Governance failures – eroding stakeholders’ trust in governance bodies that must protect their interests. Think SME Bank
By Parmi Natesan, a chartered accountant by profession and the Executive Director at the Institute of Directors in Southern Africa.
Thanks to the litany of recent governance failures, and the high-profile scandals in the private and public sectors, governance has shot up the public agenda. One of the common conclusions to be drawn is the truth of the old adage that “the fish rots from the head”. For those in leadership positions, and particularly those on governing bodies, the pressure is mounting as the court of public opinion, as well as the courts themselves, should increasingly hold them accountable for the shortcomings of the organisations they lead.
The question this raises, of course, is what issues should governing bodies be considering to ensure that they are on the right side of history?
A paper by the Corporate Governance Network, a special interest group of the Institute of Directors in Southern Africa (IODSA) sponsored by PWC, argues that these issues can be grouped into three broad themes: introspection about the governing body itself, understanding the context in which the organisation operates, and realising their organisation’s place within (rather than without) society.
The first theme, Looking within, acknowledges that the governing body will not fulfil its corporate governance mandate, or indeed its other roles if it does not have the proper skills and experience to draw on.
The central issue here is the quality and composition of the governing body. Because of its key roles in setting strategy and ensuring governance, the governing body is often seen as one of an organisation’s “most critical strategic assets”, according to Vanguard CEO, William McNabb (Vanguard is a major US investment fund). It’s thus vital that it has the right mix of skills and experience in the light of its current and future needs. Succession planning and the management of talent and skills are vital components of this.
Director independence is clearly a critical enabler of an effective governing body. Governing body members have to be able to exercise judgement effectively—and be seen to be able to do so.
A final issue within this theme is the need for the governing body to pay more attention to how it oversees corporate culture. It is clear that corporate culture both on the governing body and the organisation as a whole provides the growth medium for certain kinds of behaviour—good and bad.
Steering through choppy waters
The second theme that should concern governing bodies relates to the business and socio-political environment in which the organisation operates. As a general observation, it is clear that organisations have to deal with unprecedentedly swift change. Innovation and its flipside, disruption, have become the defining characteristics of the 21st Century. The acronym VUCA—volatile, uncertain, complex and ambiguous—is often used to characterise the modern business environment and its risks.
This change frequently comes on the back of technological advances which often have unintended and unanticipated consequences. At present, cybersecurity and privacy threats are among the most serious, but governing bodies must ensure that they are equipped to govern all risk in this shifting context.
A related issue is how to define and ensure long-term value creation and sustainability. Risk is one factor, but others include investment in R&D, corporate culture, incentives and skill retention. At the same time, environmental, social and governance factors are becoming more important to stakeholders, among them institutional investors.
The final theme relates to the rebuilding of trust within the broader context. Governance failures and irresponsible business practices have eroded the trust that stakeholders have in organisations—corporate governance has a critical role to play in rebuilding that trust. Issues that need attention in this context include the governance of ethics, stakeholder communications and crisis management, remuneration, and fostering trust between the governing body and management.
While this set of issues is by no means intended to be exhaustive, grouping them into themes will prompt governing bodies in creating their own long-term agendas.
Whatever the specific issues that are identified by individual governing bodies, they are bound to present a daunting prospect. A second Corporate Governance Network paper on the importance of mentorship for governing bodies, and how to make it happen, offers part of the solution. By learning to leverage the experience of others, whether governing body colleagues or not, governing bodies can avoid making the same mistakes and benefit from others’ successes.