Chairmen are required to take on more of a leadership role

After the recent financial meltdown, higher standards are expected of senior corporate managers, says Elizabeth Henshilwood.

In the wake of the financial crisis, and to avoid a repeat performance in the future, the government recently commissioned a Review of Corporate Governance in UK banks and other financial institutions. Headed by Sir David Walker, and contributed to by organisational change consultancy Crelos and the Tavistock Institute of Human Resources, the review found a clear link between board behaviour deficiencies and poor business performance. It suggested a series of reforms.

Yet Sir David's review has repercussions that go beyond the financial sector. The Financial Reporting Council is custodian of the Combined Code, which sets out standards of good practice in relation to issues such as board composition and development, remuneration, accountability and audit, and relations with shareholders. This month it is publishing proposed revisions to the code. These include: a greater focus on board behaviours; new principles on the role of the chairman and non-executive directors; and new "comply or explain" provisions on the frequency of board evaluations and directors' development reviews.

Utility boards will be affected, and those serving on them need to be aware of the new expectations. After all, utilities provide the British people with water and fuel to enable health and sustain life. An ill-thought-through decision or poorly executed strategy can have a dire impact, and consequently the right boardroom behaviours need to be fostered.

Risk management

For example, managing risk, specifically when the health and safety of employees and the wider British public might be affected, needs to be a continuing focus. As part of his review Sir David asked the pivotal question: "How can we address risk more strategically and sustainably?"

Risk is the assessment of expected gain and loss. Risk management requires the analysis of all positive and negative outcomes, along with probing of decisions and consideration of options and contingencies.

No group of people assessing risk is immune to "groupthink" - the unquestioning acceptance of obviously wrong answers simply because it is socially painful to disagree. Indeed, in interview, some very senior banking officials in situ during the 2008 financial crisis acknowledge that they knew that their behaviour was excessive, but persuaded themselves otherwise. Their behaviour was delusional with characteristics of herding. Group mentality had developed and was embraced enthusiastically, with senior executives throwing caution to the wind.

Challenge the executive

In his review, Sir David discusses the "failure of individuals and of non-executive directors as a group to challenge the executive on substantive issues as distinct from a conventional box-ticking focus on process". Therefore, one of his recommendations is that non-executive directors develop the ability to constructively challenge the decisions and strategy developed by the executive. It is the role of the chairman, supported by the chief executive and human resources department, to develop the boardroom to be one where individuals are encouraged to state their mind and give a clear point of view.

Both the Walker Report and the review of the Combined Code advocate that to enhance board performance, evaluation reviews should be externally facilitated and take place at least every three years. Ali Gill, chief executive of Crelos, explains: "Board evaluation is an ongoing process of development, not a one-off-event. This requires chairmen and their boards to realise their fallibility and engage in the task of developing themselves and the way they interact."

Changing behaviour

So how can utility boards go about changing their behaviour? Behaviour describes how we get things done and is not to be confused with personality (our preferred way of doing things) or motivation (what we want to do). Behaviour can be used to describe day-to-day activities such as searching for up-to-date information, developing options and contingency plans, influencing, communicating, facilitating teams and asking open, probing questions.

However, these positive examples of behaviour have contra-indicators including ignoring information, using threats and coercion, centering discussion on oneself and overtalking others so that they cannot put across their point of view. These negative behaviours, if encouraged to be "the way we do things around here" can often prove extremely detrimental when used over a sustained period of time.

Behavioural change is not easy. Fortunately, research shows behaviour can be learned and is predictive of performance. Crelos uses an approach that takes individuals through five stages - pre-contemplation, contemplation, preparation, action and maintenance - to increase the like­lihood that the desired change will be made and embedded.

However, the development of positive boardroom behaviours requires chairmen and non-executive directors to be open to feedback, supportive of continuing personal development and, most importantly, see the need for and have a desire to change.

Elizabeth Henshilwood is client director, energy and utilities, at Crelos.

Who's expected to do what?

The chairman will be required to take on more of a leadership role, coaching and developing the members of the board and evaluating their performance as individuals and as a whole. He or she will also be expected to encourage the use of behaviours in the boardroom that will develop honest, frank, open discussion and encourage critical challenge.

Non-executive directors are now expected to have substantial industry expertise and really know their organisation by spending more time with it. They are also expected to challenge the authority of the chairman, query decisions and make suitable recommendations to move the business forwards.

Human resources practitioners can support the chairman and non-executive directors and implement some of the recommendations such as: regular board reviews; changes to reward and remuneration practices; and more stringent selection and development processes for executive and non-executive directors.

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