Effective governance - what does the evidence suggest

I thought you might be interested in an article I recently wrote for Governance.

The article focuses on the topical issue of governance and what we need to understand in determining whether the board has done a good job. My argument is that to make this assessment, we need to look at the big picture that is presented in the annual report and ask whether the key elements that make it up and which are critical to business success are coherent, aligned and clearly articulated – particularly around: strategy, remuneration structures, KPIs, risk assessment etc. Our experience is that when they are, they reflect a business that is better managed, has a clearer sense of direction, and knows what it’s about and how it intends to achieve its goals. Perhaps this is an area we should be focusing on as governance models around the world are reassessed and challenged. In the UK, where we have had extensive governance and remuneration reporting for many years, we also need to challenge the model. While many aspects are good, we should also be honest enough to recognise those that have fallen into the lip service/box ticking bucket.

By coincidence, I attended a very interesting presentation last week for Non-Executive Directors. The title of the evening was Risking it All and revolved around a film that has been developed to highlight how easy it is for boards to make the wrong decisions when faced with a challenging issue such as whistle blowing. The discussion that ensued highlighted the importance of board diversity and the tone from the top in determining how boards operate. As I sat and listened I was reminded of an article that Baroness Denise Kingsmill recently published on the subject of Tone comes from the top and why, regardless of all the other processes put in place within a business this is arguably the most critical component. If that tone is right it pervades the organisation, it is the route from which behavioural norms develop and over time defines how an organisation thinks and acts. It gets to the heart of a key question which many organisations are currently trying to ground: "What is right?".

So as we rethink what the ingredients are for sustainable economic activity lets not forget about the tone from the top and behavioural norms. Clearly this is not something that can be legislated for but it may not be beyond the bounds of human ingenuity to think of ways that it might be better exposed to the world at large.

I'd really be interested in your views and ideas.

David

Comments

[Kevin Reed]

Hello David, interesting post. One of your counterparts over at KPMG is also interested in the 'tone at the top' debate and the role non-execs play in a company's governance, if you're interested you can view it here:

http://www.accountancyage.com/accountancyage/comment/2239664/corporate-governance-pick

Kind regards,
Kevin Reed, features editor, Accountancy Age

[Niall Kavanagh]

Dear David

I would agree; well actually more like about 90% agree. Yes, the leadership element is critical the Board, and all its elements, be they the CEO, NEDs, SID etc, have to be the driving force of the organisation. As Warren Bennis holds there are distinct differences between management and leadership and being good at the former does not guarantee success at the latter.

To quote Mr Bennis himself, "The manager has a short-range view; the leader has a long-range perspective. The manager asks how and when; the leader asks what and why. The manager has his eye on the bottom line; the leader has his eye on the horizon. The manager accepts the status quo; the leader challenges it."

However the remaining 10%, I think has to go to the responsibility of ownership, the shareholders have a lot to answer for the current crisis and they too, have made some fantastically bad decisions in recent times. This is nothing new of course, and Paul Myner focused on this, but somehow this avoids the focus it should warrant.

If one takes the above quote and substitutes the word “owner” for “leader” one gets a message that could provide some strong guidance for shareholders in general;

"The manager has a short-range view; the owner has a long-range perspective. The manager asks how and when; the owner asks what and why. The manager has his eye on the bottom line; the owner has his eye on the horizon. The manager accepts the status quo; the owner challenges it."

Maybe on this review, this vital and but too often overlooked second section of the combined code might get more of the attention it deservers.

Thanks

Niall