John Harty shares his views and advice for greater alignment on financial services boards.
The financial crisis of 2008 and the resulting period through the euro crisis of 2011/2012, to the ramifications which are still in place today, highlighted significant short comings in how we analysed risk and accountability practices in the past.
The requisite collective reaction over this period has led to better run financial institutions. This is in no small part due to the development and diversification of corporate boards, particularly regarding the role of non-executive directors (NEDs) and independent non-executive directors (INEDs), with specialised skills in areas such as risk assessment and finance.
However, as the economy makes its way through this era of recovery and, hopefully, into a sustained period of growth, a whole new set of challenges face the boards of Ireland’s financial institutions in the coming months and years. For example, the explosion of technology is rapidly changing the way in which companies must conduct themselves.
Today, trading and communications operate on a continuous cycle, while digital and social media have shifted power to the consumer.
We recently compiled a whitepaper based on research into financial services organisations in Ireland. Through the interviews we conducted with chairmen, CEOs and non-executive directors, we were in a position to collate the real-time views, opinions and experiences regarding the past, present and, ultimately, the future of financial service boards.
The ultimate realisation of the research was the necessity in establishing a balanced board of directors, with well-aligned independent and non-executive directors that could competently and confidently fulfil their duties in advising and governing the companies executives.
To achieve this, financial services boards must consider three key areas when appointment and development of their NEDs: The appointment process; the need for greater diversity; and induction and training of INEDs.
The appointment process
While it may seem like an obvious place to start, the appointment process – from identifying the shortcomings in the current board’s skillset to establishing a shortlist of suitable candidates – is an area that is underappreciated in the financial services sector, resulting in less time being committed to it than may be necessary.
Unfortunately, much like building a house and failing to lay the foundation correctly, neglecting to establish a clear appointment process can lead to significant issues further down the line.
In order to ensure the most appropriate candidate is selected, the most successful financial services boards begin by assessing themselves through detailed gap analyses and board reviews. While the primary skill they are looking for in the incoming INED may be actuarial or accountancy based, such reviews can shed light on additional, desirable skills or qualities that would be complementary to the board and might otherwise have been overlooked.
One of the most prominent realisations from our research is the shifting focus on the competencies required of INEDs. While risk management, numeracy and financial management are still the most sought after skills, an understanding of technology, social media and digital are becoming more and more desirable, with a number of interviewees suggesting that it could be a dedicated position in the near future. Indeed, a detailed analysis is hugely beneficial in developing a clearly defined checklist, helping the nominations committee to establish a profile of the kind of INED they’re looking for.
This profile must go beyond the skills desirable in the role and take into account the characteristics that the board requires also. If an INED is to be correctly aligned with the board then he or she must possess those traits that will invoke a strong sense of confidence in their fellow board members.
From our research, a number of key characteristics came up time and time again: integrity; an ability to challenge but be supportive; an ability to provide constructive criticism; and a demonstrable commitment of time and effort.
Whoever your board appoints, he or she must immediately be able to command the trust of their fellow board members, the company’s shareholders and the executive team. This will only be achieved if they are someone whose reputation for integrity and credibility, in addition to their professional competencies, precedes them. Remember, an INED is there to challenge the executive board members in a constructive manner, so while the board might not necessarily like what they are hearing, they can at least respect and appreciate the value of the insights being shared.
For the past year, diversity – more specifically gender diversity – has been the subject of much debate in the Irish and European media. However, the issue of diversity goes far beyond gender.
Our research revealed that executives, non-executives and INEDs almost unanimously felt there was a greater need for Irish financial services boards to expand the levels of sectorial and geographical experience that are shared by their directors, driving greater cultural and experiential diversity.
The true danger of a lack of diversity is that it raises the likelihood of ‘group think’, where the attitudes and beliefs of board members are too similar and nobody is challenging the decisions and practices being adopted. As we know only too well from the economic crisis, this can have calamitous consequences.
While greater diversity is something all boards strive towards, achieving it presents something more of a challenge. The greatest issue being the increased strain placed on financial services boards by ever increasing regulation. On the one hand boards are trying to build upon and complement their industrial experience through the appointment of incoming INEDs. On the other, they must secure appointees with specific skills for specific roles in order to attain regulatory approval. Overcoming this conflict is perhaps the greatest obstacle financial services boards face in aligning INEDs to their boards.
One final area that Ireland’s leading financial services corporations are investing in, as a means to establishing greater alignment of their INEDs, is the establishment of methodical induction and training schedules for their incoming and existing INEDs.
Of course a dutiful INED will take it upon him or herself to ensure they are completely up-to-speed with the workings of the organisation they are joining as part of their own due diligence. However, outlining a clear programme that may involve site visits, introductory meetings with members of the board and executive team, and briefings on their duties within the organisation can be hugely beneficial.
Equally, identifying courses and training programmes that can assist INEDs in fulfilling their duties must also take greater precedence.
Many of the directors we spoke to during our research highlighted the great support they receive from the companies they work with in this area. However, to date, much of it has been demand-led.
This is an exciting time for those working in the financial services industry in Ireland. Financial services professionals are navigating their way through unchartered territory full of new opportunities and challenges.
Ultimately, as we move into 2015, those who succeed will do so because of their ability to adapt, diversify and embrace new technologies and best practices in order to capture new areas of the market. To do this they must be first set in place the building blocks for success and that begins with ensuring effective alignment of their boards.
John Harty is managing director of Harty International, an executive search firm; and the UK and Ireland partner for Board Partners.