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The Future of Financial Services Boards

Induction, Evaluation And Culture


ForewordThe conditions under which chairmen, executive directors and non-executive directors can make an effective and positive contribution to the strategic direction and control of companies need to be understood by boards and, critically, by regulators. In today’s increasingly regulated environment, the importance of striking an effective balance of skills and experience on boards is crucial. There is a danger, however, that too much emphasis is being placed on board composition and a one-size fits all governance framework, ignoring the context and conditions that create effective boards.

This paper focuses a lens on aspects of governance that move beyond a board composition-centric perspective, drawing on the key areas of: director selection processes; director induction; getting the most out of board evaluations; the board as drivers of corporate culture and the challenges of subsidiary governance - all of which play an interrelated role in establishing a truly effective board.

The benefits of gaining insights from experienced directors who have been through selection processes, induction processes and board evaluations and thus can opine on the benefits, pitfalls and challenges therein, are significant.

In my role as Programme Director of the Institute of Banking’s Certified Bank Director Programme, I place considerable emphasis on the issues covered in this paper in class and I welcome its publication. Congratulations to the research participants and the researcher for an informative and thought provoking paper.

Dr. Margaret CullenDirector of Executive Education, The Institute of Banking

DUBLIN T 01 6610090 • 77 Sir John Rogerson Quay, Dublin 2

LONDON T 0203 1788 7141 • 1 Cornhill, London, EC3V 3ND, UK


Contents

Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

Executive Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

The Induction Process. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

Content. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

Structure. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

Assessment and Evaluation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

Importance of the Chairman.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

Level of Detail. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

Evaluation Tools. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

Outcomes and Follow Up.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

Skills Gaps. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

Selection Process. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

Boardroom Culture. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

Role of The INED.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

Board Influence on Corporate Culture. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

Group and Subsidiary Boards. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

Group Interaction for Subsidiary INEDs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

Closing Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16

List of Contributors. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18

Acknowledgements

We would like to take this opportunity to thank those CEOs, Chairmen, Non-Executive Directors and Executive Directors who took the time to speak with us and share their valuable insights. Without their valued contributions, this report would not have been possible.

John Harty Pat BrennanManaging Director, Harty International Director, Harty International Consulting


Harty International Executive Search 1

IntroductionIt would be a major understatement to describe the economic downturn and the years that followed it as a period of flux for the financial services sector globally and particularly in Ireland. In the aftermath of that epoch, as the Irish economy once again gains momentum, it is fair to say that a number of positives came as a result of the great adversity.

One such beneficial outcome has been the almost unanimous call for greater transparency, governance and regulation from those within the sector. Nowhere is this more evident than in the emphasis that is now placed on board and corporate culture and the processes corporations have adopted in their induction and evaluation processes to deliver the best results for the organisation, its shareholders and its customers.

In this whitepaper - the third in a series which explore the changing function of Ireland’s financial services boards and the individuals on those boards - we will look in greater detail at those areas mentioned above, drawing on the practical views of some of the country’s prominent Chairs, CEOs, INEDS and NEDS, to understand better the evolving nature of the induction and evaluation processes in Ireland’s financial services sector as well as the crucial impact the board’s culture has on the organisation.

Executive SummaryAssessing and evaluating the performance of key contributors within the company - be they individuals, work teams, specific departments, or senior managers - in a structured manner has been common practice for many years. Today, financial services boards are expected to provide a similar, if not greater, level of scrutiny to their own performance. But that hasn’t always been the case. In 1996, Korn Ferry International conducted a survey of directors at Fortune 1000 companies which indicated that only 25 percent of America’s largest companies evaluated their board’s performance. Even as recently as 2003, a MORI Poll of 605 directors of UK listed companies, carried out on behalf of the Higg’s Review, revealed that only 24 percent of respondents received a formal induction post appointment.

In this whitepaper, we seek to gain a clearer insight into how board assessment and evaluation are evolving, while gaining a clearer understanding of the impact that the selection and induction processes can have on them.

As Ms. Rosemary Quinlan, Independent Non-Executive Director with Ulster Bank Limited, Ulster Bank Ireland Limited and Royal Sun Alliance Ireland Limited, highlights: “It is interesting, how considerable time is spent on executive evaluation, executive performance and executive development and how, historically, so little time is given to all those aspects of the board, especially when board performance in high-impact institutions is particularly pertinent. It is now a priority focus for many boards.”

Along with an increasing demand from many organisations’ shareholders, investors and the Regulator, the mistakes that contributed to the economic downturn have provided a strong incentive for boards to evaluate their effectiveness, to ensure individual and collective weaknesses and skills gaps are identified before they become an issue.


Harty International Consulting2

The Induction ProcessThe collection of individuals interviewed for this whitepaper, many of whom are currently Independent Non-Executive Directors (INEDs) and former CEOs, agreed that the induction process is crucial and it should be a compulsory requirement for INEDs joining any new board, whether it is regulated or not. Indeed the corporate governance codes set out by the Central Bank clearly stipulate that “the board shall ensure that new non-executive directors are provided with adequate induction training about the operations and performance of the institution.”

