When it comes to corporate governance, the visible hand of management and the board must be the driving force behind any sustainable business, acting as an adjunct mechanism for regulating the interaction between corporations and society. The governance framework of every organisation should support and provide assurance on compliance with that organisation’s regulatory license to provide a service. The board and executive management should instill the importance of regulatory compliance from the boardroom and into every facet of the business and ensure that the internal governance framework facilitates and tests this compliance. In short, the board should ensure that the governance foundations are built and that the board, working in conjunction with executive management, agrees the basis of reporting on all matters of interest to the board, including regulatory compliance matters. The chair of the board, in turn, must allocate the scarce resource of time proportionately across the range of topics, key indicators and matters reserved that require board consideration, discussion and decision.
Dr Margaret Cullen: "Our members were challenged, however, in reconciling conceptually and philosophically how individual accountability and collective board responsibility can sit side by side within the boardroom".
Striking the right balance between looking back at past performance and assurance versus forward at emerging risks and opportunities can be challenging for board chairs and boards generally. All boards should reflect on the rhythm in the boardroom vis-?-vis ensuring the framework for compliance exists and getting assurance on its effectiveness versus allowing the regulatory agenda to consume board discussion and time. In highly regulated sectors, there is a risk that the information provided to the board and, indeed, the discussion in the boardroom is disproportionality skewed towards regulatory matters and past events, crowding out strategic, forward-looking discussions and debate. What we want in financial services is board led governance supporting a regulatory compliant culture with effective stakeholder engagement. Regulatory policy in financial services, as in other sectors, should seek to enable rather than disable the visible hand of executive management and the board.
Following consultation with our members, the Institute of Directors (IoD) in Ireland, the leading membership body for directors and business leaders, made detailed submissions in response to Consultation Papers 153 (Enhanced governance, performance and accountability in financial services, Regulation and Guidance under the Central Bank (Individual Accountability Framork) Act 2023 (“IAF”)) and 154 (Consolidated Guidelines in respect of the Central Bank Administrative Sanctions Procedure (“ASP”)). As noted in our submissions, IoD Ireland understands the historical and social context behind the regulatory objectives of IAF and, specifically, lessons learnt from the global financial crisis when governance deficiencies and insufficient accountability were revealed. IoD Ireland’s focus in considering CP153 and CP154 is not on bad faith actors who set out intentionally to breach individual or firm obligations and/or to harm customers or investors but for good faith actors who might find themselves the subject of an investigation / inquiry under the ASP. The IoD reviewed CP153 and the draft IAF Regulations and draft IAF Guidance through the lens of our Vision and Purpose and the core tenets of corporate governance which we believe in and promote through our work: clarity of purpose to inform corporate strategy; principle of collective responsibility within a unitary board; division of responsibility to ensure no one person has unfettered control including the separation of the roles of CEO and board chair; the benefits of independent non-executive director representation on boards; robust systems of internal governance; effective assurance mechanisms; transparency; integrity. In response to our member survey on CP153, the common perceived benefit of IAF cited was clarity of executive responsibilities and accountability and a reduction in the risk that executive responsibilities would “fall within the cracks” of a system of governance. Members noted that the IAF should discourage the negative behaviour of a few bad faith actors.
Our members were challenged, however, in reconciling conceptually and philosophically how individual accountability and collective board responsibility can sit side by side within the boardroom. In terms of concerns identified by our members within our consultation, this challenge emerged as one of the prominent concerns. Collective board responsibility and related strength is not a veil for directors to hide behind. It integrates the system of governance in a forum that requires the business and risk judgement of the board, leveraging off the individual skill sets and the objectivity that comes via the non-executive directors who are not involved in day-to-day management. Our members are concerned that the regulatory philosophy of prescribed responsibilities being allocated to individual directors is inconsistent with collective responsibility and, given that several of these responsibilities are being assigned to non-executive directors, is not consistent with the concept of being “non-executive”. Members are also concerned that the Senior Executive Accountability Regime (SEAR), a pillar of the IAF, will create a more siloed approach to director role execution which negates the benefit of NED representation on boards and adds risk to individual financial services companies and the sector as a whole.
IoD Ireland’s view is that a system of governance should have at its core that one person does not have ‘control’ over decision-making and that the system of governance includes forums for decision making with the board being the ultimate forum with regard to matters reserved for its decision. Our members are concerned that the emphasis on individual accountability is misaligned with the fundamental governance principle that no-one person has unfettered control and could in fact compromise the effectiveness of decision-making forums within the system of governance. There is a concern that the rigidity of individual responsibility might impact on a board’s discretion in designing and evolving the optimal system of governance for a specific company, particularly but not exclusively where the organisation is part of a larger group.
