Success for the Board is delivering the Agreed Goal
The primary legal responsibility of the Board is to ensure that the Company achieves its agreed Goal. That is what success for the Company means, and that therefore defines successful performance by the Board.
So success in running a company is achieving the agreed Goal, and that is the over-riding role of the Board, and how Board performance should be judged.
How is this best achieved?
The UK doesn’t have a 2-tier board structure, but in a sense, UK public companies operate using a 2-tier structure. The Board sets the corporate Goal and adopts the necessary policies for the company to achieve that Goal. Its responsibility is to ensure that appropriate management and resources are in place to achieve that Goal. It monitors performance and changes management if necessary or the corporate Goal if appropriate.
Hence, the best way for the Board to achieve success is through:
- Effective leadership (governance)
- Effective management (executive delivery)
What are the characteristics of effective governance?
There are plenty of books about effective management, but what do we mean by effective governance? Most published work on governance addresses the way the Board is constituted and the way it conducts itself. Our own approach, developed and implemented over twenty-five years ago, is a holistic one and has two elements:
- what we describe as Five Golden Rules of HOLISTIC corporate governance
- an effective system to measure and monitor holistic Corporate Governance performance.
Five Golden Rules
This is how we define the holistic requirements of good corporate governance – what we call the Five Golden Rules of good corporate governance, defining holistic corporate governance as being structured round:
- an honest or ethical business culture and morality of organisational behaviour
- a clear goal, and purpose, taking account of the interests of, and agreed by, all the key stakeholders
- a practical strategic plan to achieve the business’s Goal, recognising the market opportunities and pressures, and the strengths and weaknesses of the resources available
- an organisation that is appropriately structured and adequately resourced, in terms of people, skills, processes, assets and finance, to deliver the chosen strategy
- trustworthy and reliable reporting systems to provide accountability and transparency to the stakeholders who have an interest in the business.
Corporate Governance monitoring system
An effective holistic Corporate Governance monitoring system consists of:
- an open and on-going relationship with KEY stakeholders and recognition of wider stakeholder interests
- appropriate and specific standards of holistic governance performance
- an effective measurement system to monitor performance
- an on-going performance improvement programme.
It should be noted that a company’s Corporate Governance performance as measured under our system is SPECIFIC to that company’s Goal and strategy. Thus, the weighting given to the views expressed by the various stakeholder groups surveyed will be geared to the company’s Goal and business objectives. The views of non-key stakeholders will influence policies to the degree that they are deemed to affect the achievement of the company’s business plan, or require it to be modified.
Hence, it’s not possible meaningfully to compare one company’s holistic Corporate Governance performance with another’s from published information to derive league tables which purport to rank companies with good and bad corporate governance.
Notably, a few years back, the UK’s Institute of Directors tried to do exactly that in conjunction with a leading business school, but gave up after a couple of years as the results led to meaningless conclusions.
Corporate Governance Codes
Where do Codes fit in?
Corporate Governance Codes have been a key element in attempts to improve the governance of public companies since the release of the Cadbury Report in 1992. But the role of codes is similar to that of industry regulations, though without a similar legal weight of enforcement behind them. These are simply guidelines as to how the Board should operate.
Limitations of Codes
As such, these guidelines aim at boards’ operating practices and internal procedures, and they miss the essential point of Corporate Governance which is leadership to achieve the holistically agreed corporate Goal. It is simply assumed that by complying with these guidelines, magically the corporate Goal will generally emerge. They don’t address the need for measuring and monitoring progress, picking up areas of concern, and taking corrective action in good time to keep the company on track.
Origins of limitations of the Corporate Governance Code
In the early 1990s, the Cadbury Committee was set up, with a brief essentially to allay suspicions between City investors and public company managements after a series of high profile financial scandals. Indeed, the very title of its report was The Report of the Committee on the Financial Aspects of Corporate Governance.
Although the Report’s recommendations ranged widely over the duties and responsibilities of directors, there was a major emphasis on the aspects relating to reporting and auditing. As such, the accounting profession was put on notice that it must work to improve its standards in these regards, and such references as ‘internal controls’, and even more so, ‘going concern’, caused some consternation in relation to potential legal liabilities.
Hence the accounting and auditing profession made sure it played a major part in the development of the UK’s Corporate Governance Code, with the objective that investors in public companies felt they could trust the figures produced by Boards and audited by the profession.
Hence, therefore, the on-going emphasis on matters concerning the accountancy and audit profession, covering:
- financial reporting
- internal and external audits
- internal controls
- risk management
- independent directors and time-limits on board positions to limit temptation and capture.
This was the emphasis, as opposed to practical guidance to achieve holistic governance within an appropriate cultural environment and a system to deliver the agreed corporate Goal linked to a practical business plan.
Other current distractions
Other recent distractions include:
- the impact of the needs of global wider stakeholder groups
- implications of climate change on a company’s operations
- global publicity for cases of bad treatment of employees in supplier companies
- environmental damage actually or potentially arising from a company’s activities.
In this context, there is frequently a conflation of ‘responsible investment’ with the specific Goal of a company agreed by its key stakeholders (customers, employees and owners).
The objectives of these ‘responsible investors’ may not be immediately compatible with the Goal of their target company. The responsibility of the Board members of the target company is the long-term future of the company, so they must assess to what extent the aims of the pressure group should or, indeed, can be accommodated.
The company’s Goal should only be changed by the Board to the extent that any new Goal is agreed by the key stakeholders, and, of course, it must be feasibly achievable.
Failing such a modification being appropriate, achievable and acceptable to the ‘responsible investor’, that investor must look elsewhere to place its investment.
The other side of the coin, of course, is that a Board whose policies cause the company to run out of supportive investors is failing in its statutory duties regarding safeguarding its future. And increasingly, the general investment community is wishing to be seen to be “responsible” (however that is defined by their marketing department).
A similar distraction in recent years has been the woolly term ‘purpose’, which has connotations of ethics, not harming the environment and of social objectives. Clearly, in the context of the future of the planet, these are of huge importance, and the Board must give these appropriate weighting in judging its ethical position and in setting the corporate Goal.
Thus, an unethical culture is inimical to good governance, and sooner or later will result in failure, as will blindly ignoring environmental and social considerations.
An excessive focus on social or environmental objectives, however, is a distraction unless these are part of the Goal agreed by the key stakeholders, and the arguments above in relation to ‘responsible investment’ apply.
Summarising: neither external pressure from ESG advocates nor from proponents of ‘purpose’ should be allowed to unduly influence, let alone to DRIVE the company’s holistically agreed Goal.
Firstly, current Corporate Governance Codes have expanded over the last thirty years from guidance on Board procedures to include rafts of content which more properly belong in handbooks of management (and indeed exist there in profusion). As such, the Codes have to a great extent become a bureaucratic distraction.
Secondly, to this day there is NO Corporate Governance system in the market to:
- measure INTERNAL holistic Corporate Governance performance, including, of course, compliance with Codes & regulations
- take FULL account of key stakeholders’ interests
- take appropriate account of wider stakeholders’ interests
- assist the Board in the SUCCESSFUL ACHIEVEMENT of the company’s GOAL.
Our ACG holistic Corporate Governance System was built to do just that. Its technologically up-to-date successor is desperately needed.