An effective induction is necessary for new board members in order to bring them up to speed on matters concerning the organisation in a relatively short time-frame so that they can use the skills and experiences they have acquired over the years to the benefit of the company. Additionally, the induction offers INEDs a strong insight into the organisation’s culture, processes, financials and structure.

As Mr. Ciaran McGettrick, INED and Managing Director, Phoenix Ireland and President at Insurance Ireland, points out: “No matter how detailed your due diligence, it’s only when you begin your induction that you get a clear understanding of the board and the business. Reading the board minutes and meeting the management team can speak volumes about the culture of an organisation”.

ContentKnowing what information is useful to the INED and what is irrelevant is a matter that must be considered by every organisation when compiling

the induction pack. The focus for most financial services corporations is likely to centre on risk analysis, board culture, business operations and the executive team.

With the large volume of information available to the incoming INED it is essential that it is presented in as digestible a manner as possible. Mr. McGettrick suggests an approach to better facilitate this need: “It would be hugely valuable in bringing the INED up to speed in a more timely manner if induction packs - and all documents presented to the board for that matter - included a management extract outlining some of the key issues that have occupied the management’s time and in particular the boards time in recent years, such as significant customer, risk, legal, solvency and regulatory issues and also explained if the issues were systemic and how the board dealt with these.”

Although every induction has different requirements and priorities, the questions posed by Lorsch and Carter in 2004 are a good starting point for most induction programmes and non-executive directors, covering, inter alia, the creation (and destruction) of shareholder value within the organisation, margin trends, the management of major risks, financial reporting issues and accounting practices, major projects and progress, employee morale and retention, market share and trends, branding and corporate image, competitive strategies, and the views of analysts and brokers.

An induction pack, which directors receive well in advance of their first meeting, should include



information on the issues noted above, including the legislative and regulatory environment and specific corporate documents such as the Memorandum and Articles of Association, Matters Reserved for the Board, Terms of Reference, Conflict of Interest policies, and any shareholder agreements or major service contracts. It may also include: information on business strategy and activities; key shareholders and stakeholders; previous board and committee papers; financial data; the risk register; press cuttings; organisational charts; and information on service providers such as bankers and advisors.

The induction programme should also explain how the board fulfils its key roles regarding strategic development, the stewardship of financial and human assets and the expression of shareholder and stakeholder interests. New board members benefit from an understanding of how the board fulfils its responsibilities regarding: strategy; financial monitoring; risk analysis and management; executive performance monitoring and remuneration; board recruitment; succession planning and leadership development; and communication with shareholders and stakeholders. 1 (Long, T. 2008)

Structure One of the greatest challenges in developing an effective induction programme lies in the need to retain a certain amount of flexibility in order to facilitate the specific requirements of the incoming Board Member. The diverse nature of a board and the differing backgrounds of its members means that each induction will need to be tailored to a certain degree. On this basis, it appears a

collaborative approach is best suited to developing the induction structure and agenda.

Ms. Julie O’Neill, INED at Permanent TSB plc, AXA Life Europe and Ryanair plc and Chairperson of the Sustainable Energy Authority of Ireland, points out: “I think the company secretary needs to work with the incoming INED, taking into account their background, when forming the induction. Taking my case as an example; I’m not a specialist in the financial services sector, but I’m joining the board of a financial services company. I’m likely to need a more structured and detailed induction than someone whose had a lifetime in banking and finance.”

“As a matter of best practice, it makes sense that there should be a set induction process in place: One which levels the playing field by bringing everybody to the same starting point. However, where the INED feels it is necessary, they should be able to dive deeper into the areas they feel they need to, be they risk issues or treasury matters.”

This is a notion echoed by Ms. Debbie O’Hare, CEO, Hannover Re (Ireland) Limited: “The company must be open to suggestions from the INED based on what they feel their most important requirements are. It must also give them (the INED) a good grounding to make a determination of what’s important based on a thorough understanding of the business model and the environment in which the company is operating.”

Mr. Tom Barry, INED & Chair of Audit at New Ireland and Chair of Risk at Aegon Ireland, suggests that the induction programme often



raises new questions for the INED and may identify areas that require further consideration: “Before you actually start your company visits in an induction programme, you know so little about the company that you don’t necessarily know what it is you want to seek. I often find that through the process of induction, things will come up that mean you want to add new areas to see or new management to visit.”

It is strongly recommended that the induction programme entails more than just an induction pack and meetings with board members. In order to develop a better understanding of key personnel, the workings of the organisation and the corporate culture, incoming NEDs should ask for and be encouraged to hold formal and informal meetings with senior management, make site visits and attend away days - particularly for NEDs of subsidiary boards to the group headquarters.

As Mr. Dermot Browne, INED Aegon Ireland, former CEO of Aviva Ireland, former International leader at Zurich Insurance PLC, puts it: “In much the same way that an INED should realise their weaknesses and the gaps in their knowledge that need to be filled, they should also be confident enough to request access to the best means of filling those gaps, meeting the key contributors to those areas within the business, site visits or attending particular seminars and courses.”