In the context of the way decisions are made in practice and the fact that decisions can be made in good faith in the interest of the company without full consensus across the board, IoD Ireland, along with its members are concerned that the pivotal role of the board chair has the potential to be compromised or even hamstrung within an IAF framework. Members are questioning whether a board chair can continue to make a call on a board decision absent a consensus, as is best practice, or can the view of one director who has responsibility for a particular prescribed responsibility in their PCF role hold things up or force the board into an alternative decision for fear of regulatory scrutiny. There is further concern that the IAF will result in granular and managerial type discussions at board meetings given the understandable attempts of non-executive directors to meet the Central Bank of Ireland’s (CBI’s) expectations of demonstrating challenge and reasonable steps. If such a behavioural shift occurs, it may crowd out strategic, forward-looking discussions and debate and the appetite for risk taking, all of which are critical to executing the fundamental role financial services organisations play in the economy and society. There is an added risk that this concern will impact on executive and non-executive directors’ and indeed PCFs’ appetite to take risks or indeed take on senior roles. 67% of respondents to our IAF member survey consider that the introduction of SEAR is likely to discourage senior professionals from applying for or remaining in INED roles in in-scope firms.
57% of respondents to the survey either agreed or strongly agreed that the introduction of the IAF would be challenging for subsidiaries of global organisations that operate an integrated global system of governance. Members are concerned with how subsidiary companies and boards can synchronise SEAR allocated responsibilities in a group matrix structure where the equivalent role within a group does not have IAF responsibilities. As well as creating challenges for subsidiary governance, this might discourage directors of parent organisations from sitting on their subsidiary boards in Ireland due to the reputational risk in a global industry.
With regard to CP154, the draft ASP Guidelines make very limited distinction between enforcement actions against companies and enforcement actions against individuals. The draft ASP Guidelines do not acknowledge the significant difference between the reputational and psychological damage that an enforcement action imposes on an individual versus a firm. Neither do the draft Guidelines demonstrate how the psychological safety and professional reputation of inquiry subjects who are individuals will be safeguarded. IoD Ireland’s concern is not for bad faith actors but for good faith actors who might find themselves the subject of an investigation / inquiry.
A significant change in the new regime will be the Central Bank’s ability to take enforcement action under the ASP directly against Individuals for alleged breaches of their obligations rather than only for their participation in breaches committed by a firm. We are concerned that the ASP process may not sufficiently distinguish between good and bad faith actors and that the former could end up in professional limbo or, in some cases, with no future career in financial services. We are also concerned that the IAF exposes individuals who have acted in good faith to personal, professional, and financial costs in circumstances where (i) they are not supported by their organisation if the CBI instigates an investigation or (ii) they have left the company when a CBI investigation is instigated and are not entitled to support from their former employer. The draft IAF Regulations and Guidance are silent on this matter as are the draft ASP Guidelines.
The legislative amendments introduced by the Act incorporate changes including the introduction of court confirmation of sanctions before any sanction can take effect as part of early resolution or settlement of an ASP matter where admissions are provided. There is a significant emphasis on early resolution within CP154 and the draft ASP Guidelines. Early resolutions related to undisputed facts settlements may be a sound course of action for an organisation that can bounce back from such events. Given the CBI emphasis on early resolution and the offer of discounts on monetary penalties, IoD in Ireland are concerned that Inquiry Subjects who acted in good faith may feel pressurised into an undisputed facts settlement or an investigation report settlement even where they fundamentally believe that they have taken reasonable steps in executing their responsibilities. The professional and personal reputational impact of an undisputed facts settlement and an investigation report settlement and indeed a no admissions settlement, is significantly higher than at the level of the organisation.
Like a significant number of stakeholders, IoD Ireland, on behalf of its members, has raised several questions and sought clarifications on aspects of the IAF and ASP with a focus on good faith actors. Whatever the outcome of the consultation process, the industry must not lose sight of the fundamental role financial services organisations play in the economy and society and of the importance of the visible hand of boards and executive management, executed in good faith in the interest of the company and the customers / investors it serves, in driving the effectiveness of the governance architecture. As companies integrate the IAF into their governance architecture, boards and companies must be mindful to be regulatory compliant but not regulatory led in the boardroom.