Corporate governance is particularly associated with companies listed on the stock exchanges of developed countries, where ownership and control is more clearly separated than in other contexts. Effort has also been devoted to improving the governance of public bodies, but how applicable are governance principles to new and emerging challenges, the changing nature of organisations, private companies, family businesses, SMEs, social enterprises, the voluntary sector and professional bodies? What should the priorities be for governance in 2016?[gt_heading id=”gt-heading-736″ tag=”h1″ type=”double-separator” text_align=”center” icon=”” separator_color=”” font_size=”21″ font_color=”” font_weight=”900″ css=””]THE ROLE OF GOVERNANCE[/gt_heading]
How should those with the power to influence governance arrangements best ensure that enterprises pursue appropriate aims, engage in relevant activities, and use capabilities and resources effectively and sustainably? How can they either prevent or reduce the risk of individuals and cliques in positions of power taking advantage of their positions and pursuing their own interests, for example by paying themselves excessive remuneration?
In the case of family businesses, owners may be intimately involved, perhaps attending board meetings. Where ownership is widely spread, shareholders use periodic communications such as an annual report and accounts to assess how directors have performed. They are reliant upon the judgements of others. The protection of their interests can partly depend upon governance arrangements and how they are implemented.
Appropriate governance structures can be accompanied by the inappropriate behaviours of directors. Given the nature of human beings and extent of temptation, many investors do not entirely trust governance arrangements. By investing in a diversified portfolio they spread their risks and avoid excessive exposure to particular boards that may under perform, for example by taking mistaken decisions or missing opportunities.
[gt_heading id=”gt-heading-891″ tag=”h1″ type=”double-separator” text_align=”center” icon=”” separator_color=”” font_size=”21″ font_color=”” font_weight=”900″ css=””]GENERAL OR CONTEXTUAL RESPONSES[/gt_heading]
Many directors associate corporate governance with principles set out in codes of practice. Such documents can suggest norms and create concerns that deviations from them need to be justified if they are not to result in adverse reactions. Might this inhibit innovation and diversity to address particular circumstances?
In other walks of life a departure from standard could indicate that one has gone beyond a norm and taken the time to address the requirements of a specific situation. Customers often pay a premium for responses that meet their individual requirements. How should directors best determine the most appropriate course of action in a particular situation and context?
One can understand collective efforts to identify fundamental principles such as seeking to prevent an unhealthy concentration of power, but in relation to corporate governance the duties and responsibilities of directors are set out in legislation. Companies Acts are often quite specific in terms of what directors should and/or should not do. Beyond this, while some might benefit from guidance, to what extent should governance be general and standard as opposed to appropriate to the context?
[gt_heading id=”gt-heading-670″ tag=”h1″ type=”double-separator” text_align=”center” icon=”” separator_color=”” font_size=”21″ font_color=”” font_weight=”900″ css=””]RELATING GOVERNANCE TO INDIVIDUAL COMPANIES[/gt_heading]
Are directors following fashions or thinking about the right form of governance for specific situations and contexts? Is there too much prescription and too little guidance? Has corporate governance become a process of compliance with standard and external approaches, codes and models that seem detached from the practical process of business building and satisfying stakeholder interests? Some boards delegate the observance of codes – or doing just enough to justify ticking a box – to a corporate legal or company secretarial team, rather than think about better ways of operating, or how a board might add more value.
Why should we assume one model of governance should apply to an entrepreneurial start up, a long established family business, a diversified international conglomerate, or a professional, public or charitable body? Why should directors imagine that one approach will be appropriate at all stages of an enterprise’s development from start-up and through new lines of business, international expansion, technological innovations, mergers and acquisitions and changing market, regulatory, economic and social contexts?
Given the diversity of organisations, situations and contexts and the range of contemporary challenges and developments, why is there such a lack of variety in governance approaches, models and practices? Given also that much of the governance infrastructure is designed to prevent a recurrence of past ‘scandals’, should boards do just enough to comply in some areas, while focusing their attention on priority challenges and opportunities and remaining alert to new and emerging areas of risk that the governance community has yet to address?
