The Danger of Ignorance or why Good Corporate Governance is important

 Hear no evilTake Away Line

If there’s anything we can learn from the collapse of the banks and other major institutions, it’s that their boards have to be more than a mere shadowy presence: their input matters.  The consequences of weak governance can be hard to spot until it’s too late.  Underpinning weak governance is ignorance – not knowing, not seeing and not acting  – and yet weak governance is not just about missed opportunity, it can leave in its wake a collapse of confidence in an entire industry or chip away slowly at public confidence in previously esteemed organisations, such as charities.  As stewards, board directors and trustees have a vital role to play – and one that they must demonstrate they are playing well.

Boards in a Box

It’s not so very long ago that you could hear chief executives say, perhaps somewhat confidentially, and over a drink, that, in so far as they think about their boards, they tried to keep them separate and unaware of what’s really going on, isolated and in a box.  I recall one such discussion, in which the senior executive in question, described her board as ‘kindly folk, who bring nothing to the business whatsoever – when they bother to turn up’.  ‘But that’s better’, she continued after a thoughtful pause, ‘than them actually attempting to make a serious input – what a disaster that would be!’

Perhaps there is nothing so distant as the recent past, but hers was a common view, usually sotto voce, (you don’t want your board as your enemy) and one that seems odd, and certainly immature, even after a few years.  Whatever your organisation, public, voluntary or corporate, having a board is not an option, but in their cases, they didn’t, it was alleged, add much.  Expressed perhaps in a more considered way, senior executives were perhaps really saying: ‘if boards are the answer, can you please remind me of the question?’

And since any mention of the word ‘leadership’ clearly takes you into executive territory (they might think), the question can’t be: ‘How do you ensure leadership for this organisation?’

Or can it?

If a board is not ‘adding much’ (i.e. adding value), it must, it seems to me, be taking value away, if perhaps not much.  If the effort of recruiting and supporting board members, of running and supporting meetings and the executive time for all this, doesn’t add value, it must be a net cost to the business or the charitable cause in question.

Worse than That

The story so far is a caricature of a governance culture that you might describe as benign neglect: well-meaning people, doing their best, often – in the case of the public and voluntary sectors – unpaid.  Does it really matter that they don’t add much value?

It turns out, of course, that it does.  And it’s much worse that we might think.

This state of not knowing has caused calamity on a vase scale.  Hyperbole?  The 2009 Walker Report[1], commissioned by the UK’s then Brown government in the wake of the 2008 banking collapse, speaks starkly of ‘serious deficiencies in prudential oversight and financial regulation in the period before the crisis [that] were accompanied by major governance failures’.

Walker is attributing the banking collapse of 2008 to a fatal combination of poor management, weak governance oversight and poor regulation as an ultimate backstop.

Just recently (June 2013) The Parliamentary Commission on Banking Standards report – Changing Banking for Good[2] – speaks of the governance culture of banks as being: ‘characterised by the creation of Potemkin villages to give the appearance of effective control and oversight, without the reality.”

But it’s not only the big cases that make the point.  There are sadly plenty of examples of ineffective control and weak oversight elsewhere.  In its reports into the publically funded social housing organisations that had previously been under special measures, that sector’s then funder and regulator, the Housing Corporation, found that in every case there were weaknesses in governance[3].

Meanwhile, Walker in his report considers that ‘group think’ is a major danger, unfortunately present in the case of the banks.  By group think, he means the tendency a board might have to coalesce too quickly around a particular viewpoint, failing to exercise independence of mind, challenging propositions and performance effectively.

But these are still examples where there is an audit trail that can be followed to attribute governance failure to serious cause of public concern.  Back to our ‘benign neglect’ scenario, it is certainly the case in my practice that it’s the little things that make the big picture – boards that don’t quite get the issues, that don’t quite challenge the received wisdom, that fail somehow to seize the moment, and that find it so hard to come to a point of closure on the issue in hand – that result not just in weak governance performance, but also have a negative impact on the business or cause.  In other words, such board not only don’t add value to their organisations, they actually take value out of their organisations.

A Case in Point

One case in which I was closely involved, saw the regulator eventually take action following a growing number of concerns in respect of a regional social housing organisation in England.  First, there were anonymous complaints about performance ‘from the public’, somewhat supported by the performance information that was then available.  But there began to be concerns too about the quality of reporting information, financial as well as business activity.

With a newly appointed chief executive in place, attention began to turn to the board and to other members of the executive team. An odd combination of docility, fractiousness and group think was discerned in a board that didn’t seem to understand its role well (acting more like partisan advocates than independent board directors) and certainly wasn’t performing that role effectively.  In fact, it was a weak board, typically on the back foot in relation to the executives it had itself appointed.

A small team of statutorily appointed board members made radical changes to board composition and process, and gradually the board – and later the organisation – turned round.  Having taken value away, the board started eventually, slowly at first, to add value.  It still is.

So, Good Governance is Important

While we can show that bad governance makes a negative difference to an organisation’s success, it seems to be much harder to show that good governance makes a positive difference.  While this seems a safe if intuitive prediction, it is hard to prove.  And it is hard to find much in the literature on the subject too.  The Hampel Committee’s report, back in 1998[4] states: ‘Business prosperity cannot be commanded.  It is important to recognise that there is no hard evidence to link success to good governance, although we believe good governance enhances the prospect.’

So, good governance is important for two key reasons:

  1. It’s good for business
  2. It’s essential to build confidence and public trust

Good for Business

The business performance of any organisation will be enhanced if the board ensures that the organisation is well led and has in place mechanisms of accountability that are appropriate to that organisation’s needs.  It’s good for business to have checks and balances, not to slow decision-making, but rather to test the decision making and to consider the risks inherent in any proposed coarse of action.

Building Confidence and Public Trust

The poor governance of the banks in the run-up to the financial crisis of 2008 didn’t just affect the performance of those companies; it had very negative consequences for all of us, for our trust in the banks themselves, as institutions, and for the reputation of the UK and its financial sector.  Writ small, the failure of, say, a local charity to govern itself well, impacts on people’s perceptions of charity itself.  As reported by McKinsey, quoting a senior international banking figure[5]: ‘Effective governance is the means of building and maintaining the qualities that are at the foundation of all commerce: confidence and public trust’.

Unless You Can Show the Value Your Board Adds…

Trustees and company directors are the stewards of their organisations and their vital role and performance in that role is something that has been both examined to death (with one commission of inquiry after another in every sector over decades) and yet is still not fully addressed, since the challenge from large-scale neglect to small scale ignorance persists.

The creation of so many commissions to examine good governance is testimony to the simple observation that so many boards forget: unless you can show you are acting as good stewards, providing good governance, it is worth entertaining the hypothesis that you are not.  And weak governance matters in ways that are often both hard to see but terrible in their consequences.

Debating Points

  • Is your board in a box or adding value?
  • How sure are you that your board adds value?  How do you know?

About transformingtales

What you do is what you do, isn't it? Nothing special there. What I do is work mainly with civil society organisations, but also some public and corporate sector outfits, to help them change. For the better. For good. If you provide a list of the things you do, the services you offer, like strategic planning, leadership development, corporate governance, culture change and performance management, they are just words. And tricky sounding words too that put you off and imply more questions than they answer. So, this blog is about the stories, the joys and the woes of making tranformative change happen (on a good day) and when and why it doesn't (on a bad day). And it's dedicated to my daughter who asked the question a few years ago: 'What do you do again, Dad?'
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