimed at helping rather than hindering the wealth and service creation process of the organisation.

The vocation of a director calls him or her not only to serve their own organisation, but also to work in other ways which will benefit their community and society as a whole. This provides another significant opportunity in which the learning and professional development of directors can be of even more value.

Finally, directors, like any other individuals, will experience and struggle with corporate dilemmas which can often place the ways of the world in tension with the civilising principles of honesty, truthfulness and openness. Understanding the reasons for these tensions can inform the way that directors respond to them and transform the practice of governance.

Part 1

The Resilient Director

Chapter 1.1 The Resilient Director

Chapter 1.2 Clarifying the Role of the Non-executive Director (NXD)

Chapter 1.3 Why do Directors Behave as They Do?

Reflection 1A – The Non-executive and the Road to Happiness

Reflection 1B – NXDs Beyond the Club

Reflection 1C – Early-stage NXDs

Part 1: Conclusion

References and Recommended Reading

Case Studies

Case Study 1.1 – Lexi Holdings

Case Study 1.2 – Learning from the Charitable Sector

Case Study 1.3 – Madoff Securities International Ltd

Case Study 1.4 – Governance Issues in a Capital-hungry Start-up Company

Case Study 1.5 – Serco

Boxes

Box 1a – Your First NXD Appointment

Box 1b – Extract from Appointment as Commissioner to English Heritage

Box 1c – Due Diligence to be Undertaken by an NXD Prior to Appointment

Box 1d – Effectiveness Life Cycle of an NXD

Box 1e – NXD Independence

Box 1f – NXD Appointment Letter

Box 1g – NXDs at and Between Board Meetings

Box 1h – Person Specification for a Charity Treasurer

1.1 The Resilient Director

Learning outcomes

Readers will be able to:

Introduction

Resilience can be a critical survival skill in the boardroom. The ability to hang on in there and see things through can be a board-saving skill, as resilient directors persevere and do not admit defeat, even at times when problems are not being properly addressed and the status quo is being too easily accepted. Resilient directors face up to the harsh realities of the boardroom and seek to change them, and this requires an ability to play the long game, not to admit defeat, and to live on the edge of the social dynamic of the existing culture of the board, however dysfunctional that may be.

Issues of life at the board

Whilst resilience is a skill that is useful in dealing with life in general, there are ways that resilience can be of particular relevance to directors. These include when a board has an ineffective or bullying chairman; a board that spends its time discussing trivia and, as a result, deals with everything and gets nothing done; a board that includes members who either never stop talking or never make a contribution; a board whose executive management members always dominate discussion; or, a board that meets so infrequently that everyone has forgotten about the decisions that were previously taken and has to start the discussions all over again!

A central theme of this book is about overcoming the problem of boards which do not function and getting them to work. This can be where board meetings go on for too long, or where other board members are disagreeable, or those board meetings that are called at short notice or are held without prior sight of the papers to be discussed – in short, boards in which the dynamics are dysfunctional. The list of things that can make board members lose their will to live is endless. All of these are challenges to resilience and the determination of effective directors to participate in the board and drive matters forward within it.

From such experiences, directors can know what it feels like to be bent, stretched and compressed by the work of being a director, with all the good cheer, optimism, hope and vitality squeezed out. The word compression is the opposite of the word resilience.

This process of compression and resilience can be expressed in circular terms that include incompetence, depression and ineffectiveness, compared to competence, confidence and effectiveness, with their attendant behaviours of nastiness compared to pleasantness and a sense of achievement. Words such as ineffective and nasty suggest the opposite of resilience.

The case for resilience at the board

Resilience can form the basis of a high-performing board. Resilience is also a skill that can be acquired in the everyday practice of being a director. This can be done by developing the ability, amongst others, to take brickbats, to remain uncrushed, to be well adjusted, not to be angry, to be emotionally mature and to be able to take the ups and downs of life at the board with equanimity. Such practice confirms the relevance of the words resilience and resilient to express new and revised abilities that directors can acquire. In this way, they can maintain and develop ways to recoil, spring back and resume their original shape after bending, stretching and compression (based on the Oxford English Dictionary definition of resilience) and, as a result, can be more resilient, that is, cheerful, optimistic, hopeful, spirited and vital.

Resilience also means having the ability to hold something back, to keep something in reserve; to retain some slack in normal times so as to deal with stretch; to acknowledge and handle variety and complexity and to manage the ebb and flow of resources into and out of the organisation.

