The essence of good governance

Governance has become mainstream in recent years.

Governance has become mainstream in recent years. Corporate mishaps and failures of various kinds have resulted in boards and governance becoming the subject of research, criticism and more. Despite considerable attention, confusion over what governance is, the role of the board and how governance might be practiced has resulted in more questions than answers. So, what do boards need to do, if they are to become more effective in their work, and achieve and sustain high organisational performance?

In this podcast, Dr Sabine Dembkowski, Founder and Managing Partner of Better Boards, discusses board futureproofing with Dr Peter Crow. Peter holds a doctorate in corporate governance and strategy. He has served on the boards of private and family-owned companies, has an extensive international record advising and educating boards, and is active in board research. He is a Chartered Director, and he holds memberships with several international institutions, including the International Corporate Governance Networks and the Global Peter Drucker Society.

Some of the key takeaways of the conversation include:

“We’re working in an environment where we’re what we’re trying to achieve is a little bit camouflaged”

Peter starts by acknowledging today’s dynamic world, where the only constant is change. Covid has demonstrated that it is very difficult to predict the future or understand how we should be operating. Boards have pressing issues of sustainability agendas, ESG participation, diversity, equity and inclusion, geopolitics and nationalism, and now energy security. In addition to these are stakeholder and activist expectations. Plus, compliance demands more and more, so the environment outside the boardroom is extremely dynamic. Board Directors only meet as a board periodically, which means reconfiguring and resetting before each meeting. It’s almost as if we are working in an environment where what we are trying to achieve is a little bit camouflaged, and we only have partial information. Hence, board work becomes challenging, and good chairmanship, process and practice are pivotal, if boards are going to contribute well.

“The hurdles are many”

Peter explains that he is regularly asked 3 questions which have not changed significantly in over 15 years. These are: what is corporate governance, how should it be practised, and what is the role of the board? The first hurdle is understanding the job, as there are often multiple different understandings of the role of a given board. The second hurdle is the statistic that one in 6 directors understands the business of the business. Worse, he relates that only about one in 20 boards have a single united view as to the overall purpose of the company. Yet in law, one of a board’s duties is to assure the ongoing performance of the business.

“One size fits all, or “best practice” is deeply flawed”

Peter jokes that things would be fine if boards were made up of something other than people. He describes the problem that the board does not run the company, that is the job of the chief executive, and the executive team’s job. The board’s job is to make decisions, and then to ask the chief executive and their team to implement those decisions. The board’s decision making is usually reserved for the very big, strategic decisions with long term impact. These big decisions take time to prepare, and when things change, to uncommit – and the material effects, benefits or outcomes could take months or even years. Peter also explains that in his view, best practice assumes there is one best way of doing something, but businesses vary greatly. So, while he recognises some universal principles, he believes “best practice” is deeply flawed, and should be replaced with “best fit”.

“I wish that some of these corporate governance codes would be shortened greatly”

Peter relates that when a problem arises, the lawyers or regulators become involved, and the reaction is to design more regulation or add to the code, but as time goes by the code becomes more complex and prescriptive. The goal is to help boards do their job properly, yet counterproductively, this focuses boards more on complying with the regulations and codes, leaving them with less time to do the rest of its job (which is value creation).

“The likelihood of the board effectiveness being a function of what it looks like is low”

Peter describes the balance between value protection, compliance and value creation. This work emerged from his doctoral research a decade ago, and Peter says that if the board is to have any impact on the future performance of the business in a sustainable way, then three things are necessary. Firstly, strategic competence, which is director capability or competency – the mix of skills and expertise that directors individually and collectively bring into the room, and directors who apply relevant skills and expertise to perform their tasks well. The second factor is activity and engagement – where directors have prepared beforehand, actively participate, debate and make informed decisions about what the board ultimately decides, not as individuals but as the board. The third factor is behaviour. Peter notes that in America boards can have as many as 20 members, and the Chair still has to convene and coordinate those people in terms of the way they act and interact. A sense of purpose is essential, as is the motivation and resolve of directors to make decisions in the context of advancing the company towards what it’s trying to achieve.

Peter believes that this is like a multiplication equation, and that if any of these elements is missing, the likelihood of the board adding any value at all drops to zero.

 

The three top takeaways from our conversation are:

• Governance is an activity, not a legal framework or structure, although the laws and regulations are important because they define the boundaries. However, they are not governance themselves. It’s about steering and guiding the organisation.
• Boards can make a difference.
• Effectiveness is a function of what directors bring, what boards do and how directors act and interact.

Don’t forget to subscribe never to miss an episode of the Better Boards Podcast Series. Available on Apple, Spotify or Google.

To find out how you can participate in the Better Boards Podcast Series or more information on Better Boards’ solutions, please email us at info@better-boards.com.