The challenges presented by post-pandemic issues, new governance requirements, stakeholder, shareholder and regulatory demands are ever-increasing.Directors need to be able to deal with new and uncertain trading environments, and to anticipate and plan for environmental, social and governance (ESG) or governance risk and compliance (GRC) requirements.How can the in-house lawyer or company secretary help the Board to get ahead of these challenges?
ESG and GRC
It might be helpful to start with a quick glossary on ESG and GRC.
ESG investment concepts flow from philosophies focused on sustainability and socially-responsible investing. There is no single definition, but essentially three areas which are integrated into investment considerations.
- Environmental, which includes a focus on energy efficiency, carbon footprint, climate change and pollution.
- Social, which covers employment and people issues, including board composition and diversity, human rights, data and other human capital issues.
- Governance, which covers the way that organisations achieve oversight and compliance.
There is a link to a useful Harvard paper on ESG in the Further Reading Section.
The concept of GRC is the integrated collection of capabilities that enable an organisation to reliably achieve objectives, address uncertainty and act with integrity. GRC as an acronym denotes governance, risk, and compliance and was coined by OCEG (originally called the Open Compliance and Ethics Group) as a shorthand reference to the critical capabilities that must work together to achieve what it describes as ‘principled performance’ and integrate the governance, management and assurance of performance, risk, and compliance activities. This includes the work done by departments such as internal audit, compliance, risk, legal, finance, IT, HR as well as the board itself. You can find more details of the GRC concept in the Further Reading section.
Understanding the future of governance and compliance
The UK government put forward extensive possible changes to the governance and compliance regime in early 2020, and continues to consider the responses to its consultation exercise. The proposals included significant changes to audit processes, and to the market for audit providers. Government is also replacing the Financial Reporting Council. Although many of the proposals are aimed at the corporate sector, they impact other organisations either directly or by changes in practice.
Internationally, many other jurisdictions are reviewing governance regulation, and there are many sector-specific controls and regulations which impact and interact. Climate change, post-Brexit regulation, financial regulation and Covid-related controls are just some of the underlying changes to which organisations are subject.
At the same time, organisations are developing their risk and compliance processes to ensure that they identify, mitigate and manage both existing and new and emerging risks.
Board members are personally exposed to failures in governance and compliance, and the in-house lawyer has a role to play not just in working toward appropriate governance and compliance in the organisation, but in helping board members understand their personal duties whether under the Companies Act or other governing legislation, such as the Charities Act for third sector trustees, and what they might do to adapt.
You might want to consider:
- Ensuring that the in-house legal team is an integral part of the risk and compliance process in the organisation – working cross-functionally with other specialisms and with operational colleagues to ensure the various streams are brought together in a clear compliance plan which is reviewed against best practice and regularly updated.
- Working with your external information sources such as Practical Law or Lexis Nexis, law firms and other providers to ensure that you have a focused horizon-gazing process to identify new issues, new regulatory requirements, and compliance changes which will impact your organisation both now and in the future.
- Taking care to highlight key legislative or regulatory issues at the consultation stage so that matters which impact your organisation critically can be considered before they come into force, and the board made aware of developments.
- Considering whether the board should run a fresh effectiveness review process to consider whether it should change how it does things following the pandemic, and how best to implement changes or recommendations which it may make.
- Engaging proactively with stakeholders, government, shareholders and other influencers so that changes in the way your organisation is regulated do not come as a surprise, and do not have unintended consequences. It is much easier to influence change before concepts are formed into firm proposals – do keep an eye on consultation exercises, engage with your professional organisations and advisers to find out as early as possible.
Building future boards
Most boards recognise that an increasing diversity of skills, outlook, experience and expertise is of advantage. Corporate boards seek to meet investor pressure for diversity, and to recognise that evolving ESG demands require greater attention to diversity. Remember that diversity is not simply about what someone looks like, their gender or race – it’s about ensuring a diversity of approach, experience, expertise and thinking to allow the organisation to establish appropriate strategy, consider its priorities, operate most effectively, provide the best service to its customers or other users and to be as effective as possible in its contribution to society.
Future boards must bear all these issues in mind, while ensuring they are recruiting the best people for the job, that they are composed in a balanced way which allows those skills to be utilised, and the board is continually having an eye to its refreshment process so that thinking does not become stale, while at the same time ensuring that corporate knowledge is not lost.
The in-house lawyer or company secretary can contribute effectively to the debate in a number of ways, and you might want to consider:
- Is your board recruiting effectively? The use of open recruitment, either directly or via a targeted network, can be more effective than a traditional head-hunter process which can simply restrict recruitment to a different closed network. Consider whether your existing processes are satisfactory or how they can be improved. Do your processes have inherent bias, or work on assumptions which are no longer grounded in fact. Do your board members need to come from the same backgrounds as before – or of other members? Have you carried out a board skills analysis recently – and if not, would one be beneficial? Do you know where the gaps are in your board skills?
- How are you managing induction? Historically, people joining boards would perhaps have been restricted to those with significant experience in their own organisation – they would have attended boards themselves and gained an understanding of how they operated. More diverse boards may mean that members with valuable and different skills are recruited, but that they do not have experience or understanding of how a board works. Induction programmes need to cover a much broader range of disciplines than before – not just how the organisation works, but how a board operates, how to contribute most effectively, and what responsibilities a board member has.