The research found that while the structure and implementation of the induction process is far better than it was in the past and continues to improve, there remains significant room for improvement, with a greater need for more bespoke programme development.

Assessment and EvaluationLooking once again to the Central bank’s code of conduct, the guidelines for regulated entities are clearly stated: “At a minimum, a board shall conduct an annual assessment of its own performance and compliance with relevant provisions. Every three years an evaluation by an external evaluator shall be undertaken.”

Consensus among interviewees was that the regulator’s recommendation is reasonable. Annual internal reviews, with an external evaluation every two to three years is considered good practice and these are becoming more commonplace in non-regulated corporations too.

As Mr. Paul O’Faherty, Non-Executive Director to VHI, Merrion Capital and companies in the BlackRock, State Street, Standard Life, Mediolanum and Nevastar groups, states: “Regular assessment, aside from being a regulatory requirement for many organisations, is simply a matter of best practice. It helps overcome the risks of over familiarity and complacency”.

An effective board evaluation carries a host of benefits, all of which lead to a more effective board. It can clarify the individual and collective roles and responsibilities of the directors and committees, the contribution each director makes to the organisation’s objectives, ensure that the board and committee’s structures and procedures are in-line with their governance codes, while offering an opportunity to reflect on the culture of the board and identifying areas for improvement.

Ms. Quinlan comments: “A board evaluation should look at the skillsets and qualities of the directors on the board, but it should also go much



further addressing things such as engagement, level of clear communication between all parties, ultimately leading to corrective plans for the board to perform more effectively. The notion that NEDs or INEDs don’t require skills development and governance/subject matter training is a thought of days gone by. Given the internal and external challenges and the pace at which things are changing, continuous learning throughout the entire organisation, including the board, is of critical importance”.

While Mr. Vincent Sheridan, Chairman of Mercer Ireland and Mercer Global Investments and INED to a number of financial services companies, highlights the importance of evaluation in gauging the directors’ understanding of the business: “For INEDs there is an opportunity from the outset to try and get to understand the business. The problem is that it’s only when you get beneath the bonnet of the engine, if you like, and start getting reports that you may realise there are parts you don’t understand. At this point it can be difficult for INEDs to come back and say ‘I don’t really understand this part of the business.’ One element of the assessment for me must be to see do they really understand the business and not just to ask that, but to challenge them on it.”

Importance of the ChairmanDuring our research it was proposed that the level of scrutiny of the internal annual evaluation can differ vastly from company to company, where in some cases it is more a formality than a valued exercise.

While there was a general consensus that, in the

case of an internal annual review, the Chairman should play a key role, it was suggested that there may be notable differences between the experience of directors on group boards and subsidiary boards.

Mr. McGettrick explains why: “For an INED, who is there to meet regulatory requirements on a regulated entity, which is a subsidiary of say a captive insurance company or major multinational, their experience may be that there is a challenge in getting an appropriate level of engagement from the parent. Building a strong relationship with the parent company board representatives and particularly the Chairman, where he is based overseas, is important in facilitating the appropriate level of engagement.”

“The quality of board effectiveness surveys vary greatly where they are carried out internally. However, the key issue is the level of dialogue that the Chairman has with individual directors on issues which are disrupting board effectiveness. I don’t believe that it is sufficient for the board to sit together with a report and review it at a meeting as this might not surface areas of conflict.”

Level of DetailAs mentioned above, the pros to conducting board evaluations are many. However, the time required to conduct a full appraisal can be significant. On this basis, respondents felt that an in-house annual appraisal, supplemented with an external evaluation every three years minimum, was sufficient. Ms. Catherine Woods, Non-Executive Director, AIB plc, offers a detailed breakdown of the areas that a board may wish to address in its



evaluation. The extent to which the various elements are evaluated is a decision that must be made by the board.

Ms. Woods: “In terms of what should be covered, I would suggest you look first of all at the composition of the board, how you’ve arrived at that composition, whether or not to correct it and if there is a need to add additional skills. Be specific about the new skills required.”

“Secondly I’d assess the running of the board. This would include agenda setting and content, the substance and quality of the board papers that are being submitted and whether the workload is appropriate. Time allocation is also very important.”

“Following this, you need to consider board training. Is there a proper induction programme for new NEDs and appropriate ongoing training? Are the correct external insights being provided via lectures or discussions, be it from industry experts or creative thinkers from other industries? Ultimately, the board’s knowledge should be up-to-date, gleaned through the individual efforts of each director and collective exercises.”

“Clearly, the board should allocate an extensive amount of time and energy to strategy. The question here is whether the NEDs are satisfied with the level of focus on strategic issues. So ask questions such as ‘is there a sufficient, in-depth annual or biannual review of the strategy? Have we the correct mechanism to ensure that there are ample strategic discussions and evaluations?’ There’s always a temptation to get trapped in the nitty-gritty, day-to-day operational management and it’s a

prime responsibility of the Chairman to make sure that doesn’t happen. Looking at the agendas shows how board time is allocated. The evaluation offers a good opportunity to stand back and ask ‘how satisfied are you in respect of the time spent on strategic discussions last year?”

