This article was first published in the February 2014 Ireland edition of Accounting and Business magazine.
Tim Madigan, an independent NED for a number of investment funds, shares his thoughts and consults some other experienced members of ACCA about the contribution that accountants can make in the boardroom.
Financial services sector
‘Recent failures of corporate governance in the Irish banking sector have forced regulators to introduce much tighter rules for directors of financial institutions,’ explains Tim Madigan, an independent NED for a number of investment funds.
The corporate governance code for banks and insurance companies introduced by the Central Bank of Ireland at the beginning of 2011 aims ‘to ensure that robust governance arrangements are in place so that appropriate oversight exists to avoid and minimise the risk of a future crisis’.
The code includes provisions on the membership of the board of directors, the role and responsibility of the chairman and other directors, and the operation of various board committees. NEDs, who are independent of both the management of the company and any of its interested parties, must be appointed.
The ‘fitness and probity regime’ introduced by the Central Bank in 2011 assesses the ‘competence, integrity and financial soundness’ of directors and senior officers of financial institutions, explains Madigan.
‘Accountants have a key role to play as NEDs across all sectors – public, private and voluntary,’ says Madigan, ‘but are vitally important for those complex financial institutions that sit at the heart of the financial system.’
‘Jobs for the boys on quangos’ is a regular perception of public-sector directorships, according to John Crawley, the finance expert. He concedes that this is ‘unfortunately all too true and has been to the detriment of the good work of public-sector bodies’.
‘Nevertheless, in the majority of cases, those appointed as NEDs do the job to the very best of their ability, act professionally and get very little financial reward,’ says Crawley. ‘In the aftermath of the meltdown of the financial sector we have seen a new badge appear on the lapels of NEDs – “public-interest directors”. These are NEDs appointed by government to the boards of “pillar banks” to represent the public interest.’
The Code of Practice for the Governance of State Bodies is the basic rulebook for public-sector NEDs, explains Crawley. ‘NEDs must comply with the Ethics in Public Office Act 1995 and the Standards in Public Office Act 2001, both of which set out how they should deal with disclosure of material private interests and the standards of behaviour that are expected of them.’
Crawley believes that a key challenge for public-sector NEDs is to ‘ensure that the board they sit on has an adequate focus on value for money for the taxpayer and that open and fair procurement of goods and services is undertaken’.
The coalition government elected in 2011 promised it would end cronyism by opening up the selection process for appointments to state boards. Feedback has been mixed on its performance against this promise.
‘Joining the board of a company in the SME sector is very challenging, especially if it is the first time that the company appoints a NED,’ says John Doris, a widely experienced NED.
‘The operation of the board has to change from an informal discussion between friends or family members to a much more structured arrangement and, quite often, the company’s owners are not sure how to go about it,’ says Doris. ‘This gives the NED an opportunity to bring in best practice, thus ensuring that a formal agenda is put in place, that board papers are sent out before board meetings and that minutes are prepared after the meeting highlighting decisions made and actions to be taken.’
Doris believes a NED on the board of a company in the SME sector needs to have wide business experience and that he/she should be able to make a contribution to all aspects of the business. ‘If the main business of the board meeting becomes a discussion of management accounts, then its usefulness is seriously diminished.’
He advises that a successful NED should be a business all-rounder who can bring an independent view to the board table. ‘The position is very challenging; not only has the NED to be able to add value but he/she has to be seen to do so.’
‘Becoming involved in the activities of a charity whose mission touches you is always a good approach to building up a track record as a NED,’ says Etain Doyle, CEO, senior executive business coach and former communications regulator.
Doyle explains that charities are called ‘not-for-profits’, but thinks a better term for this would be ‘not-for-loss’. ‘Like every other organisation, a charity has to gather the necessary resources to deliver on its mandate. Recession tends to reduce charity income just as demand for charity services increases.’
‘Directors with financial skills can help focus attention on ways of reducing costs and perhaps finding new sources of revenue,’ explains Doyle. ‘Very often, they will be asked to serve on audit, finance and remuneration sub-committees. They can enhance the board’s financial discussions by ensuring that the financial information is presented in a format which all members can understand and use.’
Doyle warns that accountant directors should not see themselves as the ‘super accountant’ to the charity. ‘The more they have an understanding of its work and the contribution that it can make to society, the more they can make the appropriate contribution to oversight and strategic direction, key responsibilities of all directors,’ he says.
‘NEDs can contribute hugely to ensuring viability and good stewardship of assets,’ says Doyle. ‘A company must be very careful in its prospectus and in its use shareholders’ funds, but charities are subject to even greater scrutiny. They raise funds from the general public and taxpayers, and have a duty of care to their clients and to their funders to operate in line with the representations they make.’
The website boardmatch.ie, which ‘matches candidates with charity boards’, is an alternative approach to securing a role as director of a charity, advises Doyle.
Role of chairman of the board
‘The role and operational performance of the chairman are critically important,’ according to retired economic affairs director of IBEC Con Power, who, over four decades, has chaired nine of the 20 or so public- and private-sector boards he has served on. ‘That importance is from two viewpoints: firstly, to ensure the efficient and governance-compliant performance of the board and, secondly, to provide an appropriate environment for safeguarding the reputational integrity of the corporate entity, and, particularly of the invariably vulnerable NEDs.’
Power describes the chairman as the ‘leader of the board’, whose role is to ‘proactively manage the affairs of the board and the conduct of board meetings in accordance with all applicable legislation, regulatory and administrative protocols.’
The relationship between the chairman and the company secretary is ‘critically important’, according to Power, as the latter’s role is to ‘support and inform the board by acting as a functional conduit between the board and executive management’. He says that all board-related actions by the company secretary should be undertaken on the authority of the chairman. ‘The rights and duties of the chairman relative to the CEO should be enshrined in the contracts of appointment of both chairman and CEO,’ explains Power. ‘In particular, the expenses of the CEO should be subject to approval by the chairman so as to ensure transparency and to protect the reputational integrity of the corporate entity.’
Power concludes that: ‘In broad and practical operational terms, the chairman leads the board and the CEO leads the enterprise; the roles of chairman and CEO are therefore complementary and interlinked.’
NEDs play an important role in the boardrooms of Ireland and can ultimately help drive the recovery and future growth in the economy. Members of ACCA Ireland are well-placed to make a strong contribution.