Effective corporate governance does not, in and of itself, mean good corporate governance; ‘good’ may well be implicit; I prefer to make it explicit. The word ‘corporate’ can also be somewhat misleading and some people may, mistakenly, conclude that corporate governance is a matter for large organisations. My recent survey evidence suggests that this is not the case; corporate governance applies to all organisations, I have therefore decided to use the ‘shorthand’ good governance. Corporate governance and good governance are used interchangeably throughout this article.
The fundamentals of good governance and the principles that underpin good governance are neither sector specific, nor are they country specific; they transcend international boundaries and are equally applicable to all organisations, whether they be:
• Public Sector;
• Private Sector;
• Private Companies;
• Quoted Companies;
• International Companies;
• Charities; and,
• Not-for-Profit Organisations.
Although the level of sophistication in matters pertaining to good governance that might be appropriate to a FTSE 100/Fortune 500 organisation is clearly well over the top for an SME with 20 employees, it seems to me that, at its core, good governance contains some self-evident truths that retain their relevance and validity regardless of the size and nature of an enterprise. There are a number of core themes that underpin good governance: Consistency, Corporate/Organisation Culture, Ethics, Integrity and People. The essence and governance of 99.9 percent of organisations is in my view, determined by people and corporate culture. In a survey that conducted in June 2015, an overwhelming (96.7 percent) of respondents felt that corporate governance was an organisational (cultural/ethical/people) issue, rather than a financial one, which was quite surprising, but reinforced my long-held belief that good governance needs to be holistic, inclusive, and people-centric. It follows from my survey results that it is an organisation’s people and its corporate culture that are fundamental to achieving and maintaining good governance. Accountability, systems and structure are undoubtedly important, but it is an organisation’s people, at all levels, that need to take responsibility for good governance and it is those same people who make the systems and processes work effectively. There is a popular misconception that good governance is the sole responsibility of the Board, or Executive; good governance is the responsibility of every single person in an organisation. Ultimate accountability for good governance must rightly rest with the Board, Trustees, or Executive (Politicians, especially Ministers of State, please note), but day-to-day responsibility is everyone’s.
Good governance is, or should be, both holistic and inclusive, it is not a ‘tick box’ exercise and it is my contention that good governance must go well beyond the traditional, best practice, tick box approach that has failed repeatedly in the past and is continuing to fail. The tick box approach is not concerned with the practice of good governance; rather it is about demonstrating compliance with Codes of Practice, Legislation and Regulations. I believe that the constructive challenge of what may be perceived as good governance is helpful indeed beneficial to the broader debate of what constitutes good governance. Priorities and emphases will change according to the sector in which your organisation operates and its size, but there are certain underlying, fundamental, principles to good governance that remain unchanging.
This article is largely based upon my personal practical experiences, observations and opinions, but I have, of course, also drawn upon some of the wide range of literature (including a number of published ‘Codes’) that is available on the subject of corporate governance and undertaken some survey-based research. One of my conclusions is that if you do what feels right, do what you honestly believe to be right and do it consistently, then that is a good starting point for achieving good governance in your organisation and getting the calibration right. For the avoidance of doubt, ‘rightness’ involves: reasonableness, fair-mindedness, ethical behaviour, and integrity. I would never suggest that there is a template for good corporate governance; it is questionable whether a single template for good governance exists, or ever will exist. This does not in any way detract from my view that at the core of good governance, there are a number of self-evident truths that remain constant and universally applicable. That being said, I would argue that serious thought should be given to having a single overarching ‘Code’ rather than the current proliferation of different codes and regulatory frameworks. My argument appears to be supported by the respondents to my initial surveys. In the first, 36.7 percent of respondents felt that the current proliferation of codes of governance was unhelpful. In the second, 69.4 percent of respondents indicated that a single, over-arching, code of corporate governance that was not limited to listed/quoted companies would be helpful; an objective that at least two Countries, Malaysia and South Africa, have gone some way towards achieving.
Corporate Governance is not a new concept. The phrase is relatively new, dating from the 1980’s, but the concept has certainly existed as long as trade itself, as Bob Tricker explains in his excellent book ‘Corporate Governance – Principles, Policies, and Practices’ . There are Old Testament references, such as Psalm 72, to what might be considered corporate governance (primarily the relationship between rulers and their people) and most ancient Vedic scriptures make mention of the concept; if a king’s (ruler’s) behavior is not consistent with the principles laid down in ‘Manu Smriti’ (the ancient Vedic code of conduct for people to live by roles, responsibilities and laws, collectively called Dharma ), then the ministers, officials, soldiers and eventually the subjects would all contribute towards failure of the state. The analogy holds true today; if a Chairman of the Board shows scant regard for the principles of good governance, the other Board members will soon follow suit, leading eventually to executives, managers and workers behaving in accordance with the example set by their leaders and poor governance becomes endemic to the organisation. Happily, the converse also holds true.