“Another area would be the evaluation of management, and in particular their performance. Do you have the correct scorecard and KPIs? Are you sufficiently and regularly monitoring them? Do you need to adjust them in any way? Are they linked only to the strategy? What worked well, what hasn’t worked well?”

“Assess the committees. Do you have the correct committees and composition? How good is the flow of information from committees to the board and how appropriate is the common membership between the committees? Is the collective skill set complete?”

“Finally, you must consider the performance of the Chair – how he/she has performed, areas for improvement, etc. – and the culture of the board. In respect of the latter, you might look at the NED interaction with management between board meetings, at board meetings, the level of support and constructive challenge that was provided to the CEO and so forth in determining whether or not the culture is appropriate.”

Evaluation ToolsWhen undertaking an in-house board evaluation, the general approach is that it is led by the Chairman with the assistance of a senior independent director and the company secretary. In general, interviewees felt that an interview



process tends to be more effective than a questionnaire led self-assessment, but a combination of both works very well. Equally, it should be a two-way process that looks at both the content and the style of the board and its individual members.

Ms. O’Neill comments: “At a most basic level it should be a two-way process where the Chairman interviews each INED separately, getting their feedback on how they as individuals feel the board is functioning and the Chair’s performance, while providing feedback to them on how he sees they are contributing. That can deal with both content and style. Obviously it’s very helpful if you have a strong chairperson in place who is very comfortable in his or her own skin around this kind of territory.”

The Chairman may opt to include a variety of tools in the process, including psychometric testing, behavioural interviews, director/peer evaluations and personality assessments. While there are insights to be gained from such tools, it was suggested by a number of interviewees that the manner in which they are introduced, by those conducting the evaluation, is vitally important.

One director commented: “By and large, for the kind of remuneration they receive, many INEDs will greet processes like psychometric testing with hostility. A better way of doing it may be during the appointment of a new INED. Using that situation as the basis for carrying out the tests, to establish a clearer profile for the incoming director may seem less invasive and confrontational.”

Outcomes and Follow UpIn a broad sense, the purpose of board assessments and evaluations is to improve the effectiveness of the board. Looking more acutely this may involve identifying knowledge or skills gaps, cultural or procedural discrepancies or other underlying issues which might otherwise not have been addressed, on which the board can take action.

As Mr. Barry points out: “Annual assessment is highly useful in identifying skills gaps on the board but it does a lot more. It identifies what’s working at board level, what dynamics are there that might inhibit the board, areas where information could be improved or clarified, areas receiving too little attention to name but a few. All those things go into an assessment and really do lead to greater effectiveness.”

As with any evaluation process, it is of little use unless the findings are acted upon. A number of interviewees pointed toward the benefits of one-to-one meetings between the Chairman and each of the directors following an evaluation as being highly beneficial. Here weaknesses can be addressed and measures put in place to shore those gaps where appropriate. These meetings are also particularly useful in cases where the evaluation reveals that a particular INED may be underperforming.

On the issue of underperformance, Ms. O’Neill says: “I think that this is a major responsibility on the shoulders of the Chair and they must tackle it first. You need to look at the types of underperformance that can arise:

1) You can have someone who’s just not putting the



time or effort in, be it reading the papers, making a strong contribution etcetera. They can be taken on pretty head-on.

2) More complex is when there is a personality clash between individuals. I prefer to see contention rather than blandness on a board any day, but if it’s reaching a point where it’s counter-productive then I think that requires a tough conversation between the chair and the person involved.”

Mr. Browne, goes beyond this, stating: “If it’s a case where the underperformance can be easily rectified then it’s a question of the chairman having a one-to-one and this should always be the first step. However, if the person is incapable or unwilling to pick up their performance then they need to be managed out and this is best done in the least confrontational manner as possible. Where seen, underperformance tends to be in people who are out of their depth and the only way to manage it is an amicable separation.”

The findings of the evaluation should also be discussed at board level, looking at the collective strengths and weaknesses of the board in order to develop actionable points that address any of the shortcomings exposed. Once these points have been established, Mr. Barry suggests that as a matter of good practice a letter should be sent out by the Chairman putting forward the changes they plan to make over the coming months and that the Chair should come back to these points regularly throughout the year to ensure they are being adhered to.

Ms. O’Hare suggests: “Ultimately it should be a process that enables the board to reflect upon its performance and identify areas for improvement. Ideally, in a board where you have an open and

transparent communication culture, the Chairman and the board can have a mature discussion on the findings and agree on the steps forward.”

Skills GapsOne of the greatest benefits of the evaluation process is that it can, when done correctly, highlight gaps in the skillset of the board members so that this can be remedied before any issues ever arise. All those interviewed agreed that this is essential to good corporate governance and board effectiveness.

