Governance for growth: Why challengers should not be tied to bank-style Board governance

We have seen challenger banks and fintechs come under regulatory pressure to reform their governance structures along traditional bank lines as they scale, even before they are caught by rules requiring them to adopt these structures. This has the comfort of familiarity, but it does not mean that it is always the right approach.

Getting on board with good board governance

Board governance refers to the way a firm is overseen by its board. In the regulatory context, the concept encompasses board composition and the roles of the individual board members, their duties as directors and regulatory responsibilities as Senior Managers, and the delegation of functions to committees. Governance is one of the main aspects that the FCA looks at when assessing a firm’s culture and when it considers the effectiveness of its internal systems and controls.

There is no question about the importance of effective board governance. What is open to question is what makes board governance effective.

Much corporate governance theory applied by the financial services regulators derives from rules and guidance set for large, publicly listed companies. Unsurprisingly these are considered the gold standard when it comes to setting the size of the board, the number of independent directors, how decisions are delegated to committees, the oversight and management of risks, and so on. And regulators tend towards the PLC-style model because it is what they typically come across in their supervision of the largest firms. But there is room to consider whether the same rules should apply across the board.

Go back to the drawing board

What is appropriate for a large public bank is not necessarily appropriate for a challenger which is looking to scale. It may be unrealistic, and arguably counterproductive, to expect relatively young firms to have in place a majority independent board and a fully-realised committee structure, until and unless they are in scope of rules that mandate these elements. New and growing firms need to find a governance structure which works for them at their current level of development, while simultaneously ensuring this is scalable and capable of responding to upcoming challenges as their business grows and becomes more successful. Governance structures also need to reflect the shareholder composition of growth companies, where it is common to see early stage investors brought in by the executive team because of the contribution that those investors can make through boardroom discussions. 

Whatever their stage of development, firms can expect to be asked to justify their governance structure to regulators: the PRA has said it expects even smaller firms to have at least two independent non-executives. To enable firms to do this, it is useful to go back to basics and consider the fundamentals of effective governance.

For example, an important role for any board is to enable key stakeholders to be heard and to resolve potentially diverging interests of shareholders and the executive team. With this in mind, regulators may look carefully at board composition and the balance of skills when questioning how the views of an influential individual, such as a founder-CEO or chair or a shareholder representative, are balanced with other voices in the boardroom. In this context and in the absence of multiple independent directors, firms can still craft a line-up that both ensures – and shows how – the board provides an effective check and balance, and ultimately makes good quality decisions.

Building from the bottom up, rather than copying pre-existing models, should allow governance to be structured in a way that best suits the needs of your business. Since there can be no one-size-fits-all approach to board governance, it also leaves room for innovation – a concept which is often fundamental to the business models of challengers and fintechs. Whatever structure is adopted, it is important to remember that it cannot be set in stone. As businesses grow, especially fast-growing firms which quickly attract regulatory scrutiny, it is important to keep board governance under review.

How we can help

We work closely with firms of all sizes on how best to structure their governance arrangements. Our challenger bank and fintech clients benefit not only from our experience of how mature governance frameworks work well but also our contentious regulatory experience which highlights areas where governance has been tested or failed. We can benchmark and evaluate your approach, advise on the fundamentals of good governance and how to meet regulatory expectations, whilst working with you to tailor a governance structure that will best suit the needs of your business.