GOOD GOVERNANCE – WHAT IS THAT?

GOOD GOVERNANCE – WHAT IS THAT?

When Enron filed for bankruptcy in December 2001 many did not realise then that the event would become one of the milestones in the story of corporate governance. The word Enron has become synonymous with business failure caused by poor corporate governance. We have become more informed of the early signs of when a business is at the start of the slippery slope that leads to its eventual demise. We also have a clearer idea of what constitutes good corporate governance, and there is consensus on the importance of good governance to the strategic and financial performance of an organisation. In addition to Enron and other high profile cases, what have you learned from your own experience?

As a business professional specialising in strategy and finance, I have had the privilege of working in various capacities with the leadership teams of diverse organisations, and of being in a position to observe first-hand their corporate governance choices and behaviour given various situations. Organisations have included listed corporates, private equity investee companies, state owned entities, industry associations, and non-profit organisations. Roles have included chief financial officer, executive officer, independent non-executive director, and independent strategy consultant. The strategic and financial challenges have ranged from doubling the value of profitable businesses to doing turnarounds of loss making entities.

Signs of good governance tend to be relatively easy to identify. One of the key features is the willingness of an organisation’s leadership team to engage in robust and honest debate, while maintaining good interpersonal relationships within the team. The focus is on the pros and cons of various choices, rather than on the personalities of the team members. There is a clear sense of the vision and values that guide the team through difficult decisions. A good sign is when a leadership team is prepared to support governance processes and decisions that support the organisation’s vision and values, even though they anticipate operational or financial challenges as a result. The team is prepared to pay the price for good governance.

Poor governance is not always easy to identify in the early stages. Compromises to integrity are often cloaked in the guise of good intentions combined with supposedly limited choices. The high road to doing the right thing becomes obscured when leaders prevaricate and seek an expedient solution. Even when it becomes clear that corporate governance is being undermined, there is major resistance when one challenges the ethical standards and personal behaviour of those individuals that seem to be motivated more by personal gain than by the interests of the organisation that they are responsible for leading.

What are some of the early warning signs of poor governance? There may be cause for concern when the chairman, CEO, CFO or other member of the leadership team:

– Attempts to manipulate the financial reports of the organisation in order to enhance falsely its perceived financial performance,

– Rationalises and endorses unethical behaviour on the basis that the practice is already being applied without censure in other organisations,

– Dismisses the well-informed guidance of competent corporate advisors because it does not coincide with their personal interests and agendas,

– Side-lines challenging views or questions of new team members on the basis that they have not yet earned the right to express a view or ask questions, or

– Becomes defensive when asked legitimate questions regarding his or her work performance or his or her reasons for various l strategic and financial decisions.

The correct composition of the board of directors is essential for good governance. Weak boards tend to produce weak governance. What are your choices if you encounter critically flawed governance as a board director? If you see potential for correction you can try to improve the quality of governance (expecting possible resistance from other directors). If not you can preserve your integrity and resign from the board. Thirdly you can retain your directorship but compromise your standards and integrity. The sad reality is that many individuals opt for the third choice without realising it. It is easy to mistake the slippery slope for pragmatism and compromise when doing a seemingly attractive deal on a tight deadline. Doing the right thing can be a rocky road with uncertain rewards, but experience shows that in the long term it is the better choice.

Reference: Troy Dyer