An important distinction needs to be made between filling a skills gap and a propensity towards group-think. The general sentiment was that filling a skills gap should not have an overly influential impact on the level of diversity of the board. While it was highlighted that a wide range of skills is particularly helpful, and in some cases essential, in allowing the board to fulfil its role, a host of other factors such as age, gender, experience and culture must also be taken into account when looking at the diversity of the board and its exposure to group-think.

As Mr. McGettrick points out: “It’s important to plug skills gaps and have diversity to avoid group-think. This may mean having individuals who are not financial technical experts, but who cover out other areas such as IT and cyber security risks. It’s the Chair’s responsibility to recognise the strengths of each director and fill the gaps where necessary. It’s important that not only are the wider experiences the person can bring to the board considered, but also that their attitude and style of management fit with the dynamics of the board. All of these should be addressed during the selection and appointment process.”



Selection ProcessFollowing on this point, it may be argued that effective assessment and evaluation begin at the selection stage of the process. A host of considerations must be made when identifying a new INED to join the board: What skills gap are they filling? What experience do they have and how will that benefit the organisation? What is their management and leadership style? How will they fit with the rest of the board?

It was proposed by one director that many of the individual issues with board members that are raised through assessment should in fact be flagged during the selection process and if they are serious issues then that person never should have been appointed to the board in the first place. They felt that it is at this stage that psychographic and behavioural tools should be used in addition to ensuring the incoming board member is sufficiently skilled and knowledgeable. Naturally a full background check should be conducted by an external consultant.

A greater risk to the board, in terms of diversity, is the narrowing of the experiential field by the Regulator through the introduction of ever more onerous responsibilities. Taking Solvency II as an example, one interviewee commented: “The central bank expects that every director will understand Solvency II – what it’s about, what’s the risk appetite, what the mitigating factors are, etc? - which is rubbish. What you want on the board is diversity. You might have an IT expert on your board because your business is very IT-based and fears for cyber security, etc. are very important. Having that person can be critical in terms of the future direction of the company. The fact that the person doesn’t understand the intricacies of Solvency II is a separate issue. We need to make

sure that there are sufficient competencies on the board to address Solvency II. The idea that any member of the board, including INEDs, can be called in and quizzed about Solvency II and somehow be deemed incompetent should they fail to meet expectations is preposterous. It’s this kind of thing that can lead to group-think, not the skills gap.”

There remains no straight answer to the challenges of enhancing diversity and mitigating group-think. However, for a number of reasons including improved diversity, there appears to be a growing preference for using an external consultant when appointing a new INED to the board. Some of the more obvious benefits offered by those we interviewed were access to a larger network of individuals with different experience, the value of having an unbiased perspective and a methodical process. That said, it was also felt that board members should tap into their own networks and put people they feel fit the criteria forward, so long as they are assessed in exactly the same manner as any other candidate.

Vincent Sheridan: “I think it’s up to the nominations committee to manage the process but there should be a discussion with the whole board at the outset to talk about the gaps that need to be filled and what kind of skillset would be advantageous to the board. In my experience it’s usually been a kind of network approach. It hasn’t actually been done independently. Historically it seems that if you have to go outside it’s seen as a kind of failure of your network ability. I think maybe that’s changing and that’s a good thing. A more professional approach is being adopted, where even if you’re considering an internal candidate for a role, it’s still far better if they come through a selection process.”



“Searching outside your own networks not only reduces the risk of group-think, but also the danger of dissension, not necessarily open dissension, but feelings of dissension among the board members where this actually becomes the preserve of the nominations committee. I think that would be eliminated to a certain extent if it was clearly demonstrated that a much more professional, independent, clearly objective approach was being taken.”

Paul O’Faherty: “The appointment process varies enormously from board to board, with some being more formal than others. An aspiring INED needs to understand too that the selection process is very different to being short listed for an executive job. For example, a key point is how your particular skills and experience complement and supplement those of the other board members. In my opinion a more formal, structured selection approach, using a third party is preferable. A transparent and objective process is always healthy.”

Seamus Creedon, Non-Executive Director and Chairman to several insurance entities in UK and Ireland: “Establishing real diversity on the board is a challenge and it has a way to go. The classic approach is to identify the profile of skills and competencies, particularly if you want someone to chair a committee, and then give the recruiter a brief. All things being equal you’d like to see someone with a different background from other directors in addition to the required skills. To seek someone based on their gender, age or ethnicity at all costs is going too far. But to seek someone with the right skills, say to chair an audit committee, who also just happens to be female or slightly younger than the norm is the kind of brief that boards like to challenge recruiters with.”

Ms. Woods: “We always use national and international search firms for board appointments. The standard process consists of the usual long lists, nominations committee discussion, creating a shortlist, further investigations and then whittling down candidates to a small shortlist for interviews. I’m not saying that the Chair shouldn’t introduce potential candidates. I think that can be quite helpful, but they should be assessed in the same manner as those people who have been identified externally. All CVs go into the central pool and are assessed collectively against certain criteria. There’s no priority given to people who have been introduced by the INEDs or the Chair.”



