Saturday Essay: Directors Need To Develop Scepticism
Mark Wearden MSc FCCA FCG author of the Directors' Handbook considers the role of a director one which is vast, complex and ever-changing.
The urgent need for directors to be focused, aware and sceptical has never been more prescient than as we drag ourselves and our companies out of the lockdown impact of Covid-19 and face the looming economic waves that will bring turbulence for the next few years.
The recent BEIS consultation paper on “Restoring trust in audit and corporate governance” sits at the heart of a director’s challenge.
How do we, as directors, prove ourselves worthy of the trust that is required to allow us to run a successful organisation? When working with boards, I often refer to a trifold requirement that is needed to ensure a holistic and trustworthy approach:
Leadership and senior management of a particular facet of the organisation;
Ensuring an understanding of what is meant by success; and
Governance driven through strategic focus, risk awareness and enlightened control.
To deliver this a director must ensure that they are informed, aware, wary and appropriately sceptical.
Help is at hand
The new Directors’ Handbook from ICSA: The Chartered Governance Institute, written by Mark Wearden MSc FCCA FCG, brings a plethora of required knowledge presented in an accessible and challenging form for any director in any organisation.
Either as a thorough introduction to the director role, or as a dip-into refresher for a particular topic, the book establishes the facts and the law, comments on how these might be interpreted, and then challenges the reader to apply them to their own situation.
There is very rarely, if ever, only one right answer in the world of corporate governance and oversight. Likewise, there is never only one right answer in the interpretation of the finances of an organisation, for which directors bear ultimate responsibility.
Why do organisations fail? Almost always due to a combination of poor direction and poor financial literacy.
It is fundamentally important for every director to take the time to understand, consider and challenge all decisions that are being made by asking:
What is the operational impact?
What is the governance impact?
What is the stakeholder impact?
Throughout his career Mark Wearden has worked with, evaluated, and challenged boards and directors of all types and size of organisation. He suggests two gaps are all too often evident in a boardroom:
Lack of financial literacy – the ability to look at, read, consider and challenge a set of figures – after all these figures underpin the liquidity and viability of the company for which each director is responsible.
Lack of professional scepticism – the ability to step back, and challenge what is being presented from a perspective which eliminates bias.
Photo by Andrea Piacquadio from Pexels
The role of a Director can be challenging, stimulating, life-changing, influencing, often requiring hard work, and even more often misunderstood by both the player and the audience.
There has been, and continues to be, much research and consideration into the way in which the human brain works. Not least today, in an attempt to reproduce such functionality through robotic artificial intelligence. Historically, this has often been represented as the difference between left and right brain thinking, whilst more recent neuroscience recognises that different areas of our brain are required to stimulate other areas of our brain, to then enable our thought process and behaviour to evolve – the core of learning.
The way in which we are perceived as using our brains, by others, will influence our behaviour, and we therefore move in a constant iteration – we behave in a certain way, that is perceived in a certain way, we react, and then behave in a slightly different way; and so it goes.
In our corporate world, and this includes all type and manner of organisational structure, a fundamental concept under Companies Act 2006 is that of ‘true and fair’.
Our numeracy structure, the principles of accounting, our narrative, analysis and interpretation rely on us being able to provide a logical trail from raw data to refined information. Directors are required to consider this within the context of the organisation and its wider stakeholder environment, and thus ensure a clarity of understanding and the delivery of ‘true and fair’ internal and external communications. The recent BEIS consultation recommends the retention of this concept as a bedrock of the corporate mindset.
But, of course, this judgement does not just apply at the end of a process but across the plethora of different judgements by different people that are being made continually at very differing levels within every organisation. Judgement requires the use of the sceptical human brain to challenge and enquire, but then to make decisions.
To understand the meaning of ‘true and fair’ a director must develop a healthy and positive scepticism, be aware of their own cognitive biases, and accept and recognise that the biases of others will often be different to theirs.
We must always be prepared to search within ourselves to learn and understand how and why we might be behaving and reacting in certain ways, and therefore we become better able to understand how and why others behave or react in certain ways.
To be an effective sceptical director (or person) requires us to take the time required to understand the status quo – today, right now. This enables us to begin to develop speculative strategic paths into the unknown future. But we must always be ready to reassess the status quo and therefore consider why our previously conceived view of the future needs to change. This has never been truer than during the evolving pandemic.
A sceptical director with the required breadth and depth of legal, organisational, and people responsibilities and accountabilities, needs to be able to sceptically focus upon and seriously consider two core dimensions to allow themselves and their organisation to survive ‘today’ and to help the ‘future’ to evolve:
Liquidity - the ultimate tangible risk: do we have the funds to continue; are we viable, and if so, how long will that last?
Reputation - the ultimate intangible risk: how do I behave, as a unique and independent human being, and how does my organisation behave – how, for example have we reacted to the pandemic; how have our people behaved; how are we viewed by our stakeholders?
The role of an Executive Director is enjoyable and fulfilling, but it is not for the faint-hearted. This comprehensive and thought-provoking handbook identifies and challenges the breadth and depth of expectation that is required from anyone who has the courage to undertake the role of a director.
Mark Wearden MSc FCCA FCG delivers consultancy projects through MBS Governance a private strategy consultancy, which he has run for the past 26 years, following 12 years in International Banking as an analyst, and 8 years in Industry as a finance director. Mark has worked extensively with directors and senior managers from a wide range of different type and size of organisation, from FTSE 100 down and back again, giving him a challenging insight into the minds of the directors of corporate Britain. He specialises in strategic analysis and challenge, aligned with board and director evaluation.
In addition to client-focused consultancy, Mark is an experienced Non-Executive Director and Audit Committee Advisor. He undertakes director and board mentoring and delivers public workshops, seminars and lectures for professional bodies, together with in-house programmes for boards and directors. During the past ten years, alongside his consultancy work, Mark has variously been a part-time Senior Lecturer in Corporate Finance and Corporate Governance at the University of Lincoln, chaired the ACCA Global Forum for Governance Risk and Performance, and was the strategy examiner for ICSA. Currently he is the examiner in Boardroom Dynamics for ICSA.