Developing the Capability to Run Your Business Properly
By Elizabeth Pearce, IoD Suffolk Branch Chair
Being a director is a complex and responsible role and can vary depending on the size of the business. However, core competencies remain the same and have been clearly defined by the Institute of Directors (IoD), the chartered professional development body for directors.
The IoD’s Director Competency Framework (pictured) provides an accessible, measurable and achievable guide to the knowledge, skills and mind-set required to perform effectively as a director and to successfully lead your organisation whatever your sector, industry or location.
For most, many of these skills will have developed over the years on their career pathway to becoming directors, but the main area where greater learning is required is “Corporate Governance”.
The rules of Corporate Governance are well defined for larger businesses and were reviewed recently after several collapses of major firms. Whilst many SMEs are not required to adhere to this level of Governance, there are many aspects of the requirements which would help an SME establish a firm footing.
At a recent presentation in Ipswich, Dr Roger Barker (Head of Corporate Governance for the IoD) broke governance down into the 4 P’s; Purpose, People, Process and President.
Considering these as the cornerstones of a business, we can think more readily about how they can be applied helping to evolve a sound structure for a business to grow.
So firstly, let us consider…
PURPOSE: This should be defined in the company’s Articles of Association, what is its reason for being? To make money is a purpose, but it shouldn’t be the only one. The purpose is also extended to include values and culture. If directors have not defined what they want this to be, how can they communicate it to their team and to all stakeholders? Director’s need to consider areas such as the way they operate in their community, environmental issues and inclusive business.
Finally, directors need to keep up to-date with latest thinking in the worldwide business community to ensure that their values and culture remains current.
PEOPLE: Probably the most difficult part of a business to get right and especially at director level. Many become directors due to success in a management role, but the skills are quite different, and it doesn’t follow on that managers automatically make good directors. Having insufficient skills at director level can expose the business to risk and has a direct correlation to an ‘effective’ business.
So, we need to look at ‘planned progression’ within our management teams in order to provide the right level of understanding and knowledge. This is especially important for SMEs who are experiencing high growth where the director/owner’s time becomes increasingly stretched and consequently they are unable to steer their business effectively. It takes considerable time and effort to introduce and build a management team, so directors/owners need to build these timescales into their plans at an early stage.
Establishing future directors is a key aspect to build into the framework of a business. Too many leave this until an urgent need arises, for example, when a director resigns, or a business has grown to a point where it needs to formally start to establish its board.
Where director skills have not been assessed correctly and matched to the role, it often leads to major weakness in a board and takes people into roles they are not suited for. The latest professional development course recently launched by the IoD addresses the needs of upcoming directors. The Future Directors course will be taking place in March 2020 in Cambridge.
PROCESS: This is particularly important for boards, as there are two key reasons boards fail:
1. The board is dominated by an individual or small percentage of the board. This leads to “group thinking” with none of the directors challenging, or being allowed to challenge, the lead director’s decisions.
2. Issues on the agenda are predominantly operational and not strategic.
Preparation for board meetings is critical in ensuring the key items are retained on the agenda and monitored for performance. The board should be taking a helicopter view of the business and driving it strategically.
It’s also critical that the board keeps its fingers on the pulse by measuring performance through reporting. Performance indicators should be utilised to enable directors to have a clear picture.
These should be defined and agreed in relation to set objectives. Measuring for the sake of it is a dangerous pastime and can, not only camouflage the issues, but also lead to a lack of meaning and support.
Taking minutes in board meetings is a legal record of decision-making and can, in the case of dispute, prove that a board has reviewed and performed their due diligence on a critical issue. Although often the responsibility of the company secretary, it is important that others are properly skilled or trained at legally recording in this way.
Businesses can often develop their own templates for how the minutes should be kept, but critically all agreed actions should be recorded with responsibilities and timescales defined.
This enables the board to keep track of agreed actions and ensures they are signed off effectively.
Finally, although it is not easily achieved in SMEs, the managing director or CEO should not act as chairman of a board, as there tends to be a conflict of interest.
PRESIDENT: The board is driven by the chairman. The chairman needs to have the right leadership skills and experience for the board to succeed.
It is the chairman’s responsibility to ensure that the right level of documented agreements is in place, including the Articles of Association. Many SMEs start with template Articles when they first become established. However, over time they need to become more detailed to address the specific needs of the growing business.
Other agreements which evolve over time with SMEs are the Directors’ and Shareholders’ Agreements. These are important documents which define how all relevant aspects of the business should be completed in order to address the specific interests of the parties involved.
They are never really tested until a dispute arises, so it is important to anticipate the scenarios which might occur – however unrealistic they may seem at the time – and ensure that they are professionally addressed in these documents.
Having these agreements in place can add value to an SME, especially if they are seeking funding for growth. Finance organisations will always review the qualifications of the directors and if the business can demonstrate that these governance-related documents are in place and that the board runs on a professional level, it will increase their credibility with a loan provider. Similarly, it will add value to the business if it is put up for sale.
Through the Institute of Directors, members can benefit from step-by-step, continuous development, as well as an overall Board Performance Assessment. Based on their board performance, they can decide on correct training for their individual development and for their board.
Elizabeth Pearce is the IoD Suffolk Branch Chair. The IoD can support its members in all areas of Corporate Governance with numerous fact sheets and professional development training and courses covering all aspects of being a director. For more information contact T: 02030 062729 E: email@example.com or visit iod.com/eastevents