How should an organization best integrate corporate governance principles to build resilience against financial and operational risks, and what key governance practices contribute to long-term stability in the rapidly changing financial landscape?

With increasing economic pressures, geo-political unrest, advances in technology, increased regulation and countries still recovering from the pandemic, the financial landscape is most definitely changing rapidly. Boards are having to adapt to continually balance mitigating risks with profitable growth.

There are a lot of definitions about what makes good corporate governance. To me, corporate governance is fundamentally about the way an organisation operates to deliver its strategy and monitor progress. It is integral to the organisational structure, culture and capabilities. There is also a lot written to explain why governance is important to long term viability, but given the interconnected nature of governance it can be hard to identify which particular practices really make the difference. What appears to be undisputed, is that a strong and effective board plays a critical role in ensuring the long term success of any organisation; but the board too must adapt and make sure that it effectively manages financial and operational risk in a way that remains aligned to the organisations strategic objectives. Independent directors can play a crucial role here in challenging management, providing strategic guidance and safeguarding the interests of stakeholders.

However, traditional hierarchical governance structures may be inadequate to respond to the rapidly changing environment. Some organisations are exploring more agile governance structures that enable quicker decision-making and greater flexibility with decentralised decision making, empowering teams to take specific decisions within their area of responsibly, while maintaining accountability and oversight. Cross-functional teams, iterative approach’s and more adaptive planning are becoming increasingly important, and prevalent within governance structures especially where large scale digital transformation is concerned.

To get a second perspective, I asked my colleague Dr Stephanie Henderson-Begg for her thoughts. We worked closely together at the Bank of England, where she was responsible for supervising newly authorised financial institutions.

“Talk of governance can often conjure thoughts of repetitive, rigid layers of committees and documents that doesn’t always align well with stereotypical thinking on how to manage rapid change, which is more often associated with flexibility and dynamism. But if you think of governance as a framework by which we can manage change we can find new perspective. Just as a biologist applies scientific method to new and exciting discoveries, governance provides the framework under which businesses can grow and thrive. 

So what are the key governance practices? People and process are always front of mind. You need to have the right mix of knowledge, skills and experience. But the right people are not enough without rigour in the governance process. This is where careful thought around committees, their purpose and how everyone is held to account is important. 

The less commonly discussed governance practice for success is planning. This could be planning to deal with unexpected changes or delivery of business plans and special projects. Really good governance set ups expect and put structure around how to develop, challenge and most importantly – oversee delivery of plans.

So, with the right people, processes and planning, you’ll be set to navigate the rapidly changing landscape.”

I agree, planning is important. In fact, maintaining a long-term perspective in decision making and planning can help to promote sustainability and resilience against short-term fluctuations and challenges. Corporate governance must evolve to address the changing environment by enhancing risk management, embracing digital transformation, adopting agile governance structures, and fostering a culture of continuous learning and adaptation. By doing so, organisations can enhance their resilience, sustainability, and long-term value creation in a dynamic world.

With the growing emphasis on sustainability, how can a financial institution align its corporate governance framework to promote environmentally and socially responsible practices, and what initiatives are in place to balance profitability with sustainable business practices?

If you agree that what you measure gets managed, then introducing reporting requirements can only be a positive step to drive change. The new corporate sustainability directive will impact more companies that any other regulation, it will drive greater transparency of ESG reporting and disclosures while promoting sustainable business practices and investments. This isn’t a compliance exercise; this is a shift in commitment to help the environment and communities. If done well and embedded into strategy early, this could also really add value and drive growth, not least because of the positive reputational impact with customers, but also increasingly with employees.

To align its corporate governance framework with environmentally and socially responsible practices, a financial institution can implement several initiatives, including integrating ESG factors into investment decision-making processes, risk assessments, and product development. And this is starting to happen. More companies are now offering green financing products, such as green bonds, sustainable loans, and renewable energy financing, to support environmentally friendly projects and initiatives. Similarly, many organisations are now investing in activities that aim to generate positive social and environmental outcomes alongside financial returns. This may involve investing in enterprises and projects that address pressing societal challenges, such as climate change, poverty alleviation, and social inequality.

