Dragon asked if we were old enough and if we would tell the truth. I ask does your board governance maturity provide assurance of a culture of compliance?
While you might respond that you conduct a board review every twelve months, board reviews typically assess how well the board has governed an organisation over a fixed period. Although these reviews can identify problems in how the board is functioning, the quality of the responses can vary depending on the experience levels of individual board members and an understanding of the board’s role from management. Directors’ responses can also be quite subjective as governance reviews generally do not contain concrete assessment criteria against which to judge the board’s performance, although individual interviews of directors do provide enhanced evidence. As a result, problem areas are sometimes overlooked, and the root causes of problems and performance issues are not properly diagnosed.
Knowing a board’s governance maturity and where there are areas for improvement is especially important in highly regulated sectors, such as the financial institutions regulated by Australian Prudential Regulation Authority (APRA). APRA has been focused on lifting standards of governance, culture, remuneration and accountability across the industries it regulates since the banking royal commission delivered its final report in February 2019. APRA’s intensified approach aims to strengthen the resilience of financial institutions, including addressing, and ideally preventing, issues such as poor governance practices. Other industries and boards should take note.
Likewise, the Australian Securities and Investments Commission (ASIC) made it clear in August 2021 when it published its 2021-2025 Corporate Plan that the focus was on poor governance practice. ASIC has also released its review of governance practice of responsible entities in the managed funds sector providing lessons for boards in the financial services sector generally, particularly those tasked with the stewardship of consumer finances. ASIC provides a ‘Governance of responsible entities’ checklist focussed on board composition, director tenure, commitment of directors, board charters, meetings and committees, independence, related party transactions, conflicts of interest, compliance and importantly board performance and director competency assessment.
There is a theme developing here; process, procedure and controls, coupled with alignment with strategy and risk leads to defensible decision making. Once again, APRA recently released a paper on management of compliance risk with a strong message that compliance risk management should be a priority for boards and management.
How then does a board know if it is mature enough?
At Effective Governance, we came to realise that we needed to do more to help boards perform. So, armed with the comprehensive board review data gathered over many years as well as extensive research, we decided on developing a maturity model. We came up with a methodology where the management processes of an organisation are assessed against criteria representing good practice over a series of dimensions. Maturity models are used in a range of disciplines including auditing, software acquisition, software engineering, project management and change management. Our model was a first for boards.
A powerful feature of a maturity model is that it is quite easy to assess an organisation’s current level of governance in a particular area by matching it with the typical activities, processes and procedures set out in a series of statements representing increasing maturity. The statements are typically prepared by an expert in the area and in the case of corporate governance, such tools are provided by specialist consultants.
From our research and desire to provide a leading practice board assessment model grew the Board Maturity Benchmark Assessment (BMBA), an evidence-based methodology adopting questions relating to 20 governance dimensions. These dimensions range from strategy, monitoring the implementation of strategy, CEO succession planning and selection through to compliance and risk management. In responding to each question, survey participants determine the board’s performance corresponding to one of five levels of maturity as shown in the following diagram (see Figure 1). The lowest level aside, each level of maturity includes the requirements of the preceding level. This means that unless all the requirements of a level of maturity are met then the organisation will be assessed at the preceding level of maturity. For each of these five levels, concrete examples so our experts and the board can make accurate, objective assessments of the board’s actual performance.
Figure 1: Board Maturity Benchmark Assessment (BMBA)
Being an evidence-based maturity assessment, documentary evidence is sought from the company secretary, or other governance personnel to determine the level of maturity of a particular dimension of the model. Our experts review this material against the agreed scale and verify the level at which the provided information demonstrates that the board is functioning. Having validated the level that the organisation is at for each dimension of the maturity model, then the board can be asked to indicate the level of maturity to which it should aspire. For example, while an APRA-regulated bank or superannuation fund might aspire to be ‘Leading Practice’ in all dimensions of the model, a large charity with limited resources might be satisfied with a rating of ‘Acceptable’ or ‘Advanced’ in many areas to meet its governance requirements with the ACNC.
A powerful feature of any maturity assessment model is that it is very easy to see what the board needs to drive in order to improve organisational performance. It also allows an organisation to benchmark its level of maturity against other organisations, because those making the assessments have a common understanding of what constitutes a particular level of performance against each measurement category. Further, unlike most standard board reviews that focus on individual director judgments, a board maturity assessment relies on objective facts about the state of governance. For example, a board will either have a particular policy or process, or it will not.
While annual board reviews are a valuable way to assess a board’s ongoing performance, a board maturity assessment is a very different approach in that it brings a high level of objectivity to an assessment of governance practices. It doesn’t replace the need for a board review, rather it complements a board review and ensures a board has the level of governance it requires, alerts the board to any shortcomings and, hopefully, keeps the board and the organisation out of the sights of the regulators with respect to their governance and reflecting back to Dragon, avoids sinking in the quicksand.
For further information or assistance with regard to your board’s performance, contact Effective Governance.