- Is your organisation developing a board pipeline of future members, and a succession plan? Remember that board members come from inside and outside an organisation, and also that work on an external board can be of great assistance in developing the skills and experience of your staff.
- Is your organisation effectively capturing what the board needs to know? How is the knowledge of the key corporate issues identified and held so that the board is not re-inventing the wheel and losing key corporate expertise and history? The diverse board needs to build on a common platform of knowledge and understanding, not to try to start afresh.
- Are you considering your own board profile? The skills of the in-house lawyer and company secretary are extremely valuable as a board member – the company secretary is often the person around a board table with the greatest experience of the operation of boards – and yet they are under-represented on boards as members in their own right. Your skills contribute diversity and insight to debate, and your training means you are comfortable dealing with complexity.
Working together differently
Pre-2020, most boards met in person. Their work followed a regular pattern, usually devised around a sequence of financial reporting, strategic discussion and operational issues. Occasional emergencies would be dealt with by ad hoc meetings or conference calls.
The onset of the pandemic has changed all that. Most boards have become used to holding virtual meetings; directors have become accustomed – even adept - at using technology, and organisations have become used to facilitating online arrangements. Now is the time, though, to consider what arrangements are now appropriate – and whether the organisation’s governance and administrative systems support what is needed.
You might want to consider:
- Does your meeting format still work? In-person; virtual; both or hybrid? Many organisations have found virtual meetings to have advantages, particularly for engaging distant board members, bringing together people more regularly, or allowing for more urgent discussion. A mixture of some in-person and some virtual meetings can be an excellent use of time. There are disadvantages, though – there can be a temptation to have a meeting online because it’s easier to arrange; and meetings with some people in one room and others online can require different skills of chairing and minuting than one where everyone is either in the room or online. Without careful chairing, it’s easy for individual contributions to be missed.
- Are you using the right platform? Most organisations have tended to use either Microsoft Teams or Zoom, but a number of others are also in circulation. All have their pros and cons – particularly members may not have high quality connectivity because of their location, or are using their own devices rather than those of an organisation. Remember that board members may be remote, may be volunteers, and are not engaged for their IT specialism – what can you do (including providing a helpline) to make their engagement easier and ensure they can contribute. As an absolute minimum, everyone must be able to see, hear, and be able to speak without difficulty. That may sound obvious, but there have been many meetings when that has not happened over the pandemic. Do you actually need a video platform, or is a simple audio conference call adequate for your needs?
- How are you managing documentation? Many boards – certainly in the corporate world – have used online portals for board documents for some years now, and their use has proved particularly valuable for virtual meetings. Be aware, though, that there are now many new entrants to the market who may provide what you need at a lower cost, or more features to allow greater collaboration. Again, though, the absolute need is for board members to have access to the meeting documentation without difficulty, to be able to find and follow documentation referenced in a meeting, and to annotate it for their use in a meeting and future reference. In smaller organisations, it is still very common for documentation simply to be emailed to participants, leading to difficulty in finding, accessing, storing and retrieving it. Whatever system is used, bear in mind that all the documentation used for the meeting must be able to be accessed in future, and kept with the minutes to ensure that it is clear what has been presented to the meeting and considered.
- Is your meeting secure? Do take cybersecurity seriously; ensure that the board discusses and understands what is done to ensure that cyber risks are identified and managed, and that board materials and the virtual meeting itself are on encrypted platforms.
- Does your legal and secretariat team have the right skills to support the board effectively in the new environment? The Chartered Governance Institute provides guidance and specimen documentation which can be of assistance, as well as opportunities for networking with other professionals who are facing similar challenges, while The Chancery Lane Project provides sample clauses and materials for organisations to develop and utilise contracts aligned to a Net Zero future.
Boards are subject to more challenges than ever before – legislative, regulatory, stakeholder, investor and so much more. The demands of ESG and GRC requirements are ever-increasing, and governance and compliance requirements need boards to develop in their membership, skills and outlook to cope. Board members need to work together differently, and the board needs to be resourced and supported in new ways. The in-house lawyer and company secretary can play an essential and compelling role in all this – not just in helping the board to be fit for the future, but as a board member themselves utilising their professional knowledge and skills to play a full part.
The lawyer at the table
Thinking ahead – what next after Covid
Revisiting legal risk
What is ESG? Introduction to ESG (harvard.edu)
What is GRC? What is GRC / Governance, Risk and Compliance? | OCEG
Consultation on Restoring Trust in Audit and Corporate Governance Restoring trust in audit and corporate governance: proposals on reforms - GOV.UK (www.gov.uk)
Guidelines on virtual board meetings Good practice for virtual board and committee meetings (cgi.org.uk)
Guidelines on Induction of Directors Induction of directors (cgi.org.uk)
Specimen Induction Pack for charity trustees Specimen induction pack for charity trustees (England & Wales) (cgi.org.uk)
Chancery Lane Project Race to Zero | The Chancery Lane Project