IoD – Boards of directors must take back control

The Institute of Directors’ Centre for Corporate Governance has today published a report, Are Boards Losing Control?, looking at the biggest challenges facing companies over the next five to ten years, evaluating the level of control boards have, and the actions required by boards and policymakers to address these issues.

The main conclusions of the report are:

  • Organisations face risks that are more complex than before and the idea that they operate within a business environment that is essentially benign and quite predictable is no longer valid.
  • The cumulative impact of the challenges they face has put many boards on the back foot, reacting to events rather than setting their own direction.
  • Combined with an increase in the pressure from policymakers, regulators, investors and other stakeholders, this has left some board members feeling that they are no longer in control of their organisations.
  • Now that governance is increasingly viewed as part of the broader ESG agenda, debate has become noticeably more politicised and views more polarised. This makes life more complex for boards, but they have to find ways to deal with it.
  • Boards need to step up, re-establish their leadership role and engage more effectively with stakeholders and issues of concern to wider society. But there also needs to be a debate on how the policy framework for governance operates, with the aim of having a clearer delineation of responsibility for decision-taking between boards, regulators, investors and others.

Commenting on the finding of the report, Dr Roger Barker, Director of Policy and Governance at the Institute of Directors, said: 

“This report is particularly timely, coming as it does at a time when major changes are being considered in respect of key aspects of the business regulatory framework – including revisions to the UK Corporate Governance Code, corporate reporting and the UK Listing Rules.

“Before moving ahead with any reforms, it is important for regulators to consider the cumulative impact of regulation on the ability of boards to apply their own judgement. If excessively constrained by regulation, board members will increasingly perceive their role in terms of compliance. They will contribute less to corporate performance and strategy. Over time, this will inhibit the capacity of UK business to innovate and compete.

“Now more than ever, boards need to set their own agenda. Boards are better placed to determine the best interests of their enterprises than regulators or even investors. However, if they are to do that successfully, boards must win back the trust of wider society. They need to operate within a professional framework which promotes both governance competence and ethical conduct. By actively demonstrating that they can run businesses responsibly, boards can reinforce their key leadership role in modern society.”

Chris Hodge, author of the report and the Centre for Corporate Governance’s senior adviser, said: 

“Policymakers, the market and society all play a part in establishing the framework of requirements and expectations within which companies operate. But there needs to be scope for directors to exercise their judgement in the company’s long-term interest, rather than having major decisions taken for them by others. The onus is on boards to demonstrate they are deserving of the trust that they are asking for.”