Looking Over Your Shoulder:Board Dynamics in a Regulated Sector

by Gary Ashton & Ian White

In many sectors, the board can rely on the general rule of law to frame its direction setting, performance and governance oversight and assure the right culture is in place. That is not to say this is always easy, but at least there is a framework.

However, some sectors have an additional layer of control from government and regulatory bodies. These bodies are many and varied, ranging from central government (for example a sponsoring department in the case of Non Departmental Public Bodies) to regulators such as those existing in the legal, financial services, utilities and third sectors.

Some regulators exert more oversight than others, where not only are the standards set, but organisations are regularly monitored (as with financial services companies for example) and/or even have a representative observer at board meetings. And for some sectors, to further complicate matters, there are multiple regulators, each covering different aspects of running an organisation (such as with Education).

The law alone is complex enough for directors. So how does this extra external oversight impact the effectiveness of the board and how it goes about fulfilling its duties?

More Power to the Board

Without the regulators, a board has the main function of setting direction, checking on performance and approving big decisions such as significant investments. However with the standards set by the regulator, a board can use these standards as a lever to hold its Executive to account.

Some regulators go further and hold the directors directly to account for certain rules, meaning control is more centrally vested within the board. This is the case for sports charities where in the past, individual clubs within a federated sports charity would have controlled spending, but funding by central regulators means this is now under the board’s control, for it is the board which is accountable.

However, while the board will always remain accountable (in law and regulation) it may be a specific a sub-committee, such as the Audit Committee, that is tasked with dealing with the issues tasked by a regulator. In this way, there may be a power shift from board to Committee (though not a shift in accountability).

“In a regulated environment, the board will be sensitive to the fact that the regulator will hold its directors to account – for example by seeing all board papers, and approving business plans. So this can push the board to be more hands-on than is seen in non-regulated sectors…”

Too Involved

The role of the board is to challenge and ultimately approve (or dismiss in rare circumstances) the Executive team’s strategy. However in a regulated environment, the board will be sensitive to the fact that the regulator will hold its directors to account – for example by seeing all board papers, and approving business plans. So this can push the board to be more hands-on than is seen in non-regulated sectors – and perhaps exhibit a more operational bias. The challenge is to achieve this in a way that keeps the Executive having a sense of ownership of strategic implementation, rather than feeling it is not theirs.

Restricting Thinking

With accountability resting with the board, members can potentially be over cautious; focusing even more on the risks to prevent it falling foul of the regulator. This in turn can have a dampening effect on the performance and dynamism of the organisation to adapt and thrive within its environment.

Charities and some public bodies have this challenge, where they need to act more commercially in some parts of the organisation for funding purposes, and so increasingly need to exhibit commercial behaviours (for survival) whilst holding on to their public benefit values (to maintain charitable status). The board needs to take this into account when defining and monitoring the culture of the organisation, and guiding it to strike the right balance. One way charities deal with this is to compartmentalise the commercial elements through the establishment of Trading Subsidiaries. However they still need to ensure these entities promote the charity’s interests.

Conflicts of Interest

The regulator is in effect a very powerful stakeholder. But an organisation will also have other stakeholder interests to take into account, as described in Diagram 1. Some of these interests may well be represented on the board and can at times conflict with the regulator. The board needs to manage these tensions, to make sure that it takes account of all of the stakeholders and has a way for reconciling any conflicting interests.

Diagram 1: Balancing the government / regulator interests with other stakeholder

An effective board will manage this well; balancing stakeholder interests and manage its way to wise decisions for the overall good of the organisation. Done poorly, and the board can end up looking like a splintered set of vested interests that take the organisation nowhere. Or worse, if a stakeholder board representative is strongly influential, it can move the organisation to stray from the regulators intended path.

Challenge Rich, Time Poor

For some regulated sectors, the board is made up of well-paid, strong board members with available time to dedicate to these challenges. However, in the not-for-profit sector, these challenges need still to be tackled but with a set of Board Directors or Trustees who may have less time to dedicate to board matters. In this case they need to lean more heavily on the CEO on thinking and acting for the board, even though s/he is not normally a full board member.

So how does a board manage these issues? It is often a case of prioritising and explicitly calling out and managing the dilemmas they need to tackle:

Governance – assure itself that the regulatory regime is being applied through the effective use of the risk register
Setting the right culture – as the FRC stated in 2016 (1) the board should “connect purpose and strategy to culture” . How to achieve this is covered in the article by Mark Goodridge “Toxic Culture – how does the board know before disaster hits”.
Decide who should lead – for those sectors with multiple regulators, it is about deciding which regulator do they take the main lead from, and then sense-check that they are complying with the others.
Pick your battles – choose carefully when to challenge. This is what four water companies decided to do in February in challenging the regulator on its industry price review. However Thames Water with challenges of its own decided not to join the appeal, on the grounds that fighting it would lead to “significant management distraction”.

Conclusion

Being a director of any company or organisation can be challenging and complex; in a sector heavily influenced by an outside agency this challenge can be multiplied. Boards need to remember their duty to promote the best interests of the company while balancing a number of stakeholder interests, of which regulators can often dominate.

Gary Ashton

Gary Ashton leads OE Cam’s Organisation Development practice. He consults in the re-design and implementation of organisation structures and management processes, post-merger integration, improvement of joint venture organisation capability, and board and senior management team assessment and development. He has presented at seminars on organisation change, business partnerships, has led a Retail HR Forum, and has been a visiting lecturer at the University of Cambridge Institute of Manufacturing.

gary.ashton@oecam.com

Ian White

Ian is an Associate Consultant at OE Cam. He has been the Chief Legal Officer and Company Secretary for both listed and major private companies. He now works as a consultant, coach, trainer and facilitator with an expertise in corporate governance and working with boards on effectiveness, enhancement and performance. He has an MBA from Ashridge Business School and is a CEDR (Centre for Dispute Resolution) accredited mediator.

ian.white@oecam.com

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