At its core, good governance is about accountability, corporate culture, ethics and values; this means that it is inextricably linked with people. It is your people who:
• Implement, or circumvent, the systems, policies, and processes that underpin effective/good corporate governance;
• Monitor the day-to-day operation of those same systems, policies and procedures;
• Accept day-to-day accountability and responsibility for good governance in your organisation; and,
• Are responsible for failures in good governance.
Good governance, or to be more accurate failures in good governance, has been much in the news in recent years. Governance failures at not-for-profit organisations like Kid’s Company and NHS Trusts in the UK and financial institutions such as Barings, Co-Operative Bank and Lehman Brothers are frequently quoted examples of such failures, but we should remember that organisations such as these, unlike Enron, Parmalat, and WorldCom are, or should have been, subject to strict regulation by regulatory bodies such as: the Care Quality Commission ; the Financial Conduct Authority ; the Charity Commission ; and, the Prudential Regulation Authority . This suggests to me that whilst the organisations concerned may well have failed in their corporate governance obligations, so too have the regulators. It also suggests that, in common with corporate values, you cannot simply impose good governance. You can of course impose the systems and processes and you can also impose legislation and regulations, but unless the principles of good governance and an organisation’s values are fully aligned with, and an integral part of, an organisation’s culture then good (corporate) governance will never become fully embedded.
So what do I mean by good Corporate Governance? Broadly speaking, it means the processes, relations and systems by which organisations are controlled and directed; corporate governance is not and should not be confused with management. An organisation’s governance arrangements must identify the distribution of accountability, rights and responsibilities among the different stakeholders in the organisation. These stakeholders may include, among others, the Board of Directors, Trustees, managers, Government Departments, shareholders, creditors, auditors, regulators, and its employees. An organisation’s governance structure should include the rules and procedures for making decisions in corporate affairs. Good governance includes the processes through which organisations’ aims, objectives and values are set and pursued in the context of the social, regulatory and market environment in which they operate. Corporate governance processes and systems include monitoring the actions, policies and decisions of organisations and their agents, which includes their suppliers. Good governance, at a strategic level, is therefore about what the board of an organisation does and how it sets and applies the values of the organisation.
In the United Kingdom (UK), the generally accepted ‘Gold’ standard on corporate governance is provided by the UK Corporate Governance Code . The first version of the UK Corporate Governance Code was produced in 1992 by the Cadbury Committee and it still (paragraph 2.5) provides the classic definition of the context of the Code:
“Corporate governance is the system by which companies are directed and controlled. Boards of directors are responsible for the governance of their companies. The shareholders’ role in governance is to appoint the directors and the auditors and to satisfy themselves that an appropriate governance structure is in place. The responsibilities of the board include setting the company’s strategic aims, providing the leadership to put them into effect, supervising the management of the business and reporting to shareholders on their stewardship. The board’s actions are subject to laws, regulations and the shareholders in general meeting.”
I have no issues with the broad principles contained in the Code, but I do have some concerns regarding its limited scope and restrictive wording; it lacks inclusivity. The shareholders’ role is limited to satisfying themselves that there is an appropriate governance structure in place. For my part, we would like to see ‘effective’, or efficacious, inserted in the wording; corporate governance structures and systems can be appropriate, but that does not in and of itself mean that they are effective. In addition, I believe that shareholders have a ‘stewardship’ role; they cannot/should not stand aloof when there is clearly something amiss with an organisation’s governance. All too often shareholders appear inclined to abrogate their responsibility for stewardship; understandable perhaps for small shareholders, but not for large shareholders.
If we accept the general principles set out in the Code then why should it not be more generally applicable and thus inclusive? The Code applies principally to ‘listed’ companies and primarily to ‘Premium’ listed companies, which I consider unnecessarily restrictive. There were (2015) around 8,350 UK registered companies with a turnover of £100M or more, there were only some 2,450 ‘listed’ companies. Many commercial organisations, some of very considerable size, no longer seek a stock market listing and are thus, with some exceptions, not in scope of the Code. There are many other organisations with very substantial revenues that also fall outside the scope of the code.
Such organisations, in the United Kingdom, include:
• Educational institutions (Academies, City Technology Colleges, Universities, etcetera),
• Government Executive Agencies/Trading Funds,
• Local Authorities and;
• NHS Trusts.