Boardroom CultureIn their 2012 book, The Handbook of Organizational Economics, Robert Gibbons and John Roberts describe corporate culture as being partly “the interrelated principles that the organization employs and partly the means by which its principles are communicated to hierarchical interiors and hierarchical superiors. It says how things are done, and how they are meant to be done.” 2

This frame of thinking is reflected in Ms. Woods’ comments; “The board and company culture are pervasive in all aspects of how the company functions. Every time the board interacts with any member of management or a customer, it’s an opportunity to communicate ‘this is the culture we expect.’ Every time a project is created, prioritised and implemented, it gives you the opportunity to assess the culture. The board drives the culture every time it directs how the company should interact with a customer, what its expectations of that interaction are and what the outcome should be. Culture is reflected in how the company operates and goes about its everyday business.”

It perhaps shouldn’t come as a surprise that a reoccurring theme of the research was the important role culture plays in an organisation and particularly in the boardroom. As culture carries through every aspect of the board’s activities, it must be treated as an ongoing issue, which is monitored and implemented by the board, beyond times of assessment and evaluation.

As we move away from recession and remediation towards growth, a strong and constructive culture can have a significant impact on retaining and attracting quality staff and customers.

The sentiment amongst interviewees is that an environment that encourages constructive collaboration, where there is challenge but also cohesion amongst board members is crucial to a healthy board and organisation.

Role of the INEDWhile attitudes towards the extent to which INEDs impact culture varied, there was a consistent view that their independence offers a valuable outside-in perspective of the board and corporate culture. Their involvement in various committees and their interaction with senior management allows them to see first-hand if the board’s interpretation of the culture matches the reality of the business, which they can then feed-back to the board.

Below are insights offered by some of the interviewees on just what the INED’s role should be in terms of culture.

Mr. O’Faherty sees the dissemination of culture throughout the board as coming from the executive, while the role of the INED is more to provide oversight. He states; “I think the boardroom culture should be reflective of the way the company works. In reality it’s quite difficult for an INED to have an impact on culture. By definition you’re a Non-Executive. You’re not there day-to-day. I’m a great believer in culture; that it can be changed and improved. But I think the primary responsibility for that sits with the executive. Probably the INEDs responsibility sits with making sure the executives are doing the right thing and making sure that the culture is right. For the INEDs to actually be promoters of a culture is very difficult.”



Mr. Barry: “I feel that INEDs play a significant role in making sure that the culture of the company is suitable. Actually visiting the parent company, seeing different senior management and the senior admin areas gives you a feel for the culture right from the start, as opposed to just the facts and figures. For example, the INED must flag and stamp out instances of unacceptable culture. So what you see happening in the board room, where ideas are too quickly dismissed or management treat something as less important than it is, the INED might step in straight away. Another practical example where an INED affects culture is by supporting getting less than the maximum profit. If you think back to the banks, they may have sought maximum profit but took too much risk. The INEDs have to support not achieving maximum profit in order to avoid excessive risk taking and that there’s greater clarity for customers about the products they’re buying, etc. I think the INED has an important role to play there, ensuring that it’s not just profit at the expense of the long term good of the company and the client.”

Mr. Creedon: “The culture flows mainly from the group, and from the Chairman and the chief executive. I think they have much greater influence than any non-exec. That said, I think it is right for non-execs to be conscious of the subtle influence they have on culture. For example, I try to be available to the executives as much as possible in a constructive way and I think that helps, but I wouldn’t make any great claims for my influence on culture. The best we can hope for is to be a positive influence, but as a simple Non-Executive you will not be the determining influence on culture.”

Mr. Browne: “When you’re outside an organisation you’re probably in the best position to assess the

culture. If you’re talking around the board table and people say ‘this is the way we do things here’, you’re in the best position to say ‘sorry that’s not the impression I get.’ You’re in a much better position to question the culture because when you’re not embedded in it. It’s sometimes easier to see the deficiencies in it. It’s an INEDs independence that allows them a clearer picture of how the culture is functioning in the organisation and suggest ways of perhaps improving it.”

Ms. O’Hare: “It’s really important that INEDs have a good appreciation for the company culture, day-to-day on the ground, and to have exposure to experience that company culture beyond the confines of the board meeting. One way of achieving this is to encourage INEDs to interact with members of the team outside of the boardroom. For example, meeting directly with employees where there’s a relevant topic for them to do so or by joining company off-site planning meetings. Again it goes back to open and transparent communication. If they can get a sense of the corporate culture in practice, they are able to identify any inconsistency with the boards overall objectives and the tone that it wants to set.”

Board Influence on Corporate CultureIn terms of establishing a strong and fruitful board culture that trickles down through the organisation, Gibbons and Robert proceed to highlight the intertwining relationships that exist between leadership and corporate culture.

While some directors felt that the board can only have so much of an impact on culture, the majority felt that an organisation takes its cultural cues from the board.



As Mr. Creedon sums up: “The board sets the culture of the organisation in many ways. While I believe culture is an all-encompassing thing, I also think impressions are generated top down and people tend to follow the leader or at least tend to temper their actions based on what the leaders are doing. I would think it’s very important that the board establish their vision for the culture of the organisation and then portray that in their interactions.”