Governance academics, advisers, consultants, committees, codes and publications abound. Yet where is the return in terms of innovation, relevance and proportionality? Where are bespoke responses that are easy to implement and which build board effectiveness and contribute to sustainable business development? Where is the creative exploration of better alternatives, as opposed to occasional reviews of our inheritance from governance pioneers?
[gt_heading id=”gt-heading-981″ tag=”h1″ type=”double-separator” text_align=”center” icon=”” separator_color=”” font_size=”21″ font_color=”” font_weight=”900″ css=””]CORPORATE GOVERNANCE AND INNOVATION[/gt_heading]
Does governance deter risk taking? Some entrepreneurs whose businesses are growing rapidly recognise that greater scale, international operation and new activities may require different ways of operating at board level. They may face particular problems such as succession when founder directors step back, or how to maintain family control as new people are brought in. However, they may also worry if a standard approach is appropriate and whether more formal and complex approaches being suggested and greater focus upon compliance might reduce healthy diversity, stifle creativity and inhibit innovation.
Will procedures suggested by advocates of more formal governance processes be so time consuming that people with ideas for better ways of operating may lie low rather than suggest changes? Where business units need to operate differently, will imposing common approaches act as a straight-jacket? Should companies within a diversified group have their own governance structures and practices according to what is appropriate for their individual circumstances?
For many growing businesses and family companies, would adoption of the prevailing governance structure with its origins in particular problems of listed companies in certain countries damage what is different and special about each of them? Would a better option be to build upon what already works and put in place governance arrangements that match the aspirations and requirements of each set of stakeholders for the next stage of development of each entity?
[gt_heading id=”gt-heading-926″ tag=”h1″ type=”double-separator” text_align=”center” icon=”” separator_color=”” font_size=”21″ font_color=”” font_weight=”900″ css=””]ASSESSING CORPORATE GOVERNANCE[/gt_heading]
Given its high profile, should we expect a direct cause and effect link between the observance of governance codes and measurable benefits? Are there fewer business failures today? Is there less favouritism, fraud and corruption? Are directors taking smarter decisions and adding more value? Do entrepreneurs ascribed success to governance arrangements? Are the later more relevant, flexible and conducive of value creation, or are danger signals still apparent in boardrooms?
How should directors measure governance success? Is it observance of principles, compliance with codes and laws, or the degree of challenge and/or the quality of thinking, debate and decisions in the boardroom? Should a board assess itself and/or commission an independent evaluation and/or seek external views from investors and other stakeholders? Are there indicators of external recognition such as awards? What criteria should be employed: vision, strategy, accountability, implementation, risk management, growth, profitability, innovation, sustainability or transparency?
Is corporate governance more relevant to some functions of the board than others? Does it make dilemmas faced by directors easier to handle? Does it favour some stakeholder groups over others? Are activities from visioning and delegating to implementing strategy and reporting noticeably better or worse? Could changes be explained by factors other than corporate governance? Where does it rank in terms of impact, compared with director and board development, or changing the composition of the board as a company grows and develops?
[gt_heading id=”gt-heading-961″ tag=”h1″ type=”double-separator” text_align=”center” icon=”” separator_color=”” font_size=”21″ font_color=”” font_weight=”900″ css=””]REVIEWING AND DISAGGREGATING GOVERNANCE[/gt_heading]
Governance arrangements should reflect how people are rather than how we would like them to be. What about digital governance? What arrangements and policies should be in place to address risks such as hacking, money laundering, terrorism, funding banned organisations and the stealing of personal and corporate information? Are boards reviewing governance arrangements and re-shaping them for the next phase of business development? If directors are doing just enough to show willing, how do we move on from compliance with general codes, rules and regulations to getting governance arrangements right for particular enterprises?