Most of these organisations are subject to some form of regulatory framework, but many of the regulators have a remit that is largely restricted to either financial or professional standards. Both of these have a role to play and whilst I am not suggesting that they can be replaced by or, in some way, subsumed into the Code, I do believe that having a single, common, standard for Corporate Governance in the UK is a good idea for all organisations and their stakeholders. In an ideal world there would be a single, overarching, global, code for good governance, but we do not inhabit an ideal world and such a code if it existed would currently be unenforceable . We need much greater convergence in governance processes, structures and systems before such a global code becomes anything more than wishful thinking. In my recent surveys (June and July 2015), a significant proportion of respondents indicated both that the current proliferation of codes of corporate governance was unhelpful, and that having a single, over-arching, code would be helpful. Good governance should not be confused with professional ethics, regulation and standards, which I believe could be subordinate to a single, universal Code of Corporate Governance. Governance is internal to an organisation, whereas professional ethics, regulation and standards are externally imposed and require compliance.
Do we really need the current proliferation of codes of (Corporate) governance? Do charities, local authorities, NHS Trusts, schools, voluntary organisations, and the rest; really need their own (entity-specific) codes of governance? I think not and, as mentioned above, my survey results appear to confirm that view; I believe that, with minor amendments, the UK Corporate Governance Code could be generally adopted by organisations in the UK and that its core principles could be incorporated into a Universal Statement of Principles that would provide a baseline/benchmark for all organisations. Taking the analogy of a car steering wheel, it is round with one, or more spokes leading to a central hub. The rim (wheel) may be made in plastic, laminated with wood, or it may be encased in leather; it is still a steering wheel and the same holds true for codes of good (corporate) governance. My general proposition is that by law all organisations (charities, private, public and not-for-profit) with operations in the UK and with revenues in excess of £100M should be in scope of the Code; the £100M figure is entirely arbitrary, but seems a sensible threshold. I have deliberately chosen revenues/turnover because of its simplicity and relative transparency. I also propose that all organisations be encouraged to voluntarily subscribe to the broad principles of the Code. We entirely accept that such a move would involve some work on the part of the likes of the Charity Commission, Financial Conduct Authority (We are not entirely clear why the FCA is now considered the arbiter on matters pertaining to Corporate Governance in the UK), and Government Departments, but I believe that it would be well worthwhile with the long-term benefits far outweighing the costs. In her book (Good Company) Laurie Bassie stated:
“Many companies during the past decade have launched disparate initiatives such as becoming an employer of choice, reducing carbon footprints and beefing up compliance efforts. But firms that aim to succeed in sustainable ways must move to become good companies through and through.”
If we substitute ‘organisation’ for ‘company’, or ‘firm’ then we think that this paragraph becomes relevant to all manner of organisations. In the same way, we can take paragraph 2.5 of the original (Cadbury Committee) UK Corporate Governance Code (see above) and with a very few alterations, it takes on a much wider scope:
‘Corporate governance is the system by which organisations are directed and controlled. Boards of directors, governors and trustees are accountable for the governance of their organisations. The shareholders’/stakeholders’ role in governance is to appoint the directors, governors, trustees and the auditors and to satisfy themselves that an appropriate and effective governance structure is in place. The responsibilities of the directors/governors/trustees include setting the organisation’s strategic aims, objectives and values, providing the leadership to put them into effect, supervising the management of the organisation and reporting to shareholders/stakeholders on their stewardship. The actions of the directors, governors and trustees are subject to laws, regulations and ultimately the stakeholders.’
Good governance is inextricably linked with accountability, culture, ethics, integrity and values. Without the clearly defined distribution of accountability, corporate governance structures and systems, no matter how well designed, are missing an essential ingredient. To use the analogy of Adair’s interlinking three circles, all three elements of Accountability, Structures and Systems need to be present if an organisation is to have good governance. If any one element is missing, or incomplete then the other two elements are left incomplete.
For good governance to prevail organisations need a clear set of values and it is arguable that good governance must be ‘values based’ if it is to become fully embedded in the organisation’s culture. Good governance and a clear set of values are integral to being a ‘good’ organisation and, as Laurie Bassi has clearly demonstrated, being a good company/organisation is good for business. Being ‘good’, provided it is also accompanied by consistency and transparency, will have a number of significant benefits:
- It will enhance your organisation’s reputation generally,
- It will give consumers, customers, regulators, suppliers and potential investors confidence,
- It will help establish/enhance your reputation as ‘An Employer of Choice’,
- It will, to a degree, enable you to differentiate (positively) your organisation from others, and;
- It will facilitate increased engagement, loyalty and trust on the part of your people.
