Below is a case study about the need for clear goals, taken from one of our books on corporate governance.
Losing sight of the need for a common goal
An industry sector group operated as a trade association within the engineering industry, with members drawn from all the leading UK engineering firms. After one particularly reflective general meeting, it was decided that the industry would benefit if a new organisation was set up to introduce self-regulation into that sector, to eliminate the cowboy operators.
An organisation, which we shall call Directorate for Optimum Operating Methods and Enhanced Designs, or DOOMED for short, was established for this purpose with a brief to introduce new standards and encourage sector companies to join the organisation and become accredited to the new standards. The organisation was set up as a company limited by guarantee with the shares held by the industry sector trade association, and the guarantee being underwritten effectively by the leading engineering companies.
One of the conditions of gaining approval for such an operation was that a board of directors was set up to govern the DOOMED organisation, whose members were selected to be representative of all the parties likely to be involved. This was a standard condition for the organisation itself to be accredited by UCAS and required the appointment of directors drawn from the ranks of suppliers, customers and the trade association, with a couple of academics thrown in for good measure. Interestingly, this did not include representatives of the general public as final consumers of the products being certificated, and neither was the chief executive made a director, so all the board members were non-executive.
Over the next few years, nearly fifty per cent of the firms in this sector were prevailed upon to join the organisation and become accredited, and the first objective seemed to have been achieved. Then the problems began to emerge, which highlighted the lack of goal congruence, or indeed any clear goals, which had been built in from the start. The problems were triggered by the very success of gathering members since this alerted potential competitors to the possibilities in this new market which had been created. First one, and then another certification body started approaching members with a “cut-price” offer, using the same standards which had been developed by DOOMED – a practice they were perfectly entitled to adopt – and cutting back on the number and extent of monitoring visits.
The conflicts of interest now became apparent when management drew the board’s attention to the rapidly deteriorating trading position and asked for guidance in determining a strategy to remedy the situation. The reactions varied:
- the directors representing larger suppliers insisted on there being no dilution of standards, pointing out that this process would eliminate the smaller competitors who would go for the cheaper certification, thereby damaging their reputation in relation to the market leaders and hence losing market share; in fact the certification process should probably be made more demanding and more expensive to hasten the departure of the smaller firms
- the directors representing smaller suppliers felt that the proper solution was to reduce the demands of the monitoring process and cut the prices to compete with the new entrants; in any case, they had been saying for some time that they themselves could not afford the current fees and had been warning of the likelihood of cut-price competitors entering the market
- the directors representing customers were in favour of a reduction in fees, since this was clearly what the market was indicating, but they also believed that standards ought not to be reduced with the implications for an inferior product; DOOMED was the first in the field and still the market leader and the Experience Curve surely indicated that their operating costs must therefore be lower than the new competitors. DOOMED must cut its costs to reduce its prices while maintaining standards.
- the academics agreed with all the arguments above and felt that it was too early to be able to predict how the market might develop; in any case, the organisation was committed by its constitution to continue imposing high standards on its members – any change would surely require a constitutional conference. So, since the bank balance was still healthy with undistributed reserves from the earlier successful years, DOOMED ought to leave any radical decision for another twelve months while it watched developments and use its reserves to fund any shortfall in trading cashflow.
- the chairman in this situation felt unable to give any clear direction to management, and the matter was deferred to the next quarterly board meeting.
The chief executive, charged with running a successful organisation, and denied guidance from the board, of which he was not a member, faced a rapidly deteriorating trading situation which required a fresh assessment of the market, and a new strategy. Clearly the board was riven by conflicts of interest, so he decided to go direct to the shareholders.
At this point, he realised that the trade association was the shareholder, but that it held the shares effectively as a trustee for the big engineering firms, and they appeared to have only a marginal interest in an organisation which was peripheral to most of their businesses. They provided directors to sit on the governing council of the trade association, but most of these were very senior directors in multinational corporations who had little knowledge of DOOMED and even less interest in being sucked into discussions about its trading problems. If pressed to express a view, it would be: “close it down if it has become a problem”. In reality no-one could speak for the shareholders of DOOMED.
The chief executive’s frustration with the market pressures and the growing need to agree a strategy to address them was then coupled with despair at realising that there was NO goal (let alone a clear goal) that could possibly be elicited from shareholders or board. In effect his job was not do-able.
His despair turned to clinical depression and resulted in a nervous breakdown. He never worked again.
DOOMED appointed a replacement chief executive, but failed to address the contradictions inherent in its constitution. Its trading position deteriorated and soon it was subsumed into a rival regulatory body, and in due course it disappeared.
The lesson is very clear. DOOMED was set up with no attempt to ensure that there was a commonly accepted, clear goal amongst the various interested parties. This made it impossible to provide the chief executive with a proper brief beyond simply recruiting members and writing standards. When market pressures required a market strategy, none was, or could be forthcoming. The organisation had no long-term future, and the chief executive had an impossible job.