Sharon Donnery: Governing for the good - doing the right thing
Remarks by Ms Sharon Donnery, Deputy Governor of the Central Bank of Ireland, at
the Institute of Directors Chartered Director Programme Graduation, Dublin, 3 October
2024.
* * *
I am delighted to be here with you all this evening, and many thanks to Eileen for
inviting me, and to John for the introduction.
I was where you were sitting just a few years ago. I remember how challenging,
interesting and worthwhile it all was. And I personally found what I learnt on this
programme, and who I met, invaluable to my role as a senior leader and as a member
of our own board, the Central Bank Commission.
In today's world, I believe that in many ways the role of boards has never been more
difficult; but it has also never been more important.
The internal and external complexity which boards must manage - from increasingly
complex organisations to a challenging and rapidly changing external environment -
has led to increased demands and higher expectations of boards and their directors.
But it has also heightened the necessity of good governance, and in particular the
crucial role boards play in managing the risks and steering the culture and strategic
direction of their organisations.
This is why institutions such as the Institute of Directors are so important, and why the
role they play "educating, informing, and supporting directors to lead successfully", is so
necessary in instilling stakeholder trust and confidence in our organisations.1
In this context, in my remarks today I thought I would outline from my point of view the
importance of good governance and organisational culture - and try to answer a
question I am often asked: 'what does good look like?'.
Good governance, good outcomes
My own experience in looking at and thinking about these issues comes primarily from
the Central Bank's role in regulating and supervising the financial sector.
And while I speak from that experience, the lessons apply much more broadly. For
regardless of the sector or business model, the important role of good governance, risk
management and culture is something that holds true.
I firmly believe that good governance is the bedrock of successful firms - and that good
governance leads to good outcomes.2
And indeed in the Central Bank of Ireland, our supervisory experience tells us that firms
with good governance, culture and controls are much better set up for success - both in
terms of growing safely as well as dealing with the risks facing them and their
customers.
On the other hand, time and time again we have seen how poor governance is the root
cause of many failings; how external shocks can amplify poor management behaviour;
and in the world of financial services, how risks of consumer and investor detriment
rises when poor business practices and weak business processes are allowed to
persist.
For this reason - and following the hard lived experience of the governance, risk
management and cultural short-comings that led to the financial crisis - strengthening
the governance framework of financial services firms and improving the leadership and
culture of these organisations has been a key focus for policymakers and regulators
over the last 15 years.
I am happy to say we have come a long way since then - both in terms of the
regulatory framework as well as the increased importance placed on good governance
by all stakeholders, including industry. While standards have improved, however, it is a
journey we are all still on.
Established firms continue to improve their governance and culture - through
supervisory engagement and lessons learned from previous failings. Many new
entrants, especially fast growing and innovative firms, on the other hand are at the start
of their own commercial and regulatory journey - and from our point of view have the
opportunity to embed good practices at the very outset.
In this regard, it is important that good governance and risk management is treated as a
founding pillar of their business. That it is seen as a key enabler for growth, rather than
an afterthought in their commercial strategy.3
For good governance and risk management is not just good for compliance - it is good
for business, good for shareholders, good for customers, and good for the economy.
Furthermore in the fast changing environment we operate in, and in light of the evolving
challenges we face, Governance is also something that needs to continuously evolve.
Something that needs to reviewed, updated and enhanced regularly - not just in the
face of evolving governance codes, but through lessons learned and in the spirit of
ongoing efforts to foster confidence and trust in your organisations.
Risk management, traditionally a backward looking exercise based on historic data,
needs to adapt too - with more forward-looking risk management techniques necessary
in a changing and uncertain world.
Tone from the Top
So, good governance and robust risk management practices are essential components
of sound and successful organisations. And indeed in a rapidly changing world, and in a
heightened external risk environment, they are becoming increasingly so.
As a regulator and supervisor, one of the things we are trying to re-iterate with industry
is that these are key issues that the firms themselves are responsible for. That they
need to take more ownership of their governance and risk management, including a
proactive, rather than reactive, approach to managing the risks and uncertainties facing
their business and their customers.
Well-run firms know that this is not just about meeting regulatory requirements - but is
in the long term interests of their businesses.
And so while embedding good governance and proactive risk management is a
supervisory priority of our own related to the financial sector, I think that this is
something that should be a priority for boards more broadly.
As the IoD's Standards for the Board states, a board's key purpose "is to ensure the
company's prosperity by collectively directing the company's affairs, while meeting the
appropriate interests of its shareholders and relevant stakeholders."4
In this regard, while governance and risk management is fundamental to ensuring
prosperity and appropriately meeting the interests of shareholders, it is not enough to
have these things on paper - they need to be embedded throughout the organisation.
