The 7 Governance Myths

The 7 Governance Myths

Within the field of governance, there are several myths or commonly held beliefs which surround what good governance is. These myths can lead to the wrong focus, bad practice or even failure. I would like to share with you my thoughts on what I call the ‘7 Governance Myths’ to lift some of the cloud of doubt about what good governance actually looks like. I will share the first four in this blog and follow up next time with the remaining three.

Myth 1
As a non-executive director you get the best out of your executive colleagues by always keeping them on their toes.

In a unitary board environment where executives attend and contribute in board meetings. board’s work better collectively when there is a collegiate approach. An aggressive approach is counter-productive and although healthy tension and professional scepticism is recommended this should not extend to a conflicting environment. The board room should be a safe place for everyone to be able to perform to their best ability. One of the key roles of a non-executive director is to ensure that they remain independent and that they are able to challenge, stretch and scrutinise the executive team effectively but equally there should be support. This challenge must be appropriate and shouldn’t create a culture of ‘us and them’ within the organisation. Employees are motivated by understanding how their individual performance contributes to the success of the organisation and thrive when they are made to feel worthwhile.

In the quest to carry out their role as non-executives effectively as possible, they sometimes get too operational and feel that their compliance role justifies behaviour that can be very demotivating. Executives should not be directed in such a way that they feel undervalued- monitoring, scrutiny and challenge doesn’t mean there can’t be praise.

Myth 2

Risk management, particularly in complex organisations should be left to specialist individuals and committees.

Boards are sometimes complacent about their responsibilities around risk management and take comfort in the activities of the specialists that are employed on risk committees, but it is their responsibility to ensure that they carry out a robust assessment of the principle risks and how to mitigate them.

Risk management is a key component in the organisation’s wider governance framework. Management control, internal control measures, and oversight functions are the first and second lines of defence and the board must ensure that they are confident that they work effectively. The internal audit function and how the board manages the function will then become an integral part of the management of risk.

There have been many corporate failures where the board were competent and were provided with good risk plans and processes but failed to gain sufficient assurance on many of the indicators that they were presumably monitoring. The larger and more complex an organisation is, the more difficult it will be to get the assurance that a board member needs. Establishing the professional internal audit activity is a crucial part of the governance activity of the organisation but board members need to ensure that they carry out their role.

We are all now familiar with the term ‘Black Swan’ and organisations that function well at both strategic and operational level will cope better with those ‘Black Swan’ events. Andrew Grove speaks about strategic inflection points in his book, ‘Only The Paranoid Survive’ describing the moments in any business when massive change occurs. Every board member has a responsibility to consider the risk that sooner or later something fundamental in your business world will change.

Myth 3

Providing you have a really good executive team who are efficient in carrying out their role, as a non-executive you should leave them to it.

Executive teams, as the term suggests, are operational by nature, boards are there to set the strategic direction and monitor the activity of the executive to ensure that it stays on track. You need to have that strategic balance coming from the board. The relationship between the exec and non-exec is fundamental to a well-run organisation. But a cosy relationship is to be avoided.

Getting the balance right between offering guidance and support and getting into the detail, the phrase “nose in, fingers out” springs to mind. While good relationships should be maintained between the board and the executive, the board should not be afraid to disagree and offer constructive solutions that promote the success of the company. There is a real risk of just rubber-stamping where the board members do not have sufficient expertise to provide value to the executive function. Good staff teams welcome positive contributions, stretch and scrutiny but most important is a different perspective or experience from another sector or business without the non-executive getting too operational.

A reliable and competent executive team is a definite asset for an organisation and a fundamental ingredient for any successful company but the better the executive team is, the better the board needs to be!

Myth 4
When there are major disasters you must get rid of the Chair/CEO or both

It may or may not be necessary to get rid of Chair/CEO to fix a problem. What is crucial is that the root causes of failure are understood and often, these problems can be embedded in the culture of the organisation. More often than not, it is the prevailing culture of an organisation that contributes to failures in governance. When there is a scandal, stakeholders will want to find someone to blame and while it is true that the buck stops at the top, the solution is wider than that.

Dealing with issues such as conflict on the board and passivity in the boardroom, can be more effective than assuming that getting rid of the chair or CEO will improve governance.

There are many examples of where the solution actually was to change the board, get the whole board to stand down and then the organisation will start again with a new Chair and more effective strategic leadership.

I remember way back in 2008, Sharon Shoesmith was dismissed from Haringey Council in the wake of the death of 17 month old Peter Connelly, known as Baby P, yet the children’s services department and others across the country have continued to experience challenges in being able to protect children from harm. The problem was wider than an individual. By the way, she has since received a financial settlement after the appeal court ruled she had been unfairly dismissed and “unfairly scapegoated.”