To bring this subject to life, I asked Ben Medland, the co-founder and CEO of DRIFT, a company that I have been following closely over the past year to share his perspective. Below he explains how his company have embedded sustainability into their business from the Board down, and how considering sustainability as a factor in reporting and decision making, can not only help the planet but also drive commercial value:

“At DRIFT, we are commercialising a new class of renewable energy. Using sailboats to regenerate green hydrogen over the deep ocean. Alongside this we also have an ambition to be the most sustainable form of green energy production. After all, our business is operating in the ocean, a place to care deeply about. Hence, our tag line is to leave nothing behind but oxygen. As such we are committed to two techniques for governing the sustainability of our enterprise.

First is that we have a permanent ‘voice of the ocean’ seat on our board. This is enshrined in our company by-laws to ensure the voice of the ocean (and its associated impacts) are considered in our highest levels of decision making. These board members will have backgrounds in ocean preservation, blue economy, sustainability, and for us we target the types of people that move in UN and WEF circles.

Our second approach is that we look to truly account for sustainability. Decisions are only as good as the information that goes into supporting them. On our travels we met with Dr Ralph Chami as assistant director at the IMF. His recent work on the blue economy places the value of blue whales. It’s about $2m a whale. Meaning blue whales and all filter-feeding whales are a $1 trillion natural asset. By putting a value on it means you can make better decisions – something Dr Chami noted when he was mobbed by bankers and insurance companies at the WEF in Davos. For us, this means we plan to have marine sensors on the ship and design our routes to avoid known migration paths.

The same is true for carbon accounting, circularity of materials, end of life planning, diversity, etc. To give an example, we need to choose what material to build the ships with. Carbon Fibre has so many advantages but when you apply a 360 degree accounting of it end-to-end sustainability, it drives you towards Aluminium as the better choice for the planet. Of course, decisions like this change over time as recycling or material sciences improve (e.g. flax fibre and two-way epoxy). And that is both a challenge and an opportunity for businesses. How does your firm establish the framework for 360 degree accounting? How do you keep up with this expanded data set required for this accounting model? When do you know enough without overdoing it and slowing the business down? How do you use it for competitive advantage… no one wants to be seen buying a ‘bad for the planet’ product! But the prize for being good at this is so huge. It means you get access to more financing options, perhaps more favourable terms. And the loop reinforces.”

I think this really demonstrates how focusing on sustainability from the board down, making sure that you have the right expertise to embed sustainability into the fabric of a company, bringing the real impact of taking positive environmental and socially responsible decisions to life, can add enormous value. But perhaps most importantly that thinking about sustainability is not a one off exercise but like any other change, a continuum which must be embedded into decision making, risk management practices, and systems and controls at any enterprise level.

In fostering a diverse and inclusive workforce, how can an organization best approach talent development and ensure equal opportunities, especially in leadership roles, within the financial services sector? 

In an increasingly interconnected world, there is so much that we can learn from people with different backgrounds and cultures. We know from numerous studies that organisational cultures that embrace employees from different cultures, ethnicities and backgrounds and make people feel able to share their unique perspectives can become employers of choice more readily.

The importance of strong leadership and talent development is evident even for smaller firms in the financial services sector. If you read the regulatory expectations of new and growing banks, there is a clear expectation that firms invest in their management and governance as they mature and this includes bringing in the right talent to manage, govern and shape organisational culture early on. A commitment from the top is clearly very important. People in leadership roles should demonstrate a genuine commitment to diversity, equality, and inclusion (DEI) initiatives, and reflect that commitment in policies, practices, and their own behaviours. Other steps that could be of help to foster a diverse and inclusive workforce include:

Education and Training: Provide education and training for leaders and employees on unconscious bias, cultural competence, and inclusive leadership practices. This helps foster awareness and understanding of the issues.