Going beyond this, Ms. Quinlan suggests the need for greater measurement of the corporate culture: “The board has a responsibility to set the corporate values of the organisation. For many years there has been a focus on measuring the effectiveness of such values, through leadership and engagement surveys/reviews. It is now just as important to ensure effective metrics are in place to measure the culture of the organisation, to ensure the values set are effectively embedded and are resilient to the changing environments in which companies operate”.

One interviewee outlines the process an organisation they work with went through when implementing a change to its culture; “We were trying to significantly change the culture and we spent a lot of time on it at board level. We employed occupational psychologists to definitively identify the culture. We then had to consider how we wished to change it, what were we moving it towards and what our desired brand values were. Subsequently, we organised an individual assessment of the top 200 management against those brand values. This created a foundation upon which we could assess the culture going forward. Finally, we involved our employees in terms of how we should change and refine these brand values and

how they should work in practice. Consequently, the employees felt that they really owned the brand values and they were subsequently endorsed by the board.”



Group and Subsidiary BoardsThe difference in the experiences of those on group boards and those on subsidiary boards - be they Irish subsidiaries of multinational organisations or Irish subsidiaries of another Irish company - has come up throughout this paper and so warrants reflection. Understandably, the subsidiary board is more so responsible for overseeing the implementation of the strategy set by the group. As one director put it, they act more as “strategy takers than strategy makers”.

The implications of this difference run through all aspects of the board’s operations and the manner in which it works. It was stated multiple times that there is a greater onus on group boards to involve the subsidiary board, particularly the INEDs, who can provide direction to the subsidiary board, helping ensure a similar culture and vision for the business is embraced. Whether, this is put into practice is another matter.

As one board director explains: “In a multinational context, one of the things I look for when considering a board position is the parent’s attitude to the subsidiary board. In particular if I get the impression that INEDs on a subsidiary are considered a necessary evil then I’m not that keen. In fairness though, while this attitude might have been quite common 10 years ago, you don’t come across it so much these days.”

Meanwhile, Mr. Sheridan shares some thoughts on what he believes to be best practice for group subsidiary boards: “The role of the Chairman is always important, but nowhere more so than in a domestic subsidiary of an International Group. The Chairman should be an INED rather than a Group NED. It is clearly essential that the Group has confidence in the ability and independence of the

Chairman. If the subsidiary is a financial business, subject to a Financial Regulator, then everything must come - and be seen to come - through the Board, but this is best practice in any event. Clearly the subsidiary will be influenced by Group Strategy and decisions, but the Board of the subsidiary must have the opportunity to discuss major issues and gauge the implications in the context of the local domestic market and the financial performance of the domestic business.”

Group Interaction for Subsidiary INEDsIn terms of giving INEDs of subsidiary boards a better feel for the company, its culture and so forth beyond the local market, best practice appears to involve taking measures for the INED to interact with the wider company through company away days, meetings with the group board and members of senior management at company headquarters, operational site visits, etc., while ensuring open lines of communication and the establishment of strong support structures. The importance of this is significant. It was suggested that a lack of support may increase the likelihood of a disengaged, poorly performing INED. That said, it was also put forward that INEDs must actively seek opportunities for greater engagement with the group board.

The research revealed a very mixed experience of interaction between subsidiary INEDs and their parent companies, with some highlighting that it was a major issue, particularly in non-regulated organisations, where they felt INEDs were in some circumstances perceived as ‘a necessary evil’ and even ‘an annoyance’. Conversely, others expressed their deep satisfaction with the manner in which the group communicated with them and, where



appropriate, involved them in the decision making process.

In terms of the measures that can be taken to further enhance the incorporation of INEDs, a variety of suggestions were made. However, clearer, more open channels of communication was a consistent theme throughout.

Ms. Quinlan: “Some groups are excellent at embracing INEDs. Some companies are much better at embracing and understanding the role the INED plays. I work with some companies where they actively embrace the INED and there’s a really strong link between the subsidiary board and the group plc board. If an INED isn’t being embraced then the INED needs to find a way of injecting themselves into either the group board structure and/or the group executive structure. In terms of ongoing due diligence that an INED would conduct within a group subsidiary structure, the INED should ensure that they linked with the group company, that they’re visiting the company, that they understand the priorities for the group and the shareholder and what impact they have on the subsidiary board. It helps form a more balanced view of what’s happening on the subsidiary board.”

Ms. Woods: “One way to ensure better engagement with a subsidiary is to make sure that at least one, if not two, members on the subsidiary board are also on the group board so that you create a natural two way channel of communication. The group INEDS should know the subsidiary INEDS as well, which means meeting up together from time to time and having easy access to one another. Also, the terms of reference should be very clear about the roles and responsibilities of the subsidiary board. These areas can get very grey. The more clarity you

can provide the better, otherwise there will be problems down the line.”

Mr. Sheridan: “Understanding the role the INED plays, the group should act to engage them through meetings with the group executive and so on, so that the INED may have a clearer picture of how the subsidiary board fits into that picture.”



