The Governance Framework
The latest example of corporate governance failure to start the New Year was the announcement on the 23rd January 2019 that café chain Patisserie Valerie has collapsed into administration after revealing last year a possible £40 million fraud. This has resulted in 3000 jobs being put at risk and approximately 70 shops to be closing immediately. How is it possible to report £30 million in cash that did not exist and have nearly £10 million in net debt through two overdrafts not disclosed in annual accounts? As you would expect, this raises serious concerns about corporate governance, transparency and the effectiveness of auditing and regulation.
I have previously written about governance failures including Carillion (construction), Grenfell Tower tragedy (housing), Kids Company (charity), deaths at Mid-Staffordshire NHS Foundation Trust (health), the Cosmopolitan Housing Group, the Co-operative Bank (banking), British Home Stores (retail) among others, yet here we are again witnessing another, high profile and arguably predictable failure.
How do regulators, funders, shareholders gain assurance about the long-term success of the company is the age-old question. As a corporate governance practitioner and with the knowledge that with every failure there is always a finger pointing at corporate governance, I have always thought that there should be a framework that takes a comprehensive look at corporate governance in a way that helps to become a predictor if not a prevention tool. I’ve considered that there must be a way of boards being more aware. The fact that businesses fail is not the issue, what is an issue is the lack of apparent predictability, but hindsight or the occasional whistleblower reminds us that someone, somewhere had an inkling that something wasn’t right, someone was complaining, creditors were screaming, regulators had been warned it shouldn’t have come as a surprise.
There are many robust and reliable frameworks across the private, public and voluntary sectors that examine governance as part of their inspection frameworks. My point however is if a common denominator of every failure is corporate governance, shouldn’t there be a kitemark, in essence an expected standard of governance and a framework that addresses in a holistic way all things governance.
Here’s what the NHS, Housing and Education say about their frameworks:
“In-depth, regular and externally facilitated developmental reviews of leadership and governance are good practice across all industries. Rather than assessing current performance, these reviews should identify the areas of leadership and governanceof organisations that would benefit from further targeted development work to secure and sustain future performance.”NHS Improvement
“IDAs [In Depth Assessments], assess providers’ compliance with the economic standards. Each IDA is a bespoke piece of work and will consider in detail a provider’s viability (its ability to meet financial obligations), its approach to value for money and its governance. The IDA is likely to encompass assessment of risk profiles, exposures, financial strengths and weaknesses, governance and the delivery of value for money in the broadest sense.”Regulator of Social Housing – Regulating the Standards
“The Ofsted inspection provides independent, external evaluation that includes a diagnosis of what should improve. It is based on gathering a range of evidence that is evaluated against an inspection framework inspection provides important information to parents, carers, learners and employers about the quality of education, training and care being provided. Inspectors will also make graded judgements on the following areas using the four-point scale: effectiveness of leadership and management, quality of teaching, learning and assessment, personal development, behaviour and welfare, outcomes for children and learners.”The Common Inspection Framework – Ofsted
Given this, in my opinion and based on my experience, we should be able to:
- If not prevent failure where corporate governance is a contributing factor, at least have a framework that uses a methodology that gives reasonable assurance that all is well and acts as a predictor;
- Rely on a framework that provides boards and other stakeholders with assurance around their governance;
- Ensure any such process has accredited, respected, third-party independent endorsement.
In my experience, it is clear that …
- Good governance principles apply across all sectors irrespective of size and complexity of organisation.
- Governance is more than compliance, though compliance is an important first step. A well-governed organisation will use governance to optimise the delivery of the strategy.
- Every organisation should adopt a governance code and then evaluate its practice against iton an annual basis, identifying actions for improving effectiveness.
- Good governance requires competent boardswith the right balance of skills and diversity.
- All organisations should review the effectiveness of their governanceannually and seek externally facilitated, independent, professional support every three years in order to improve their effectiveness.
- Accountability, openness and transparency in disclosing governanceresponsibilities will improve individual organisational governance and improve standards of governance across all sectors.
- Good governance assessment will use past performance,benchmark against others and learn from others.
Almost ten years ago, I first introduced the tgf Governance Methodology. A key assumption of this Methodology is that: “…governance is more than compliance”and although the methodology includes compliance drivers as the first layer of assessment, it is also informed by performance drivers which offer a more dynamic examination and assessment of governance. These drivers are briefly described here:
Every organisation should be able to demonstrate how it complies with a recognised code of governance and have a clear plan of action of areas for development. There should be a clear and transparent process of providing evidence, assurance and details of the degree to which there has been compliance with the code and how the organisation has applied the principles.
Every organisation has an obligation to its stakeholders to disclose meaningful, integrated reporting about its governance whether that stakeholder is a board member, regulator, funder or shareholder. This should be undertaken through an open and transparent process. There should also be clear, concise and meaningful information available for the board to carry out its role effectively.
Every organisation should make an impact and secure the long-term success of the organisation through its culture,decisions and activities of the board in directing the executive team. It should demonstrate how it has responded to the needs of all of its stakeholders.
Every organisation should employ a clear, robust and reliable governance evaluation, with evidence of the necessary information being provided to the board to carry out its role. The board members should be skilled and competent with sufficient oversight and the resolve to challenge. Board behaviour is a key component of effective governance and the evaluation process should pay due attention to this in its assessment.
Corporate governance is everywhere. This means that it impacts almost every facet of our lives but we often don’t realise this until there is some kind of failure. The impact of these failures ranges from the collapse of a company leaving hundreds and sometimes thousands of people with no livelihood (in the case of Carillion for example) right through to loss of life (in cases such as Mid-Staff NHS Trust and Grenfell). I’m sure you would agree then that something should be done to help predict and possibly prevent failure. There is an answer…
Until next time…