Rather than a standard code, do we need a series of codes and/or guidelines to address the needs of different types of entity and/or sectors, or particular challenges and opportunities? Each would need to be updated, but who would do this and under what auspices? Would a family of codes be a staging point en route to boards putting in place governance arrangements appropriate for the entities for which they are responsible? Should this be a statutory duty, with the lazy adoption of a standard model a possible indicator that directors are not doing their jobs?
Is separate guidance required in particular arenas, for example, innovation, knowledge, risk or talent management, IT or strategic planning? Potential adopters would need to ensure that general guidance is not inappropriate for particular companies. In some sectors intelligent steering rather than annual corporate planning may be required. Guidance relating to human capital might not be a priority if a company’s strategy is to replace people with robots, drones and self-help systems.
[gt_heading id=”gt-heading-237″ tag=”h1″ type=”double-separator” text_align=”center” icon=”” separator_color=”” font_size=”21″ font_color=”” font_weight=”900″ css=””]CHALLENGING ASSUMPTIONS[/gt_heading]
Governance is preoccupied with preventing downsides. The need for vigilance is justified by reference to past corporate scandals. However, what about upside potential? For every negative example, there may be thousands of boards that are missing opportunities and not operating as effectively as they could for a variety of reasons. What is governance contributing to improving the competence of directors and boards that could not be accomplished by other means?
Entrepreneurs and owners of SMEs and family companies often keep a close watch on their investments, or are intimately involved in ‘building the business’. Many governance approaches and codes have evolved to address a different situation, namely a separation of ownership and control and the reality that many investors have a diversified portfolio of investments and/or invest via institutions. They have less motivation to be actively involved in the affairs of a particular company.
Few individual shareholders of major quoted companies can exert much influence. But the issue of the relative advantage of standard and bespoke approaches still applies. The ideal governance requirements of an integrated utility considering a new generation of nuclear power stations may differ from those of a seasonal fashion business or an e-business in terms of board composition, frequency of meetings, agendas or how the business of the board is conducted. Why do those whose governance experience derives from some arenas assume it is relevant in quite different contexts?
Does current corporate governance assume certain forms of organisation? Is it equally relevant to the internet age and the different models of operation that are emerging, and which can quickly mutate and enable relatively small numbers of people to rapidly build valuable businesses?
[gt_heading id=”gt-heading-304″ tag=”h1″ type=”double-separator” text_align=”center” icon=”” separator_color=”” font_size=”21″ font_color=”” font_weight=”900″ css=””]GOVERNANCE AND SUSTAINABILITY[/gt_heading]
Governance and sustainability ought to be natural complements as continuity, effective challenge, the efficient use of resources and the best long-term interests of organisations and their stakeholders are concerns of practitioners in both arenas. Are they engaged in a productive dialogue? What are boards doing to reflect greater public interest in sustainability? Are people with sustainability credentials being brought onto boards? How does one assess whether or not directors and boards are environmentally aware and alert to sustainability issues?
Mobile devices and social media quickly disseminate failings. Can responses wait until the next board meeting? Directors can face challenges and opportunities that raise issues relating to direction, policy and/or strategy. In order to cope, many directors need to review governance arrangements and whether or not they should operate in new ways.
How should boards reshape themselves for tomorrow’s concerns, challenges and opportunities? What roles should owners and directors play in building more effective boardroom teams? Do we need a revolution in governance, a new model, different approaches for various situations, or is it just a question of a shift of emphasis? Should more effort be devoted to appointing honest people to boards, people who can think for themselves and put the interests of others and the organisation before their own? Perhaps this should be the priority for 2016 as their integrity and competence may be our best hope for the future.
[gt_alert id=”gt-alert-160″ title=”” dismissable=”0″ type=”info” title_color=”” content_color=”” content_background=”” border_size=”” border_style=”none” border_color=”” border_radius=”” css=””]This article draws upon the author’s theme paper for the 15th London Global Convention on Corporate Governance & Sustainability which was organized by India’s Institute of Directors. It is designed to encourage discussion about the applicability of prevailing approaches to corporate governance to wider concerns, and particularly those of family and entrepreneurial companies.