How building societies do governance

“Poor standards of governance were a primary cause of nearly all the banking failures,” according to the chief executive of the Building Societies Association. And building societies were...

“Poor standards of governance were a primary cause of nearly all the banking failures,” according to the chief executive of the Building Societies Association.

And building societies were not immune, said Robin Fieth in the introduction to a report on how the sector handles governance.

The independent review by Odgers Berndtson found the quality of governance has improved since the financial crisis, but there are still areas for development, including diversity and succession planning.

“I have been struck by the extent to which the sector takes matters of governance very seriously,” he said.

He noted that the sector follows UK Corporate Governance Code and has “voluntarily embraced standards  required of listed companies”.

In the report, commissioned by the BSA, he added: “To some extent the challenges of governance in the building society sector are more straightforward than the listed sector in that they do not have to face the short-termist pressures of external shareholders.

“Nor are they subject to the accountability to major shareholders.

“This places an onus on building society boards to act always in the interests of their members, who are also their customers.”

Jeff Morris, author of the report and partner at Odgers Berndtson, said: “The financial crisis has meant a step change in the volume and complexity of the workloads faced by building society boards and this has prompted boards to review and improve the way they operate, how they manage their business and the skill sets they require to perform effectively.”

He added: “The composition of boards has changed. The process of long-standing non-executive directors (NEDs) being stood down has accelerated as all societies have fallen into line with the UK Code.

“Encouraged by the PRA [Prudential Regulation Authority], priority in refreshing boards is mostly being accorded to NEDs  with financial services and risk management expertise.

“To recruit candidates of the right calibre, smaller societies have to look much further afield than has traditionally been the case. Boards are taking steps to improve diversity but this is challenging, particularly for smaller societies.”

This recent focus on governance has given some societies more clarity on the board’s responsibility to future members, Mr Morris noted.

Several society boards articulated their role as stewards of the society,” he said, “not just for current members, but for future generations.

“‘We’re here for the members’ has been a common mantra for many years. The notion of stewardship, of ensuring a society is well placed to meet the needs of future members, is distinctly different.”

This demands a long-term perspective on financial stability, customer propositions and investment, said Mr Morris, and there are areas for concern and challenges ahead.

“The significant improvement in governance – and, by extension, the quality of leadership and decision-making – across the sector has been born out of crisis and intrusive regulation,” he added.

“As the vast majority of members do not proactively challenge performance or governance, maintaining and indeed improving the level of governance and performance of the sector is therefore likely to fall to regulators, building society boards and the BSA.”

In his speech to the BSA’s annual conference in Harrogate last month, Mr Fieth told delegates: “In the post-2008 environment, boards and their chairmen have a simple choice when it comes to standards of governance.

“Either they can run their own boards by setting standards of governance and performance that meet or exceed the reasonable requirements of the regulators, or they can expect substantial regulatory intervention.

“This is what we mean by excellent corporate governance in building societies. And when we talk about distinctive corporate governance, we do not mean blind adherence to the UK Corporate Governance Code.

“We mean taking and adapting and applying the principles of the Code in a way that is appropriate to the particular nature, and ownership structure of each society, and of the sector as a whole.”

The ingredients of building society governance

The directors

To keep in line with the UK Code of Governance, many building societies have appointed a senior independent director (SID) and combined this with the role of vice-chair, though some societies said it was of little relevance to them.

The role was designed as a safety valve for shareholders against under-performing chairs or CEOs, but some board members felt it has not been effectively positioned as a channel of communication for members, staff and other stakeholders. And finding qualified non-executive directors is proving a challenge, especially in certain technical areas, such as treasury management.

Non-executive directors in IT and consumer/marketing are increasingly desirable. Societies have received mixed messages from the PRA over whether it is necessary for all new NEDs to have financial services and/or risk management experience, with many having these skills but other recruits coming from outside financial services.

In looking for desirable NEDs, some smaller regional societies reported sadness at having to “spread the net”, and weakening links between the board and local communities.

Some NEDs have also become champions in particular business areas, which involves taking the lead in board discussions and engagement with stakeholders. But some directors believe reliance on one expert undermines collective responsibility of the board, and creates a risk of a skills gap if the NED leaves.

Each year, some societies have a policy of refreshing the board by changing one NED. This “provides a good rhythm and engenders continuity, but can limit opportunities to change the skills mix of the board”.

Building societies admit there is still room to improve gender, race and other diversity of their boards. But many believe that targets for greater diversity would be restrictive because the size of the “talent pool” is small. The report says competence and skills come first.


Skills gaps are identified across boards through the deployment of a matrix to audit skills. To further assist directors with increasingly technical agendas, boards have introduced teach-ins and continuing professional development programmes.

Increasingly, formal induction programmes and early engagement of new NEDs are seen as important in promoting effectiveness. Seminars and external speakers for the board and/or executives are also seen as helpful.

Many boards carry out annual evaluations of their effectiveness, using questionnaires and one-on-one meetings, while others informally evaluate their performance at the end of each meeting – ie, by having a discussion about the conduct of the meeting and the quality of the decisions taken.

Some boards commission reviews by auditors or specialist firms, which were described as insightful. Others find external reviews expensive and of limited value.

The board

To help manage increased workloads since the financial crisis, boards have adopted new techniques. Directors at many societies receive risk dashboards, key performance indicator reports and visual summaries of management information with ‘RAG’ (red, amber, green) ratings.

A calendar of all requirements during the year for the board and its committees helps to set expectations, with a broad recognition that the board should not stray into executive territory and risk the danger of “not seeing the wood for the trees”.

To ensure strategic thinking is not overlooked, some boards make a point of discussing strategy and business performance first at most or all meetings.

Across the sector, it is typical to see 10-12 full board meetings, plus two separate NED-only meetings a year. Other boards have moved to seven or eight annual sessions to reduce the burden on executives.

The committees

Building societies use committees to manage the workload of the board, where discussion of operational matters is handled. At larger societies, NEDs make up the total of committee members (audit, risk and remuneration & nomination), while smaller societies have a mix of executives and NEDs.

A risk committee is also in operation at most societies, with some having the entire board on the committee since they feel responsibility for risk management should not be delegated to a small subset of the board.

Board conduct committees are becoming more common in the sector as regulatory focus on conduct grows.

The culture

The relationship between the chair and chief executive should be constructive, but not too close and the roles should be precisely defined.

The chair is responsible for setting the tone for the conduct of meetings, but it was widely observed that board culture should be open, challenging and supportive. Many directors report that the board/business culture has changed substantially over the past decade, becoming much more team-orientated and open.

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