Closing Summary

Harty International is an organisation that predominantly focuses its resources into one single area: Board Room activity. We do this via two areas: Executive Search processes for the next board room hires; and Consulting to boards, which encompasses assessment and evaluation. As a result we continue to be involved in the conversation and remain in a unique position to probe into relevant, current and future trends through our client base and the wider non-executive director community.

This is the third White Paper in the series “The Future of Financial Services Boards”. During the course of our prior research into the earlier whitepapers - “Effective Alignment of Non-Executive Directors” & “The Role of The Chairman” - and through other research conducted, we found that all three of these topics were of considerable interest and concern to Board members and in particular, to the Independent Non-Executive Directors and Chairpersons. All three are inextricably linked and thus impact upon each other.

InductionThe learnings from our research show us that while the induction process is becoming more comprehensive, it must also be flexible and tailored to the needs of the individual. The research found that effective induction processes encompass the following key elements:

• Clear induction policy• Gives the inductee a clear insight into the organisation o The Board culture o The risk analysis o The business operation o The executive team• The competitive strategy• The branding • The views of stakeholders, analysts and brokers • The structure of the Board and the committees • The policy on succession planning

Hence, an effective induction process can seamlessly deliver the key learnings that ensure the new director can become highly effective in relatively short order. However, companies must not lose sight that the induction process is on-going: with site visits; and one-to-one meetings with senior executives and key staff members.

Assessment and Evaluation When selecting new directors, an organisation can set the tone for how the ongoing evaluation and assessment will function for the board, in particular highlighting the need to use certain tools like Psychometric testing & Leadership analysis.

Induction

Evaluation Culture

Level of effectiveness



The Central Bank codes of conduct (highlighted in the text) emphasise the need for comprehensive independent board evaluation. As stated, not only is it best practice, but evaluation delivers significant benefits:

• Evaluation identifies areas for improvement both on an individual and collective basis• It examines the culture of the board• It looks at the skill-set and identifies gaps• Thorough assessment gives the chairman the tools to tackle issues and challenges the chairman to examine his/her own performance• Evaluation using tools and techniques - like 360 feedback or personality assessment - ensures the board can drive a culture of continuous improvement• Evaluation will raise issues like the potential for group-think and the need for diversity

As a result of the onerous responsibilities being laid down by regulatory authorities, the interviewees felt that Boards are potentially at risk of becoming narrow in both their thinking and actions. Comprehensive annual assessment highlights if the board is maintaining diverse and effective team cohesion and the level at which it is achieving this. Evaluation ensures that the nominations committee is fully cognisant of the talent requirement both at board and executive level.

Culture The corporate culture says in a covert way how things are done and how they are meant to be done. Culture is pervasive in all aspects of how the company functions:

• Culture needs to be nurtured

• Culture is part of the assessment process both formal and informal and it is the role of the independent directors to highlight deviations from the culture• The board lives the culture, the board establishes the vision for the culture of the organisation• The board portrays the culture in its daily actions• There must be metrics around culture, which allows the board to make critical assessment and recommendations for improvement

If a company feels that the culture needs modification or change, then this change will be led by the board and refined by the executive and staff.

In summary, establishing effective induction, ongoing assessment and evaluation as part of the vision and plan of the organisation, combined with a full awareness of the culture of the business - which begins at the top with the board - leads to better run and more corporately effective entities. Organisations without these philosophies who reach a sustained level of success are in the few.

We thank you for taking the time to read this paper and we hope it will prove to be a useful reference point in future board room discussions and dealings.



Contributions From:Julie O’Neill - Independent Non-Executive Director at Permanent TSB Bank plc, AXA Life Europe, Ryanair plc and Chairperson of the Sustainable Energy Authority of Ireland

Catherine Woods - Non-Executive Director, AIB plc

Rosemary Quinlan - Independent Non-Executive Director with Ulster Bank, Ulster Bank Ireland Limited and Royal Sun Alliance Ireland

Debbie O’Hare - CEO, Hannover Re (Ireland) Limited

Tom Barry - Independent Non-Executive Director and Chair of Audit at New Ireland and Chair of Risk at Aegon Ireland

Seamus Creedon - Non-Executive Director & Chairman to several Insurance entities in the UK and Ireland

Paul O’Faherty - Non-Executive Director to VHI, Merrion Capital and companies in the BlackRock, State Street, Standard Life, Mediolanum and Nevastar groups

Ciaran McGettrick - Independent Non-Executive Director and Managing Director, Phoenix Ireland and President at Insurance Ireland

Vincent Sheridan - Chairman of Mercer Ireland and Mercer Global Investments and INED to a number of financial services companies

Dermot Browne - Independent Non-Executive Director, Aegon Ireland, former CEO of Aviva Ireland, former International leader at Zurich Insurance PLC

1 Long, T. (2008) ‘Diving for pearls: the importance of Board induction and re-induction’, Int. J. Business Governance and Ethics, Vol. 4, No. 1, pp.43.2 Gibbons, R.; Roberts, J. (2013) ‘The Handbook of Organisational Economics’, Princeton University Press, pp.434.


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