In the wake of the failures in corporate governance that led to the global downturn, the Chartered Institute of Management Accountants (CIMA) believes that businesses should integrate long-term sustainability into their core activities. The group says that in setting the ethical direction of an organisation the tone must come from the top - that is from the executive and non-executive board directors.
“Public expectations of corporate behaviour are now, understandably greater than ever before. Both boards and executive management need to combine a commitment to the highest ethical standards and the long-term sustainability of their businesses with a keen awareness of the public interest dimension of what they do," says Charles Tilley, chief executive at CIMA.
In its new "Enterprise Governance – Restoring Boardroom Leadership" report, CIMA stresses that the right people should be appointed to the board. "They should work together as an effective team. The board must be appropriate for the business," says the paper authored by Gillian Lees, CIMA's enterprise governance specialist.
CIMA’s report presents a practical, integrated model which shows all the key factors that support board effectiveness. For a board to be effective, CIMA says that people, behavioural issues and risk management must be considered as well as supporting frameworks, processes and structures.
CIMA’s boardroom leadership model suggests key ingredients that create a climate in which challenge is possible:
• High quality management information
• Diversity in skills, perspectives and experience
• Mutual respect among players. There needs to be an understanding and acceptance on all sides that constructive challenge is vital
• Robust processes and frameworks to support strategic development. CIMA explains that it is difficult to challenge strategy if the board agenda does not allocate enough time to discuss strategy. Boards may find other devices useful, such as designating someone to play devil’s advocate for a particular discussion.
People and Behavioural Issues
For people and behavioural issues, CIMA says that the board’s composition should also take into account the independence of non executive directors (Neds). The paper notes that recent corporate failures – particularly in financial services – suggest that more value needs to be placed on their experience and technical knowledge.
CIMA also notes that a key responsibility of the non-executive directors is to uphold values that put the long-term future of an enterprise above short-term profits. This also entails management providing non-executive directors with the most relevant and accurate management information available, data which would help the board identify if the company is cutting corners ethically to get quick returns.
"The board should be a model of ethical behaviour in articulating and exemplifying the organisation’s values," says the paper, adding that the board and executive management team need to treat each other with respect and value the distinct contribution that each makes.
For the boardroom to be effective, CIMA says that it is important for the leadership to recognise the frameworks, processes and structures that will support them. These would include roles and responsibilities of key players; constructive agendas and strategic tools; information and reporting; and risk awareness.