Governance – some typical pitfalls

10 February 2020

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‘Corporate governance is the system by which companies are directed and controlled’ IoD

 

Where in the UK, the UK Corporate Governance Code (‘The Full Code’) outlines how listed companies can deliver sustainable success through effective rules, processes and systems.  Whilst other organisations eg charities or smaller listed companies are not obliged to follow The Full Code, they will, within their specific sectors follow relevant guidelines, such as the Charity Governance Code or for smaller listed companies, the majority of aspects of The Full Code.  Unlisted companies themselves have a recommended framework too.

 

So without trying to dumb this blog article down (even more), why are we stressing the above?  Well, whilst most organisations talk about good corporate governance, and often have processes in place, the actual translation of what ‘good looks like’ can be a very different matter.  Corporate governance directly affects the bottom line and standing of the organisation, and having poor policies can expose it to prosecution, penalties, reputational damage, and loss of investment.

 

Here is a broad overview of where boards face challenges.

 

Oversight concerns

 

To be effective, the board has to have meaningful oversight of the organisation’s policies and practices. This comprises, where relevant, the executive staff reporting to the board and the board’s understanding of the day-to-day activities of the organisation and the way in which its goals are being realised. The board protects the interests of the share- and stakeholders, acting as a ‘control’ against the executive team. Without this oversight, the executives might infringe laws, facing substantial penalties from regulatory agencies, and suffering reputational harm with the public & stakeholders, amongst many other potentially negative outcomes.

 

Commonly, where oversight can fail where the processes and people in place are not appropriate nor fit for purpose eg are the checks mere box ticking exercise that don’t really analyse anything properly?  What happens with the reports and their findings?

 

Accountability – or lack thereof

 

Entirely necessary for effective governance – and this accountability and reporting to each other should be crucial at all levels and divisions from juniors all the way to the C-Suite.  And these in turn should be accountable to share- ands stakeholders, and to the public.  Without appropriate accountability to each other, failings will inevitably threaten the success and sustainability of the organisation.

 

Organisations may have reporting lines but do they mean anything?  If an issue is raised, how is it dealt with?  Are there enough and appropriate fora for concerns to be aired and with impunity?  How do boards ensure they are accountable to each other?

 

Transparency

 

An organisation must precisely report significant information eg report & accounts and other pertinent data eg risks, issues etc to relevant stakeholders eg investors, donors, regulatory bodies etc.  Misreporting information such as overinflating profits or supressing vital reports such as product defects is clearly wrong, likely illegal and can seriously hurt an organisation’s standing with share and stakeholders, as well as with the wider public.  Organisations which hide information and/or incorrectly report information will also incur heavy fines.  Whatever the outcome, none are beneficial in any way for its sustainability nor prosperity.

 

Some common examples of this are when a company deliberately buries results from R&D to accelerate a product launch, or if there has been a breach in process and the issue has been covered up.

 

Conflicts of interest

 

‘A conflict of interest is a situation in which a person or organization is involved in multiple interests, financial or otherwise, and serving one interest could involve working against another.’ (Wikipedia)

 

This is a doozy because pretty much all board members – executive and non-executive will have potential for a conflict of interest.  At that level of seniority, their individual expertise and influence will mean that they are asked to advise and consult on a variety of issues and with an array of organisations.  This in itself is not an issue – for it is for these very skills and experiences that make the attractive board members.  The question is more about if they should be on the board/be part of management/be linked to a conflicting organisation’s list etc at all, how transparent these individuals are and how they manage these potential conflicts of interest.

 

Unfortunately, due to the very lucrative nature financially and reputationally of these roles, board members can often not declare these conflicts of interest, or if they do, with full transparency.

 

Violation of ethics

 

Members of the board are duty bound to make decisions which are in the best interest of the organisation and its stakeholders.  These include ensuring that they act responsibly and appropriately to its shareholders, donors, employees, the community and environment in which they operate, amongst many other things.

 

Headlines daily round the world talk about organisations which are making record profits or are doing good round the world, but scratch beneath the surface, one may find that their employees are earning unliveable and unsustainable wages, or that their staff are engaging in nefarious activities whilst performing ‘halo’ type work.

 

We’ve merely briefly touched the surface of some of the typical pitfalls which affect governance.  Whilst basic, I think this brief article should still serve as a reminder to those in positions of power of their responsibility.  As we read the headlines and analyse companies, look to invest in them or donate to charities, the above points raised are more of than not mentioned in the press on a daily basis.

 

When we evaluate leadership teams and boards, we come across a large number who do good work and who take their roles and responsibilities seriously.  Whilst it is easy to observe and comment at others from afar, I would urge board members to self-reflect and raise their own and their organisation’s self-awareness.  Some easy questions to start with are: Could this be me? us?  What are my/our blindspots?  Am I/are we asking the right questions?  What could I/we do better?

 

This article forms part of the board fundamentals series.

 

 

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