Effective boards: why boards?

There is no legal form, structure or system that can completely inoculate organisations against failure whether at local or system level. This is because they are led by people and as in any industry, success is contingent on the cumulative behaviour of individuals. But good corporate governance provides a vehicle for the provision of sound leadership, clear direction and dynamic accountability.

All available evidence suggests long term success is unlikely in the extreme in organisations where good governance is lacking. As we explore in this article, independent experts have concluded that the unitary board model provides a better prospect of good governance than other models of leadership and direction. It provides a forum to set and model positive values and behaviours.

The duty on non-executive and executive directors alike to challenge means that strategy is thoroughly tested and vetted. It provides a mechanism by which executive directors can be supervised effectively and be challenged on the results they deliver and it provides a key line of defence in the successful management of risk. So strong board leadership with sound local accountability need to be key components of system working and future evolution of systems.

While the duties of directors in England are set out in legislation based on common law duties, in the UK and internationally the role of boards of directors has changed incrementally. In the UK, the framework for corporate governance began in earnest with the Cadbury Committee report in 1992.

The Cadbury report set out the classic definition of corporate governance that is still quoted in the UK Corporate Governance Code today: "Corporate governance is the system by which companies are directed and controlled. Boards of directors are responsible for the governance of their companies... The responsibilities of the board include setting the company’s strategic aims, providing the leadership to put them into effect, supervising the management of the business and reporting to shareholders on their stewardship. The board's actions are subject to laws, regulations and the shareholders in general meeting."

The Cadbury report was built upon by the Greenbury, Hampel and Turnbull reports; Greenbury dealing with remuneration, Hampel reinforcing the requirement for companies to be led by boards of directors and the need to apply the principles of corporate governance rather than comply with them, and Turnbull dealing with advice on systems of risk management and internal control that in revised form is still in operation.

One of the most significant steps was provided by the Higgs Report in 2003, written in the wake of the collapse of Enron and WorldCom. Both these cases provided overwhelming evidence that left to their own devices, without proper supervision, executive directors do not always work in the best interests of a company’s owners or indeed its customers.

It would be tempting to think of the examples of Enron and WorldCom collapses as extreme cases of companies led by rogue directors. But the near collapse of the banking sector five years later dispensed with any notion that corporate failures could be attributed to the actions of a few individuals and further exemplified the need for strong non-executive input into the oversight of the work of executive directors.

The Financial Reporting Council's Guidance on Board Effectiveness which built on and replaced the Suggestions for Good Practice from the Higgs Report recognised that: "Flawed decisions can be made with the best of intentions, with competent individuals believing passionately that they are making a sound judgment, when they are not."

The need for boards to challenge the executive and for key risks to be considered and dealt with as part of the decision-making process could not be clearer.

Higgs acknowledged that there will never be a perfect system, a lesson that the NHS would do well to take account of today. Higgs said: "Enterprise creates prosperity but involves risk. No system of governance can or should fully protect companies and investors from their own mistakes. We can, however, reasonably hope that boardroom sins of commission or omission – whether strategy, performance or oversight – are minimised."

The much neglected, but insightful Walker Review (2009) of corporate governance of the UK banking industry looked in some detail at whether the unitary board comprised of executive and non-executive directors remained the best model for the banking sector. The review considered whether the European model of a supervisory board overseeing the executive board might not work better in an industry where non-executive oversight had been found to be seriously lacking.

Walker concluded that the unitary board, which encourages proximity and interaction between executive and non-executive directors remained the best model. He identified the crucial importance of behaviour and the interaction between directors and stakeholders in achieving sound corporate leadership and direction:

"Improvement in corporate governance will require behavioural change in an array of closely related areas in which prescribed standards and processes play a necessary but insufficient part. Board conformity with laid down procedures such as those for enhanced risk oversight will not alone provide better corporate governance overall if the chairman (sic) is weak, if the composition and dynamic of the board is inadequate and if there is unsatisfactory or no engagement with major owners.

The behavioural changes that may be needed are unlikely to be fostered by regulatory fiat, which in any event risks provoking unintended consequences. Behavioural improvement is more likely to be achieved through clearer identification of best practice and more effective but, in most areas, non-statutory routes to implementation so that boards and their major owners feel ‘ownership’ of good corporate governance."

