24th June 2015

Corporate governance and board responsibilities

Written by Julie Pardy, Partner, FSTP

When CP 18/15 dropped onto my desk at the end of last month, I noted with interest that the Prudential Regulation Authority had decided to “consult” on board responsibilities.

I have highlighted consult, as although this paper is open for responses until 14 September 2015, this consultation reads more like a “good practice” guide than in fact a consultation.

The driver for this publication, it would seem, is that as the regulator reflects on what the key factors have been in many of the major financial sector failures of recent years, it clearly sees that good governance must exist if a board is to be effective.

The consultation paper itself focuses on areas of good board governance that are of particular interest to the regulator. The PRA also clearly states within the document:

“We have a major interest in promoting good governance across the financial sector and supporting the work of boards in order to deliver this.”

It is interesting to note that the PRA has highlighted 12 key areas where it is providing guidance to the industry, namely:

  • Setting strategy
  • Culture
  • Risk appetite and risk management
  • Board composition
  • The respective roles of executive and non-executive directors
  • Knowledge and experience of non-executive directors
  • Board time and resource
  • Management information and transparency
  • Succession planning
  • Remuneration
  • Subsidiary boards
  • Board committees

FSTP works regularly with the boards of financial organisations across banking, insurance, consumer credit and investment, and we were interested to note the regulator’s growing interest in board composition and succession planning. Whilst many of the items highlighted in its 12 key areas won’t be news to many, we have noticed a rising interest from both the PRA and Financial Conduct Authority in these two areas.

We have seen in the last few years increasing expectations from both regulators in terms of the non-executives’ contributions to the board, and this is highlighted in the PRA comments about board composition in this particular publication.

With regards to succession planning, whilst many very effective boards have very robust training and briefing programmes in place for the exec and non-exec, we often find that the planning and execution of “board ready” leadership style programmes for those “executives in waiting” is not quite so structured and thought through.

So, where does this consultation paper leave PRA regulated firms? We think it leaves firms with an opportunity to use the PRA’s concerns to help ensure that when the regulator does visit and challenge you and your business on your corporate governance arrangements, that you are aligned in your thinking and your practical application.

In our opinion this is clearly a “flag” on what is coming next in terms of the PRA’s oversight of boards and their competence and capability. It’s one worth taking time out to read and review if you’ve not done so already, as it’s quite clear where the PRA is taking its thinking in this particular area.

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