In my experience, there is a tendency to conjoin good governance with audit/compliance and risk management. I consider this inappropriate as it attempts to combine the strategic (corporate governance) with the operational (audit and risk management), which is not intended in any way to diminish the importance of the likes of audit, internal controls and risk management. They are essential elements of the framework that underpins good governance; they provide some of the checks, balances and monitoring needed to facilitate good governance.
There is a pronounced tendency in many organisations to view good governance and associated activities, such as audit and risk management, from a purely financial perspective which may go some way towards explaining the role of the Financial Conduct Authority in the UK. The financial perspective is clearly important, but if you accept the premise that people are potentially an organisation’s greatest liability I contend that, in matters of good governance, an organisation’s people risk is of at least equal importance to financial risk. In my first survey only 3.3 percent of the respondents saw corporate governance as being primarily a financial issue. When considering this statistic, it is also worth remembering that over 80 percent of the respondents to this survey were either Directors, or Senior Managers.
Although the Board’s role is pivotal, good governance is not the sole responsibility of the Board; it is the responsibility of everyone employed by an organisation. There is a proverb:
‘For want of a nail the shoe was lost; For want of a shoe the horse was lost;
For want of a horse the battle was lost; For the failure of battle the kingdom was lost;
All for the want of a horse-shoe nail.’
The proverb has been attributed to a number of people, including William Shakespeare, but for us its importance lies in the interpretation. It describes a situation in which a failure to anticipate or correct some initially apparently minor problem leads progressively through increasingly critical stages to a disastrous outcome. It follows that although good governance and accountability are seen primarily as matters for and the responsibility of the board and executive management, they are actually matters for and the responsibility of all employees. This cannot happen without clarity, consistency and transparency. For me, good governance is inextricably linked with an organisation’s culture, its values, behaviours and especially its people.
Good governance needs to be fully embedded in an organisation; if it is then it is arguable that Codes of Conduct, legislation and regulation will play a relatively small part in the life of the organisation and its people. As legislation and regulations change, so must an organisation’s corporate governance systems, processes and structure; however, if an organisation’s approach to good governance is ethical, values-based and is an integral part of its culture then such changes will be adaptive/evolutionary in nature, rather than requiring revolutionary change. If an organisation has good governance fully embedded in its culture, it will be able to adapt to the challenges presented by changes in the legal/regulatory framework and, where it fails to comply with the provisions of a code then it will still retain the confidence of stakeholders. This is one of the principal reasons that I prefer the UK’s, Malaysia’s and South Africa’s incremental (comply, or explain) approach to that adopted by some other jurisdictions, most notably perhaps the USA with the Sarbanes-Oxley Act 2002 that was introduced shortly after the WorldCom accounting scandal where assets were inflated by $11Bn, 30,000 people lost their jobs and investors lost $180Bn, and the Dodd-Frank Wall Street Reform and Consumer Protection Act 2010. An alternative is provided by the reports of the King Committee (in particular ‘King III’), which moved from Comply or Explain to Apply or Explain.
Let us put aside, for the moment, the Board and consider good governance at a more fundamental, but equally important, level. I accept that good governance is essentially strategic, but looking back at my proposed model; good governance needs to be underpinned by the actions of all your people. Assuming that both your approach to corporate governance and your values are ethical, explicit and transparent then all of your people will be aware of them and will have an expectation that all their managers, from the Board/Executive down, will honour them and be exemplars in their behaviours and decisions . There is probably a detailed reference to your corporate values on your organisation’s website and there is almost certainly a reference to corporate governance on the same website, if not then we suggest that there should be. Fortunately perhaps, there is also a vast amount of information available on the internet and if that information is not consistent with the values that your organisation espouses then you may have a significant problem.
For more reading on the subject of corporate governance, I suggest: ‘Corporate Governance and Accountability’ , ‘Corporate Governance – Principles, Policies, and Practices’ , and ‘The Fish Rots From The Head’ .
If we accept, as outlined by the Cadbury Committee, that “Corporate governance is the system by which companies are directed and controlled” then that is perhaps the key differentiator between ‘Corporate Governance’ and ‘Good Governance’. Corporate Governance appears to be about systems and processes, whereas Good Governance is holistic, with people at its core, and the regulated/structured systems and processes are subordinate. People produce, maintain and sustain Good Governance – Not Legislation and Regulation. For signposts towards a more holistic and inclusive approach to good corporate governance, I strongly advise reading the reports of the King Committee (especially King III).