Winning Ways through Corporate Governance

There is considerable disquiet in the community which is calling into question present practices of governance. Depending upon one’s perspective, the areas of discontent are clustered around the following:

Good governance is the board’s duty. It is responsible for setting standards and ensuring that the company achieves them. To put this into context, we will need to look in totality at the role of the board and to match this against current community expectations. We will see a gap between these expectations and current practice. The organisation and composition of the board will influence its effectiveness and, perhaps more than anything else, the chairman will have a major impact.

In Chapter 2, we dealt with the role of the board, and, in our suggestions concerning the board’s own governance, we urged that there should be a formal appraisal process to review the board’s workings. Directors need to be satisfied that there are clear objectives and procedures for the board, and they need a process for measuring their own performance. That process of formally evaluating performance will receive greater prominence as boards of directors increasingly find themselves under public scrutiny.

If capitalism came to an end in 1996, its future historians would no doubt write that, at the level of governance, its last five years were its most tumultuous. We are living in a time of unprecedented upheaval in, or reform of, corporate governance, depending on one’s point of view. Around the western world, corporate boards are becoming much more vigorous in exercising their responsibilities. In some well-publicised cases, this has led to open conflict with senior management. Such conflict reflects the increased anxiety many boards are feeling about their companies’ stewardship and performance. Reflecting on just one country’s recent experience will make the point. Over the past few years, American Express, Citicorp, Digital, General Motors, Goodyear, IBM, Kodak, Sears and Westinghouse have each been subjected to major, independent director-driven upheaval. The directors of these and numerous other corporations have overridden senior executives to demand large-scale reforms, frequently involving a change of CEO. Usually behind such moves has been the increasing restiveness of activist shareholders. It has been said, with some justification, that we have moved from entrepreneurial capitalism to managerial capitalism and now to shareholder capitalism.

There is some confusion between understanding the importance of the control environment in which an organisation exists and dealing with accounting aspects, which are largely about presentation and form. It is important to distinguish between the two. In our view the more important area to focus on is the control environment because this provides the greatest opportunity to protect value in either commercial or non-profit-making enterprises. In the case of the accounting rules and regulations evidenced in accounting standards and best practice, this demonstrates consistency and clarity of presentation and gives a reasonable chance of understanding the health of that enterprise.

This chapter investigates the notion of corporate governance as far as the board of a non-profit enterprise is concerned. We shall discuss various recurring issues confronting Boards of Directors. We shall look especially at the distinction between direction and management as it relates to organisations in this sector. We are concerned to suggest ways in which the relationship between Directors and managers can be made as noncompetitive as possible.

The corporate sector in particular must not only have strong governance standards effectively in place but it must also be seen to have these standards in place. Just as leaders are assessed for congruity between their stated message and their actions, the same is true with corporations. Leaders know full well that to be effective they need to have clear goals with a simple message clearly and constantly communicated to their target audience. The task of communication is a priority and a time-demanding one, as most business people can attest. It requires presentational skills which need to be developed, planning to produce a coherent communications programme and constancy of delivery to ensure that the message is heard. Most corporations, as well as non-profit enterprises, recognise the need to communicate to their constituents, but — at least in the corporate sector — it is unusual for much time to be spent communicating the issues of corporate governance. Indeed, the centrality of effort is around direct shareholder interest matters such as corporate strategy, financial performance, managerial competence and commercially specific issues such as brand awareness. Governance is typically dealt with in a formal way in the annual report or on an ad hoc basis in responding to press questions or criticisms as they arise.

Running throughout this book is the theme that governance adds real value to an organisation and that for it to be effective the standards laid down must be practised in spirit and be part of the ethos of the body concerned. All senior managers, including directors, need to have standards that are compatible with the values of the company and be satisfied that their own reputation is enhanced rather than diminished in their work setting. Professional managers, especially at senior levels, have as their most important asset their reputation which must be protected by holding appropriate ethical and professional values.