For the Board, ‘We Didn’t Know’ Is Never Acceptable

Good governance is different from what it was back in the day. It’s no longer just about the direct numbers, but the reputation of a firm and the overall bearing governance has on stakeholders. Estelle Clark, Director of Policy at the Chartered Quality Institute, here talks to CEO Today about the accountability of firms and the extension of corporate governance outside of the FTSE 100.

The publication of the 2017 Institute of Directors Good Governance Report is a welcome contribution to the debate about the quality of governance in our biggest and most high-profile companies.

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.

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 our companies will not solely find the remedy for their governance issues in the audit and remuneration committee.

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.

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.

Without it, the organisation cannot understand what the board needs from it and so cannot deliver and feedback to the board on the results achieved. 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 at the AGM 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 CEO’s and 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 P&L and 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. Only through robust debate will we find the answers to the many questions posed 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