Boardrooms need more courage: Regulator commentary shines light on key governance issue

Boardrooms need more courage: That’s the message coming from the head of one of the most notable corporate governance regulators in the world. 

Richard Moriarty, CEO of the Financial Reporting Council (FRC), has renewed the long-standing criticism of directors who become obsessed with the “paper trail” element of their roles, especially if it means they fail to deal with what’s in front of them in the process. 

He’s absolutely spot on. 

In a recent Financial Times article, Moriarty said that, “for too long, some boards and their advisers have come to believe the safest course is simply to comply with every detailed provision of the code. Departures from these provisions are treated as something to avoid, often without thinking what is best for the company and its shareholders.”

He acknowledged that this mentality is often backed up by investor relations – proxy advisors in particular, who will often refuse to listen to any reasoning that doesn’t fully comply with the rules on paper. Nevertheless, he cautioned against thinking that way.  

“All too often, this results in risk aversion crowding out a board judgment that a different approach might make more sense for the business in question, its investors and stakeholders.”

Moriarty’s comments strike at the heart of one of the biggest boardroom problems: a lack of courage where it matters. 

We all know that the stakes are getting higher for the modern director. Regulators pile on the pressure. There’s more expectation and, realistically, more fallout if things go wrong. But a common misconception is developing; directors en masse are gravitating towards the belief that the rulebooks being pushed at them from above are rigid structures, to be followed in full if they want to avoid repercussions. 

In general, this is not correct. It’s also a dangerous mentality, because it stifles the courage that good boards are built on. Directors who do things because the rulebook says they should have lost their unique abilities to zoom out, to question the logic, and to decide if a particular decision makes sense in the context of their company, their goals.  

Moriarty is head of the British Financial Reporting Council (FRC) – an organisation familiar to governance experts across the world because it took some of the biggest steps towards a “comply or explain” governance code model that many other jurisdictions employ today. 

“Comply or explain” means that you either follow the rules or explain why you can’t, but many directors are simply too fearful of exploring the second part of that equation. They view “explain” with negative connotations, only to be approached as a means of justifying why something went wrong. 

In reality, “explain” is an acknowledgement that governance is subjective. Regulators cannot enforce the same rules on every company, in every industry, of every size, because it would act as a hurdle to most strategies. If you apply the exact same governance “treatment” to a high-growth tech startup as you do to a 100-year-old retail giant, something is wrong. 

“Explain” is the remedy, the best option for directors in many circumstances; they’re just not using it because the courage is lacking.

The ultimate benefit is full engagement, which is crucial in good decision-making. 

Having courage in this area of governance means your boardroom agenda never gets reduced to a “to-do list” for compliance purposes. Instead, it’s a discussion facilitator. It shows what needs to be addressed, what the code or other rules say about the issue, and gives you the chance to ask whether the rulebook approach works, or whether your business is better off with another approach because it makes more sense.

The above might sound very appealing on paper, but very difficult to explore in practice. If you think a culture of courage is lacking on your board, there are some steps you can take. 

1. Before every major board meeting, the chair should challenge everyone to identify a process that they are following subconsciously. If the answer is “it’s the rules” or “we’ve always done it this way”, it’s an eye-opening time to re-evaluate.
2. Instead of fearing proxy advisers, boards should proactively engage them. The conversations might be tough, especially if you’re leaning towards an “explain” strategy and risking their disappointment. Being proactive about it will instil more confidence in that conversation, showing that you’re thinking and not just reacting.
3. Foster an environment where a director can ask, “Why are we doing this?” without being seen as a disruptor. Being able to ask questions is one of the most essential qualities of a director. If you don’t allow it because “the rulebook says we should do it this way”, you’re missing that essential opportunity.

The “easy” mentality is to look at updates to governance rulebooks as regulators saying, “here’s your bigger list, now it’s your problem”. But the truth is far more complex. 

The higher standards of governance today are not blunt hand-offs; they’re structures through which boards can test every element of their strategy and decide what makes sense, and what doesn’t. 

The problem is that without the right levels of courage, that structure falls apart. Many boards can forget this in practice, but remembering it could be of huge strategic benefit.