What is true of the banking sector is equally true of the NHS. It is the calibre of boards and the behaviour of board members that are the determinants of effective leadership, with procedures and processes being necessary, but insufficient, and regulatory injunction most likely not producing the required outcomes from organisations.

The 2016 iteration of the UK Corporate Governance Code took account of the findings of the Walker report as well as a call for evidence in 2010 and consultations in 2012 and 2014. The latest version of the code resulted from work conducted by the FRC on corporate culture, a government green paper and a report from the Business, Energy and Industrial Strategy (BEIS) Select Committee Inquiry. It came into force at the beginning of 2019.

The BEIS Select Committee Inquiry once again stressed the role of non-executive directors: "We are in no doubt about the vital role that NEDs have in company governance and are concerned about the impact of what we heard were ever-increasing burdens on their ability to perform their role effectively, particularly if they serve on several boards."

The essence of the code: that organisations need effective well led unitary boards to succeed remains unchanged, but the updated code stresses the need to engage with stakeholders including staff in a meaningful way and emphasises the need for boards to work to promote a positive organisational culture and to look to maintain the long term success of the organisation.

Having said that, we must accept that board governance is not infallible. The deliver of high-quality healthcare involves uncertainty of outcome - risk. Unitary boards are well placed to deal with risk because they can ensure that risk is properly controlled as part of the decision-making process, they bring together non-executive directors and executives in a way that maximises the potential for constructive, but rigorous challenge, and hey facilitate the application of good practice rather than promoting unthinking compliance. 

There have been suggestions from some quarters that boards need to rely more on delegations and committees in common so that decisions that were once the business of the local board can be made at system level. There are clear advantages to system working and the appropriate use of delegation in order to reach system-wide decisions with the minimum of bureaucracy. However boards remain the unit of decision making within the NHS provider sector, accountable for quality outcomes for patients, and it is a key duty of the board to properly supervise the work of the executive.

We will have more on systems in an upcoming chapter, but here we will simply assert that as well as opportunities there are significant risks for boards working in systems and through involvement in structures where decision-making may take place outside the boards of bodies corporate, and so non-executive challenge is lacking or weak and the power of executives is strengthened.

There have been suggestions from some quarters that boards need to rely more on delegations and committees in common so that decisions that were once the business of the local board can be made at system level. There are clear advantages to system working and the appropriate use of delegation in order to reach system-wide decisions with the minimum of bureaucracy. However boards remain the unit of decision making within the NHS provider sector, accountable for quality outcomes for patients, and it is a key duty of the board to properly supervise the work of the executive.

We will have more on systems in an upcoming chapter, but here we will simply assert that as well as opportunities there are significant risks for boards working in systems and through involvement in structures where decision-making may take place outside the boards of bodies corporate, and so non-executive challenge is lacking or weak and the power of executives is strengthened.

It is not possible to talk about boards without also addressing accountability. The UK Corporate Governance Code addresses the accountability of boards to their shareholders, the owners of their businesses, rather than accountability to whatever their industry regulator might be. Who then is the 'owner' of a trust or FT? Clearly the state has a stake. Healthcare services are funded centrally and the government has a legitimate claim to be part owner, an ‘institutional shareholder’ for the NHS. But this is equally true of the people who use and receive NHS services and the local communities made up of people who at one time or another will have recourse to those services.

Healthcare providers need to be answerable to the people who use and receive their services or may have recourse to do so because they are they too are the 'owners' of the service. They also need to be answerable to the wider public for the stewardship of the service – that they use their resources prudently and that what they pass on to the next generation of leaders and service users is fit for purpose.

This cannot be done as part of some monolithic bureaucracy. Good accountability needs a strong local dimension, not just because it the 'right thing to do', but also because the local perspective can differ greatly from the perspective of the regulators or that of central NHS orgaisations. Those who work in the sector are well aware of the fact that if patient and service user engagement is to be meaningful there is a need to move beyond the accumulation of data and to listen to the authentic voice of those who use services.

The same argument applies to the voice of staff and to the public more generally. Forthcoming chapters on systems and councils of governors will further explore what 'the public' means for foundation trust boards and councils of governors following the Health and Care Act 2022.