The Governor’s Take on Governance – Part 1

Before we get into the more in-depth questions – and explore WHY we still see the same corporate failures 25 years after various codes have been in operation – I think it is important to answer questions such as:

• What do we mean by corporate governance?
• What is good governance?
• What is important for effective governance?

 

What is Corporate Governance?

I usually start with the following definition:

“Corporate governance is the system by which companies are directed and controlled”– Cadbury Report, 1992.

Although this was written more than 25 years ago, I still find that the three core components of this definition remain a good starting point. Corporate governance is a system, integrated into the organisational DNA, which directs rather than manages an organisation and controls and supervises the executive management in achieving objectives determined by the leadership.

In my own words, and at the risk of oversimplifying it, I would say that corporate governance is about the leadership of an organisation, i.e. the board; how the board is made up and what its members do in leading an organisation.

 

So what is good governance?

Well, you get good governance when you ensure that the resources for leading the organisation are appropriately put together and clearly documented.  The board must be competent, which means the members are collectively able to demonstrate the right level of skills and an understanding that their key role is strategic. A well-governed organisation will also consider the needs of all stakeholders; it will have an ethical, performance-driven culture; it will manage risk at the strategic level and take timely decisions.

Once this has been achieved, i.e. compliance, we look to the board to move from conformance to a performance-type role. So, the emphasis on resources now takes into account transparency; board papers must be clear and concise and external stakeholders should be kept informed.  A competent board is transformed from the ‘oversight and foresight’ role by their behaviour being more reflective and providing insights from their collective experiences while avoiding dysfunctional behaviour. (See TGF Zoo for more information on dysfunctional behaviour).

Finally, in ‘good’ governance, the execution of the board member role extends beyond the monitoring and scrutiny of corporate objectives and takes on a more engaged perspective looking at the impact on stakeholders. Good governance moves from outputs to outcomes and determining the impact on staff, customers and other stakeholders, considering how they impact the vision for the organisation and how they are impacted by its purpose.

 

What is the single, most critical thing that can have the biggest impact on a board and how it delivers effective corporate governance?

Without hesitation, I would suggest it’s the behaviour of the board. I am aware of many corporate failures that, on the face of it, happened at companies with robust governance processes, skilled and experienced boards and well-monitored corporate plans, risk management and disaster recovery protocols including well-developed stakeholder engagement.

However, with all of this in place there is still one ingredient that is difficult to legislate for – and that is human behaviour. Failures have resulted from human behaviour alone. Boards should avoid getting operational, but at the same time they must ensure that they are not so remote that they become passive and unaware of what is really happening. They need to know what is going on. If they have to be asked questions about significant events – ‘Could you have known?’ and ‘Should you have known?’ – they should be able to say confidently ‘Yes’.

So boards should avoid ‘group think’-type behaviour and complacency, but at the same time find a way to work collectively and cohesively. Sometimes, it is easier said than done, I know, but they need to challenge with conviction and always remember the golden thread of achieving the organisation’s core purpose.

Now that we have warmed up let’s consider one more question for this month.

 

What’s one important thing that enables a board member to stand out, and what is meant by the triangulation+?

 It goes without saying that a board member should have the necessary skills and competencies to carry out their role. They must be able to remain strategic and monitor the strategic risks – having set the risk appetite for the organisation – and stretch, support and scrutinise the CEO and the executive team. They are ambassadors as well as assessors of their individual and collective performance. I have previously identified the 6Cs of an effective board member: Competence, Commitment, Contribution, Comprehension, Capability and Code. An effective board member should be able to demonstrate all of these, but is there one thing that should set them apart from their peers? I think there is. There’s a professional humility that comes with experience. It allows an experienced board member to rely on the experiences of their fellow board members, while tapping into their own personal experiences. This ‘iron sharpens iron’ approach can then be used to consider the data, information and knowledge gleaned from the organisation and staff team that you working with. This is what I call triangulation. Three perspectives are considered: ours, mine and theirs.

There is one further element needed to assimilate the knowledge before applying wisdom and that is an understanding of some external factors e.g. best practice, the external environment, innovation and future-proofing. A board member that can triangulate and THEN use their knowledge, experience and understanding to track between the different dimensions and bring them together is what I call triangulation+.

Next month, I look forward to sharing with you my thoughts on the biggest corporate failures of recent times and why conflict arises in boardrooms.

 

Until next time…