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Governance not management?

  • August 31st, 2009

I’m shortly to address a couple of conferences on governance issues. And several weeks ago I heard an inspiring presentation that gives me the confidence to broach a topic I’ve not dealt with publicly before.

I’ve long held heretical views on several cherished principles. In the late 1990’s I helped the NZ Securities Commission to oppose IOSCO efforts to make compliance with Governance Codes a matter of law all around the world, and helped steer the NZ IOD to similar scepticism while I was a Councillor.

This was not because I thought most of them were wrong, or unhelpful. But I was suspicious that some of the principles would be misused to cow directors and to divert them into ritual compliance when bold decision was needed. I feared that formal procedure would crowd out the enforcement of basic laws requiring honesty and performance of fiduciary duties.

I’d been worried about the alleged distinction between governance and management ever since I watched some companies crawl out of the post 1987 rubble to stand tall again only because brave and determined directors (usually chairmen) ignored the supposed rule that directors should not interfere in operational matters. They just got stuck in and fixed whatever needed fixing. Other boards stayed at the lofty strategic level, avoiding embroilment in management while their companies withered and died. Sometimes they knew little of the real state of the company till the end.  A dominating CEO can block grass roots bad news.

For my first 10 years in company law I doubt that the word "governance" had ever been uttered in my presence. Around the end of the eighties it crept in. Staff of government agencies about to be corporatized were reassured that governance conventions would muzzle their new boards, as the old reporting lines up the bureaucracy were shortened. 

Given that company law had always referred to the companies being under the management of the directors, and directors were liable if they failed to manage, this stuff was new to me. But I could see the sense in exaggerating  the strength of the alleged convention if it dscouraged directors from interfering. I’d heard a respected senior Chairman explaining once that his people would only be as responsible as he made them feel – "You don’t have a dog and bark too".

The early 90s developed this industry into a full blown frenzy.  As Tomorrow’s Schools brought power from the Ministry and the regional Education Boards down to local communities only "Your Charter and Treaty Principles" paid consultants better  than governance.

Principals and teachers panicked at the thought of parents using powers previously exercised by administrative superiors and inspectors. The guidelines for preserving managment motivation and responsibility became doctrine, establishing "no cross" lines. Unfortunately they can keep Board members too uninformed to present a serious challenge to all but the most incompetent principals. Neutered Boards should have been moving poor principals on just as managers are in other workplaces, every few years other than for exceptional leaders who might justify up to 15 years..

These new governance doctrines were reinforced when Governance theory suddenly became respectable in the UK. Sir Adrian Cadbury reported in 1992 on financial corporate governance. In 1994 Mervyn King reported on similar issues for South Africa. Over the next 6 years Cadbury and his committee members worked up material from various worry reports on the performance of the shareholders’ whistle blowers, into a 1998 report that became a full blown code for directors. At the same time IOSCO was trying to get international committment to making the principles in these codes compulsory.

I’m proud to say that the NZ Securities Commission asked to see more evidence that the principles, sensible as they seemed, were empirically proven to generate better outcomes for companies and their shareholders. That tradition has been maintained. To give credit where it is due, under Chair Jane Diplock, the Securities Commission’s recommendations on Corporate Governance recognised the absence of research evidence behind some of the recommended principles. They conducted a good consultation process and their report was careful not to claim more authority for their recommendations than they’d earned. They have remained advisory, not mandatory.

And so we have been spared some of the  mindless material that disfigures annual reports from the UK and Australia. Sadly, not all.

Our law is now full of busybody notions of what shareholders should have asked for from directors but did not.

Shareholders, even in small private companies are now effectively prevented (by director liabilities) from appointing a board that is there only for two purposes – to sack a CEO and find a new one when that becomes necessary, and to blow the whistle on obvious looting or foolishness. Instead they must create a trail of evident busyness, in their own defence. It is now too dangerous to be a sleeping director, paid next to nothing and expected to wake up and bark only when the there are smoke or burglars about.

Yet that could be the most efficient model for many companies, and be the best allocation of risk and reward, using the talents and above all the instincts of senior retired people without unfair risk to them. As director and senior management exposures rise, so does the pay needed to gain and keep them. If shareholders are to get the benefit of the risky decisions that pay off, while being handed by the courts an option to revisit those that do not pay off, by recovering from directors, then directors will need compensation for the asymetry. That will have to come off the returns for risk that previously went to shareholders.

So I went with some scepticism to a presentation on Corporate Governance at the British High Commission Residency, sponsored by NZ UK Link.

Andrew Kakabadse, Professor at Cranfield University School of Management was fascinating. He is currently doing a major world study of boardroom leadership, effectiveness and governance practice. A number of governments are participating, with the survey comparing Ministers of State (including British) with directors and executives. He has a £2 million research grant .

There are some clear results already. This study is simply adding to his existing data, according to him the result of surveying 12,500 organisations in 19 countries, with 900 boards surveyed in depth.

He says his findings have been unwelcome to the establishment in the UK. Interestingly it is not because they challenge old boy networks. Indeed some of them would reinforce old boy values. The findings are unpopular because they do not reinforce fashionable dogma. Some tenets of popular Governance Codes have little correlation with the success of organisations.

The quality of the chair matters above all. While there is an enormous diversity of types of successful board, nominal diversity within a board is not correlated with success.

Quality can come from in house appointments, with an executive chair, or from outside. Age helps, as does experience in business and as a director. Having worked under a good mentor helps.

But the key requirements are high intelligence, the ability to set boundaries (of responsibility, behaviours and to draw difficult distinctions) courage, diplomacy or ability to influence, and humility (to value and elicit challenging contributions).

Social intimacy is important. Dinners and other social time together help people to know and therefore to trust each other. Without that trust it is harder to raise hard questions in ways that leave relationships intact.

Boards need members who are independent challengers of orthodoxy, but they stay useful only if they learn how to be more than gadflies.

But most of all he emphasized that good Boards come down to the personal qualities of the people on them, and in particular how they are led, and that success is not correlated with the promulgation and observance of codes and formal governance policies.

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Comments

Gravatar
  • barry
  • September 4th, 2009
  • 9:22 am

I totally agree Stephen. If you are on the bioard of DIRECTORS, your job is to DIRECT the company (hopefully in the right direction). And if the company is reluctant to be DIRECTED, then one needs to take the lead so the the right DIRECTION is taken.

The lack of good management and directors is the main reason why so many people in NZ invest in property and not shares. Why would anyone put their money and their faith in the management and directors of outfits like telecom, AHI (when it was public), Flethcers, Vending, GDC, southern cross farms (its not public yet, but they are doomed before they even start)etc.

Gravatar
  • oskar8
  • September 11th, 2009
  • 10:40 pm

I also agree with you and this is the main problem wiht bad management

Gravatar
  • peterquixote
  • September 14th, 2009
  • 4:52 pm

pink tie PM NZ John Key hasn’t got the guts to
change Securities commission, introduce CPG, isn’t changing anything, too liberal precious s to accept public opinion on smacking law,
wants to guarantee a two term Pm when he could be brave an get three terms, hello Winston Peters or his successor,

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