Leadership Development Programmes: Develop leadership programmes that specifically target underrepresented groups and provide them with the tools and support needed to advance in their careers.

Diverse Talent Pipeline: Implement programmes to attract, develop, and retain diverse talent at all levels of the organisation, including entry-level positions. 1000 Black Interns or Women on Boards are great example of this sort of specific activity.

Monitor and Assess Progress: Regularly assess progress on DEI goals and hold leaders accountable for driving change. This may involve collecting and analysing diversity metrics, carrying out employee surveys, and setting diversity goals tied to performance for example.

Whatever steps you take, DEI efforts should be ongoing and adaptable to evolving needs and circumstances. As strategy evolves or as new risks and opportunities emerge, consider how you can bring new skills and perspectives to the table. Regularly seeking and acting on employee and stakeholder feedback will help organisations to make adjustments needed to drive progress towards greater diversity, equality and inclusion, which in turn should lead to greater innovation and better results.

As financial services increasingly embrace technological advancements, how do you organisation navigate the integration of innovative technologies into governance frameworks, ensuring both efficiency and compliance with industry standards?

Going back to the first question, corporate governance is fundamentally about how an organisation operates to deliver its strategy. To stay competitive and leverage innovate technology, your strategy will almost certainly include the vision and long term technology objectives. These objectives can act as the foundation to build a strategic and resilient governance framework to help your organisation navigate the constantly evolving technology landscape, balancing the rewards associated with innovation, against the inherent risks. Talk of governance and risk management in the context of something as fast-paced and rapidly evolving as technology, may appear too rigid or stifling. However, good governance is really about allowing calculated risk-taking, without compromising your security, compliance or operational integrity. Here are some examples of what I have seen work effectively:

  1. The board of directors and relevant governance committees must be actively involved in overseeing the integration of new technologies, including into governance frameworks (the roles, responsibilities and decision making processes related to technology change). Consider having a specific technology committee, or, as many board are doing now appoint a technology subject matter expert to the board.
  2. The leadership team and board should have a comprehensive understanding of the various risks associated with technology innovation, including e.g. cybersecurity threats, data privacy concerns, regulatory compliance issues, and potential disruptions to existing business models
  3. Foster cross-functional collaboration between teams. Bringing together IT, legal, compliance, risk management, and other relevant departments to ensure that risks and compliance requirements are considered during technology transformations and that governance frameworks are aligned or updated.
  4. Seek advice and guidance from external experts, consultants, and industry partners with specialised knowledge and experience in technology governance and compliance. Leverage their insights and expertise to enhance the effectiveness of governance frameworks and ensure alignment with industry best practices.
  5. Provide training to ensure that everyone in your organisation understands their roles and responsibilities. This includes training on cybersecurity best practices, data privacy regulations, and compliance requirements.

In the pursuit of economic equality, how can an organization contribute to financial inclusion, and what governance strategies are implemented to ensure access to financial services for diverse and underserved communities?

Starting at the top, ensuring that boards and leadership teams reflect the diversity of the communities they serve can really help to ensure that inclusive decision making and implementation of financial inclusion strategies.

Organisations should then be far better equipped to design specifically tailored financial products and services to meet the needs of diverse and sometimes underserved communities. Examples of these sorts of products include simplified account opening processes, low-cost banking options, microfinance solutions, and mobile banking services accessible to those without traditional banking access.

A governance framework built to support a financial inclusion objective could collect data on access to financial services, usage patterns, and barriers to access, which would in turn inform policy development and help to determine intervention strategies. This data could lead an organisation to decide to provide financial education and literacy programs covering topics such as budgeting, saving, credit management and business management to people in underserved communities to arm them with the knowledge and skills needed to make informed financial decisions.

Heather Butler is the Director of a consultancy company providing advisory services to financial services firms, specialising in authorisations for new and growing banks and payment services firms. Heather works with a network of ex-regulators who support financial services firms including in their management and governance arrangements.