For the board, ‘we didn’t know’ is never an acceptable answer

 
Estelle Clark
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For too long, the debate around corporate governance has been restricted to the narrow issue of executive pay (Source: Getty)

Debate has been raging in recent months around the quality of governance in our biggest and most high-profile companies.

The publication today of the 2017 Good Governance Report from the Institute of Directors is a welcome contribution.

But corporate governance is not merely the preserve of the FTSE 100. We must now widen the debate into the FTSE 250 and beyond, into private organisations, SMEs and even the public sector.

Read more: Will corporate governance changes damage the UK’s business credentials?

One of the key findings of the report is that there is no correlation between company size and the quality of its governance. The only conclusion is that operational governance is not a matter of resource, but of culture and will.

For too long, the debate around corporate governance has been restricted to the narrow issue of executive pay and the misuse of zero hours contracts.

But society’s view of what constitutes good governance is changing, moving away from the narrow definition of financial performance towards a broader definition that takes into account an organisation’s impact on all its stakeholders.

A number of the key indicators in the report relate to the ability of organisations to take the aims and ambitions of the board down into the body of the organisation. High profile operational governance failures, such as Bell Pottinger and the Tesco horsemeat scandal, occurred without board approval, but have been immensely damaging nonetheless.

It would be easy to think that such things could never happen in your own company. But in any organisation, the danger of groupthink is a very real one. Assume everything is alright, neglect the processes that are crucial to best practice, and complacency can rapidly set in across the organisation. From there, it can be only a matter of time until a major issue arises.

All of this makes the role of operational governance crucial. It’s about how directors and executive teams convey their aims and ambitions across the broader organisation – the bridge between the people who set strategy and those who turn it into reality. In short, operational governance ensures the board’s intent is realised correctly. For the board, “we didn’t know” is never acceptable.

My hope is that the quality of governance will also become a greater priority for shareholders. The report includes 47 different measurements which should prove invaluable for institutional shareholders during their due diligence process. In the final analysis, shareholders stand to lose as much as anyone if a governance failure leads to commercial failure.

The role of shareholders is vital, but all too often their input is self-restricted to the financials and the workings of the audit and remuneration committee. High profile spats about the issue of executive pay only serve to reinforce the impression that shareholders, specifically institutional shareholders, only care about earnings.

And yet, this laser focus on the financials can leave shareholders blind to the governance failings of an organisation and provide a nasty shock when those failings are exposed to the world.

Let’s take Uber as an example. A financially successful company certainly, but I am sure that institutional shareholders at Benchmark, First Round Capital, Lowercase Capital, Menlo Ventures, Blackrock, Morgan Stanley, and others knew little or nothing of the company’s wider failings that have recently been in the headlines. Their association with Uber has done nothing for their own reputations and their own brands.

Ideally, institutional shareholders will use operational governance as one of their key benchmarks during the due diligence process, before making their investment. Crucial in this is the role of the brokers who need to encourage their research analysts to look at governance as well as the balance sheet, expose any flaws in their research notes and, maybe, even discount the price or place a more cautious recommendation on the stock.

I would like to call upon all organisations to join the Institute of Directors and the Chartered Quality Institute in widening the debate about governance, to help find the answers to these questions and begin to address the root causes of governance failure.

To download a copy of the 2017 Good Governance Report, please visit www.quality.org/governance.

Read more: Fixing the corporate governance problem is a national necessity

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