Is your governance structure fit for purpose?

This past week has seen two very different governance reviews released – the New Zealand Rugby Union (NZR) Governance Review and the Reserve Bank of New Zealand (RBNZ) and Financial Markets Authority (FMA) governance thematic review of regulated financial entities. While these might seem like strange bedfellows, there are some key similarities.

Best practice suggests that a board should regularly review its structure and governance rules to ensure that they are fit for purpose. But what is fit for purpose?

A fit for purpose governance structure acknowledges that there is no “one size fits all”, and that what is the best fit today may not be the best fit to help steer the organisation into the future. Accordingly, boards need to be agile and future-focused, adapting to the fast pace of change and responding to stakeholder’s changing expectations. Underlying this is the need for good governance foundations – polices, practices, processes – that enhance decision-making, ensure long-term success and sustainability, and support appropriate behaviour.

The overarching purpose of the NZR review was to answer a simple question: “Is the constitution and governance structure of the New Zealand Rugby Union Incorporated fit for purpose?” The review, however, provided pretty sobering reading from both a rugby and a governance perspective.

“...we do unequivocally state that a successful future for New Zealand rugby is unlikely without upgrading the present NZR governance framework to its 21st century context...” NZRU review, p.61

The review recognised the increasingly challenging and changing operating environment, the need for NZR to retain its social licence to operate, increased stakeholder engagement expectations, and the professionalisation of the sport. The structures and systems that provided the successes of the past were considered no longer suitable for addressing the challenges facing the sport, and facing governance today.

“A continued failure to keep pace with change will accelerate what is already in decline.” NZRU review, p.24

Similarly, the RBNZ/FMA review found that boards were often rooted in the past and despite smaller piecemeal reviews, such as when looking at a particular risk topic, (much like the 11 reviews across various aspects of the rugby network over the past six years), holistic reviews were critical. While the review spoke to the adequacy of governance of the 29 financial institutions, there were still areas for improvement and core learnings for all directors around effective board practices.

“There needs to be a holistic consideration of all components of the framework to ensure they work together to remain relevant and fit for purpose.” RBNZ/FMA review, p.10

One of the new requirements for registered charities in the Charities Amendment Bill (Section 42G) is the “duty to review governance procedures” every three years to ensure that they are “fit for purpose”. The review requires the charitable entity to consider whether its governance procedures are current, promote good governance, assist the entity to achieve its charitable purpose, and assist the entity to comply with the requirements of the Act.

Interestingly, despite some high-profile governance reviews, such as Swimming New Zealand and New Zealand Rugby, the Incorporated Societies Act 2022 does not contain a similar provision. However, the new Act provides greater clarity on directors’ responsibilities, consistent with those of directors in the Companies Act 1993. In particular, the overarching responsibility to act in the best interests of the organisation (or wider ecosystem) they are governing.

Despite being commissioned by NZR and the NZ Rugby Players Association, one of the key messages from the NZR review is the need to be proactive, and to respond before governance is sub-optimal and an entity fractures. But also, when unpalatable recommendations are provided and hard decisions need to be made, to continue to act in the best interests of the organisation. Governance structures are richly steeped in the history, people and traditions of an organisation and as such, there can be resistance to change. But those entrusted with governance need to be courageous and even risk the ultimate fiduciary sacrifice – making themselves redundant for the good of the organisation.

The overarching responsibilities of any board are articulating the organisation’s purpose – clarity of purpose is the starting point for effective governance and strategic planning – setting the culture, approving the risk appetite, holding management to account, and ensuring ongoing compliance and governance excellence.

“Sound strategy, aligned thinking, a relentless focus on impact and an unwavering clarity of purpose are required.” NZRU review, p.52

While the governance structures and organisational purposes of financial institutes versus rugby clubs and associations are quite different, some key themes ran through the two reviews.

1. Board capability and appointments
   Boards need to have robust and clearly set out capability-based selection and re/appointment processes that include diversity of perspective, skill and background. Consideration also needs to be given to the appointment of board chairs and committee members. There should be consideration of director capacity to ensure directors have sufficient time to fulfil their obligations and be effective in their role.
   
   A tailored induction programme should be in place for new members. Regular independent board evaluations are important for identifying and addressing potential problems and for driving board performance. Ongoing training to address skill and knowledge gaps, to enhance governance and to upskill on new regulatory or industry developments is also important.
   
2. Succession planning
   Succession planning minimises board vacancies and disruption on leadership exits, especially for critical roles such as board and committee chairs. A regularly-updated skills matrix that considers the future composition needs of the organisation and the balance of skills, experience and diversity is important for continuity and future-proofing. Succession planning also needs to be taken into consideration when recruiting for new members – do we need a future chair, what is the tenure of the remaining board members? Boards should also consider emergency succession plans for key roles.
   
   Boards are a responsible for having a succession plan for the CEO and key management. Larger organisations usually have a nominations or appointments committee that oversees this role.
3. Independence
   Regardless of having the best interests of the organisation as a core duty, having independent directors reduces the “pull” of representation towards supporting those who appointed you, removes some conflicts of interests, and provides a broader perspective to board discussions and decisions.
   
   Having at least one independent director, or an independent chair, helps to bring an independent viewpoint and can provide a “critical friend” in the boardroom while still providing accountability to the members/shareholders. Ideally, organisations should aim to have a majority of independent directors on the board.
4. Governance practices
   To be effective, board practices need to be embedded into policies and processes ranging from board charters to conflicts of interests policies, committee terms of reference, delegations, appointment procedures to strategic and annual planning processes. Policies and processes need to have sufficient detail and clarity, be robust and comprehensive, be regularly reviewed to ensure they are fit for purpose, and updated to reflect actual practices.
   
   Stakeholders are increasingly demanding enhanced transparency and accountability, and formalising governance practices into processes responds to this.

“As entities evolve over time, the governance framework needs to be updated to reflect the changing size, nature and complexity of the entity and ensure that critical supporting structures and practices are in place for the board to function effectively. There needs to be a holistic consideration of all components of the framework to ensure they work together to remain relevant and fit for purpose.”