It is all about squaring the circle. Corporate governance is just a string of nit-picking rules, growl CEOs. None of it helps create wealth.
If anything, it hinders the process. In response, corporate governance enthusiasts try to show that a well-run, well-governed company is better and more efficient, and brings home the shareholders’ bacon.
These two sides of opinion are often caricatured to make the arguments seem more polarised. But what is needed is something that satisfies both sides. A report advocating a process it calls ‘enterprise governance’ goes some way to providing this. It is the result of work done by the Professional Accountants in Business Committee of the International Federation of Accountants and greatly assisted by CIMA, the management accounting body.
The committee was headed by Bill Connell, who recently retired from being in charge of risk management at BOC. Anyone who knew him in his BOC days knows how tenaciously he held to the idea of systems running vertically through the business to ensure both accountability and the early identification of emerging risks.
The report, Enterprise Governance: Getting the Balance Right, available at www.ifac.org, seeks to separate the principles of corporate governance from performance and so enable both to be united through the overall concept of enterprise governance. “Achieving a panacea of good corporate governance that is linked with performance management will enable companies to focus on the key drivers that move their business forward,” it states.
The idea springs from the assumption that companies are currently lopsided. They spend a great deal of time ensuring that all aspects of corporate governance which shareholders and regulators expect to find in place are working effectively. Numerous checks and balances are inserted in the organisation to make sure this happens. But over on the strategic side of the company there are no such checks and balances. It comes as no surprise to find that the report is also packed with case studies of companies that have completely lost the strategic plot.
“There is a danger that in the laudable attempt to improve standards of control and ethics, insufficient attention is paid to the need for companies to create wealth and ensure they are pursuing the right strategies to achieve this. It is common for boards to fall into the trap of getting immersed in detail at the expense of focusing on overall strategic risk and future opportunities that drive long-term shareholder value,” says Connell.
The case studies dealing with how you define success include the Bangkok Mass Transit System, Southwest Airlines and Tesco. The conclusions are that “although good corporate governance did distinguish the success from the failures, governance issues did not feature as strongly in the ‘successes’.
Strategic factors seemed to be more dominant. This does not imply that corporate governance is unimportant for success. Instead, it shows that good corporate governance is a necessary, but not sufficient, foundation for success.”
Strategy is what’s important. “Responsiveness and strategic risk management played a crucial supporting role in terms of a company’s ability to read market trends and apply that knowledge successfully,” says the report.
But the strategic side can also bring about a company’s downfall. It also suggests that companies are at the most risk in times of ‘transformational change’. The solution devised by CIMA is a style of ‘strategic scorecard’ that acts both as an early warning system and a reminder of where the focus should be made.
It is terribly easy in an era of overkill to see this as yet another matrix – coloured boxes which could mean anything you want to them to.
But that would be to underestimate Connell and his rigorous approach to controls. “We do not pretend to present a guaranteed formula for success,” he will tell you. “However, greater attention paid to strategic oversight through the use of the strategic scorecard will go some way towards ensuring both effective corporate governance and performance.”
Companies that follow the old ways of paying lip-service to the principles of conformance will struggle. This report points a way forward which manages to square the unruly circle that causes so many companies so much difficulty.
And it has a simplicity in its logic. Pay as much attention to ensuring that the strategy is right as you do to ensuring that governance systems are right and you have closed down more risks than you knew existed.
Some of the UK’s top companies are failing to adequately report poor performance and sometimes obscure their true profit figures
Chartered accountant Colin Adams rebuilt the AIM listed company’s finance team and helped turn the business around after a challenging period
Travis Perkins to close 30 branches and could cut as many as 600 jobs, the builders’ merchant said, as it warned on full year profits