Resilience describes a practice for directors that is dedicated, durable and encourages standards of performance. It has a significant meaning in the domain of the natural sciences in which it is associated with ‘the capacity of a system to undergo disturbance and perturbation and maintain its defining structure, function and controls by absorbing the disturbance and reorganising’ (Glassop, 2007).

Resilience has also been associated with ideas about chaos, complexity and emergence (Senge, 2005). This is in contrast to the idea of control and planning, and is about the way that individuals and systems can be observed to adapt, change and transform themselves in order to survive threat and redundancy. Resilience is also associated with recovery from disruption and the search for new choices and innovative actions through the adaptation of behaviours within the board; for example, the resilience of coral reefs in the Pacific to withstand the effects of the pollution of the oceans; the resilience of the North East of England to withstand the employment problems associated with the failure of Northern Rock, and the resilience of the world’s financial system to withstand the shock of the 2008 credit crunch.

Resilience has been used to describe the process of adaptation needed to respond to complexity and to explore and evaluate issues of practice and performance at times of transition and change, which is often the task of the board. Three aspects of the membership of a board can be critical for its success: the responsibility that a director has to define and envision the mission of the organisation; the ability to provide leadership and promote change; and the ability to make progress.

A high-performing board also requires some additional qualities, such as perception, resistance, imagination and commitment, as well as ‘a marked independence of judgement in the teeth of group pressures towards conformity in thinking’ (Adair, 2007: 74). Resistance is an important part of resilience as it helps directors to learn ways to resist undue pressures around the board table that can lead to group-think and bad decision making, which may be the dominant culture of the board.

Barriers to resilience

Conversely, there are many ways in which directors can become compressed. Whilst the right kind of stress can be a positive factor in encouraging performance, the wrong kind of stress can cause compression. Reasons for compression can include:

As a result of these and other pressures on directors, there is a danger that compression can become the norm and that the resilience needed for the productive performance of a director can be lost to both the individual and the organisation. Of course, this is only one side of the story and there are many directors who do not experience all, or any, of the symptoms of compression. However, the combination of conflict, overload and ambiguity can become a toxic cocktail that can deconstruct the continuing call to the vocation of director and adversely affect both the individual’s and the whole organisation’s performance.

If compression was to become a general characteristic of being a director, this would be of great concern, because the role of the director matters and because the governance of organisations matters. Consequently, organisations seek the best of their directors and directors seek the best of themselves.

Whilst the resilient practice of an individual makes only the smallest contribution to the overall life and work of the board, it still matters that its directors should find ways to develop their practice in ways that will help them to perform their tasks to even higher standards and to sustain their professional aspirations and emotional wellbeing.

Meanings of resilience

The word resilience has been used to describe the need for robustness in people and systems or the bouncing back that has already been referred to. Three characteristics of resilience have been identified as:

More than education, more than experience, more than training, a person’s level of resilience will determine who succeeds and who fails. Three characteristics set resilient people apart: the capacity to accept and face down reality to endure and survive; the ability to find meaning and develop a set of enduring values and the ability to improvise. (Coutu, 2003)

Directors in leadership roles have a part to play in developing resilience through their ability to foster their organisation’s capacity ‘to heal, to learn, to adapt and to excel’ (HBS, 2003).

Resilience has also been associated with individual self-improvement. The Resilience Advantage (Siebert, 2005), subtitled ‘How to master change, thrive under pressure and bounce back from setbacks’, spoke of resilient individuals who learn how to ‘get through their distress, orient quickly to the new realities and cope with immediate challenges’ (Siebert, 2005). Qualities such as ‘coping, optimism, hardiness, stress-resistance, post-traumatic growth, creativity, emotional intelligence and a survivor personality’ (Siebert, 2005) were also identified as the defining qualities of resilience.

In Building & Sustaining Resilience in Complex Organisations (Kay and Richardson, 2007) the authors identified the criteria that would determine the presence of a capacity for resilience in an organisation or system that would enable it to ‘maintain its defining structure, functions and controls by absorbing (the) disturbance and reorganising’ (Glassop, 2007). Features of its design would include sufficient redundant capacity to keep going whilst in the midst of disturbance, an understanding of variety and complexity to enable the system to be flexible and responsive, and a flow of adequate resources to provide it with uninterrupted activity.

In complex social and ecological systems that face turbulence, adaptation of the individual or system would emerge from interactions with a ‘dynamically changing and uncertain environment and through [their] ability to learn from and understand patterns extracted through these interactions’ (Kay and Richardson, 2007). This adaptation would only be possible when the features of redundancy, variety and resource lay within the individual or system and when those within it applied ‘foresight and deliberate action to manage resilience and prevent system collapse’ and when such actions would be the first steps