The Higgs Report addresses one crucial issue which seems to have become lost in rhetoric – gauging whether the information that company directors are given is accurate.
This issue will drive companies away from the old and increasingly creaky methods of measurement and will push them toward the more useful end of the intangible spectrum. For directors – both executive and non-exec alike – determining what goes on within a company is vital. It is about self-preservation.
As corporate scandal after corporate scandal has shown, being on a board of directors and not having an inkling that the carpet is being ripped out from under your feet is not only embarrassing but can bring about the speedy death of a director’s career.
The future, you might say, is intangible. The old certainties of what the finance function produced by way of measurement are no longer anything like the full story. It is, as Mark Goyder, director of the Centre for Tomorrow’s Company, would suggest, “A question of getting measurement into what counts.”
In mid-March, Goyder spoke at an RSA debate on leadership and culture change. He characterised the year of Enron and Marconi as “the great crisis of trust”. Devastating as the consequences of those corporate scandals were, they have created an opportunity for board members to “think about the joined-up nature of their success and its measurement”.
This is what finance directors have done for generations. It is all about measurement. The difference today is that investors, employees and customers want measurements that reveal something other than financial figures and ratios.
The old days of measurement were driven by the need for compliance, and that is where much of the debate over the Higgs Report lies today. Another speaker at the forum, Peninah Thomson, director of The Change Partnership, summed up the real issue. “It is less about compliance and more about behaviour,” she said.
For Thomson, the difficulty for anyone in the upper echelons of a company is determining how the board can possibly know “what is going on within the company”. In the past, management accounts and financial reports on a subsidiary’s fixed assets provided much of the information directors sought or thought they needed. But Thomson argues that it is no longer just about the financials. It is now more about internal processes and behaviours, and it is at this point where financial directors put their heads in their hands.
On past experience, whenever anyone mentions “assessing behaviours” it presages yet another change-management programme, at which point many will discuss the importance of values and devise what are often time-consuming ways to cascade them down throughout the organisation.
This rarely has any effect on the company other than a short-term ramp of the share price.
But the difference now is that behaviours and values do reveal a lot about what Goyder terms a crisis of trust. Thomson argues that the corporate disasters evident in the UK – like the Marconi scandal – were more about poor judgement than about sharp practice.
We now need systems of measurement in place which will alert board members to the possibility that their judgement is going awry.
Another development which will help this process is the fortified and strengthened concept of the Operating and Financial Review. When this comes into effect under the next round of company legislation, it will require a new discipline from boards. Directors will have to state what their company promises to deliver and what indicators it will use to show that it can achieve them.
It is back to the scepticism which all directors should bring to their efforts. Goyder suggests the use of what he believes is an effective yardstick – measuring the percentage of employees who believe the company lives up to its ethical standards, and then comparing those figures with findings from the previous year.
Perhaps Goyder is right. It seems just one example of a simple yet effective way to determine how ethical a company’s staff perceive it to be and may set the amber lights blazing faster than any basic financial indicator.
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