The Governor’s Take on Governance – Part 2
I wanted to continue my series of governor reflections this month by answering some of those questions that are not always considered. These will include reasons why diversity doesn’t always work and dealing with conflict in the boardroom. I shall also look at whether governance should be able to predict, and even prevent, corporate failure.
Shouldn’t governance be able to predict/prevent corporate failure?
Developing a framework for predicting, or preventing, governance or ultimately organisational failure would surely be an auditor’s dream framework. While I cannot claim to be able to do this, I have developed The Governance Framework© that can help to identify areas of strength, weakness and therefore the potential for improvement.
The Governance Framework© has a four-pronged approach: compliance, transparency, impact and behaviour which are measured using the 9 Governance Standards outlined here:
- Code compliance
- Board Pack
- Disclosure Report
- Workforce Engagement
- Stakeholder Engagement
- Board Observation
- Board appraisal
- Skills Assessment
- Individual Appraisal
Each area has 6 main criteria and a set of minimum criteria (54 in total) and requires evidence of compliance.
We may not be able to predict or prevent failure but we should have a governance framework that is relevant to all sectors, jurisdictions and size of organisation.
What is the biggest recent failure?
When I think about corporate governance failure I immediately go back to Robert Maxwell and think about the Mirror Group pension fund scandal of 1991, but more importantly the unfettered powers of decision by one individual, which made this possible.
I reflect on Enron, an American energy-trading and utilities company, where a whole set of people were involved including executives, auditors, regulators, the board themselves …. the list goes on. After accounting fraud came to light, the company filed for Chapter 11 bankruptcy in December 2001. The $63 billion bankruptcy was the biggest on record at the time.
In recent times in the UK, I am careful not to pinpoint a failure and then attribute corporate governance to it but I feel the tragedy at Grenfell in 2017 would be high on my list with 72 people dying in a tower block fire. There is also the 2011 UBS rogue trader scandal, where $2 billion dollars was lost in trading at Swiss bank UBS. But at the top of my list is Carillion, the largest-ever trading liquidation in the UK. Carillion was a British multinational facilities management and construction services company. It went into compulsory liquidation on 15 January, 2018, with liabilities of almost £7 billion. The impact included: project shutdowns and delays in the UK and overseas; thousands of job losses and redundancies at Carillion and also in its supply chain; financial losses to joint venture partners, lenders, Carillion’s 30,000 suppliers (some of which were pushed into insolvency) and to 27,000 pensioners.
How do we recognise the origins of conflict in the boardroom?
I encourage boards to have a diverse composition and membership for all the right reasons. One of the biggest predictors of conflict in the boardroom, however, is as a result of personality conflicts which arise from a misunderstanding or disagreement or board members who just don’t like each other and can’t see eye to eye.
There are levels of interaction in the boardroom which I have outlined below.
As you will see, boards should be aiming to move from discussions and support to challenge but to avoid the other four interactions. They have been presented in a hierarchy, but boards may find themselves at any stage. My full blog on this area covers what to do about the different phases. The scale starts from passive and disengaging interaction through to support and challenge and then the other end of the scale, which is conflict and finally breakdown.
- Dormant. Boards here are passive and do not really engage. They rubber stamp decisions and turn up just to make up the numbers and tick the box.
- Stalemate. Boards are engaged but are ‘wilfully blind’ to issues, deliberately ignoring them either to maintain the status quo or to avoid dealing with a potential backlash. The old ‘elephant in the room’ syndrome is the issue that no-one wants to discuss. They ignore potential conflicts and pretend that discussions are ok.
- Deliberate. Boards here are collegiate, friendly and professional. They have good discussions but don’t really challenge. They procrastinate before making decisions and sometimes get a bit too operational rather than leading strategically. They have got to know each other, they know how to work together and they have a good mix of skills.
- Stretch. Boards at this level have been able to support each other and have complementary skills and experience. They are good at scrutinising, performance management, support and oversight.
- Challenge. Boards here expect a level of tension in the boardroom, which is not comfortable. There is challenge and debate but it concludes with a robust decision-making framework.
- Conflict. Boards here have crossed the line of healthy tension to outright conflict. Decision-making is impaired and difficult. There is a lot of disagreement and it takes real effort to come to any satisfactory conclusions or do board business.
- Battle. Boards here are completely dysfunctional. Conflict has been raised to a level of battle and attack, which puts the organisation at real risk.
To conclude, I pose a question. How robust is your governance effectiveness review?
Book your review here
Until next time…