And I would suggest that properly delivering and embedding these enablers all begins
with culture.
For without the right culture, good governance and strategic plans won't get delivered -
or they won't get delivered right . And without the right culture, firms are unlikely to look
after the long term interest of its stakeholders.
Boards should therefore look to play a pivotal role in overseeing the culture of their
organisation.
By setting the tone from the top, both through their interactions with the executive and
by making culture an integral part of the organisation's strategy, boards can make a
powerful contribution to establishing a strong ethical and cultural environment
throughout.
You know it when you see it
So, I hope the importance of good governance, good culture and good risk
management is clear, and that boards can play an important role in delivering good.
But what does "good" look like?
Governance and culture is of course a matter for each organisation - there is no one
size-fits-all model, and no two boards are alike.
But, generally, "good" looks the same - as in you know it when you see it (or indeed
when you do not).
However, as former Central Bank Governor Philip Lane once said - the "defining
5
cultural test is how a firm deals with adverse situations and indeed adverse situations
are the real test too for how good a firm's governance and risk management is.
So it is critical that organisations are proactively attending to their culture and
governance in the good times, to ensure they stand the test in the bad times.
In this regard, Boards should focus on ensuring their organisation has the right people,
expertise, and experience - as well as the systems, processes and governance
structures in place to run a firm well. It is about ensuring your firm is acting prudently,
doing the right thing by your customers or investors and proactively scanning the
horizon for potential new risks.
This does not just happen throughout an organisation - but rather it takes time, thought,
investment and commitment from senior leaders to deliver, along with a clear setting of
culture and expectations by the Board - who, as I said, play a key role from the
topdown in ensuring accountability and driving the right culture in their businesses.
Necessary but not sufficient
Now, I have spoken of the important role governance, culture and risk management
plays in successful firms. But while these things are necessary , and I would say
fundamental, they are not sufficient .
The right business model and the right strategic planning is also key. Ones which
recognise the risks, seize the opportunities, and indeed understand that there are risks
from not taking some opportunities.
Steering the business model and strategic direction of the organisation is of course a
core focus of boards and directors. So with this in mind, this brings me to a final point:
what makes a good director?
In the first instance I will bow to the IoD, where they note a director should be capable
of seeing company and business issues in a broad perspective, can bring a good
degree of objectivity and can play a vital role in monitoring executive management and
seek to ensure prudent control is exercised.6
In addition to this good summation, I will add some of my own views on the key
attributes for a director.
It goes without saying that a good director needs to be Strategic - both in the direction
setting for the organisation, but also in terms of your own contribution - what are you
influencing and affecting; what are you picking up?
They need to be inquisitive . While knowing what you bring to the table is important, so
too is the curiosity to ask questions and to probe for answers. This is particularly true for
INEDs, who need to verify and seek evidence - part of the independence they bring
and ensuring they hold the board and senior management to account.
Another key attribute for me is to be . While always true, in today's
forward looking
uncertain environment it is increasingly so. Anticipating trends, and looking to the future
- both in terms of growth and risks - should be a key part of a director's contribution to
the collective direction of the company's affairs.
Lastly I think it is important that directors are risk-based, in terms of identifying the
most material issues and risks for your organisation, considering at a board level you
can only cover so much.
Combining all these attributes directors need to bring a unique and independent
perspective to table, given the importance of broad experience, backgrounds and
thinking being contributed to the collective.
They also need to bring their people with them - to truly embed good governance, risk
management and culture throughout their organisation.
Conclusion
To conclude, I congratulate you all in completing this worthwhile programme. I hope in
line with the IoD's purpose it will help you to lead successfully, thereby increasing the
trust in your organisations.
As I have said, the role of senior leaders, directors and boards has never been more
important - which I hope means interesting, fulfilling and impactful years ahead for you
in your careers.
In those years ahead, I hope you become stewards of good governance, culture and
risk management in your future roles - doing the right thing for the benefit of your
organisations, consumers, the economy and society as a whole.
Thank you
1
IoD Our purpose: https://www.iodireland.ie/about-iod
2
There is also a wide literature on empirical evidence of this: see for example Bhagat
and Bolton Corporate governance and firm performance June 2008, or Shaukat and
Trojanowksi Board governance and corporate performance August 2017
3
See Donnery "Innovation and Trust - Regulating in the interests of us all" February
2024
4
See Standards for the Board, IoD
5
See Lane 2018
6
See Directors' Handbook, Fifth Edition, IoD, McCann FitzGerald