Cutting through the clutter in corporate governance

By: Lawrence Loh
Tuesday, 26 May 2015 17:13 | Comments (0)

For years management has been seen as the guiding force in business, sufficient to carry many companies through. Aspiring managers would be taught the act – or art – of management at business school.

Of late, however, a new notion called "governance" has emerged as a mainstay of the corporate world. Academic literature and popular media have embraced the concept and we now have to both manage and govern any corporation.

There seems to be clear distinction between management and governance and in fact there is a prescribed division of labour between the two domains. The managers are the executors and the governors are the overseers, although there are also cases where the same persons perform dual roles.

So it might seem all is well; good governance and management are accepted norms at good corporations.

Governance complexity

When it gets interesting however is when things start to go wrong. At the first sign of corporate mishap, accusatory fingers are quick to point the blame at governance.

With the plethora of company and board issues, the agenda for corporate governance is getting just too crowded and that congestion serves only to distract the board. We run the danger of having corporate governance chasing its own tail.
It's as if management exists only to claim the glory of business successes and the buck is passed to the governing body – the board of directors – when things go amiss.

Indeed, with the entrenchment of the criticality of governance, never before has the process of becoming a company director been so onerous as now. Qualified and competent people seem to shun getting on to corporate boards.

So what exactly is the crux of the problem?

The scope of corporate governance has proliferated, like a runaway horse. As problems occasionally surface, which are well-covered by the media, more requirements are added, compounding and elevating the complexity of governance.

Back to basics

What's needed, I would argue, is to re-examine the original intent of corporate governance.

Companies are formed as they are more efficient ways of organizing business activities, than being mere proprietors. Most importantly, they are better means to raise capital for business growth.

Investors who part with their funds are the owners, and the decisions on how to apply these funds are delegated to managers.

Enter here the role of corporate governance, which exists to ensure managers do not abuse their authority for their own interests.

In short, corporate governance is basically the check-and-balance mechanism to ensure the alignment of interests between managers and owners. Such is the fundamental mandate of governance.

Governance clutter

boardroomWhen companies are incorporated, the roles and expectations (so-called fiduciary duties) of directors are well defined - from the legal standpoint at least.

Over time, the board of directors then absorbs a specific range of oversight duties pertaining to the company. These may include audit, compliance, corporate social responsibility (including sustainability), investor relations, risks, among others.

In some ways, these are the so-called extrinsic "problems" that boards have to address.

And then there is a whole set of "organic" matters facing the board of directors which are intrinsic to themselves.

These include board issues like chairmanship, composition and independence, as well as director issues such as selection, training, appraisal and remuneration. These are the "solutions" to the problems of corporate governance, but have often bigger problems in themselves.

It appears corporate governance is somewhat like a garbage can where problems and solutions are all mixed up. In fact, there are sometimes solutions looking for problems. And this has to do with the ever expanding range of things the directors have to answer for.

With the plethora of company and board issues, the agenda for corporate governance is getting just too crowded and that congestion serves only to distract the board. We run the danger of having corporate governance chasing its own tail.

So what can be done?

Here are four steps boards can take to manage the firm and maintain a grip on the growing demands of governance:

1) Perspective

ThinkAloud4Boards should have a sense of perspective. Stick to the basics; stay true to the very purpose of corporate governance, and avoid being sidetracked by the media stories of the day.

Regulations such as the Sarbanes-Oxley Act in the US and even corporate governance codes in many countries have, in fact, been knee-jerk reactions to various corporate scandals. But when the dust settles, what remains is a costly and unwieldy system that often bogs down companies rather than solves the problems.

In specific terms, it will be a useful exercise at the first board meeting to devote some time to discuss the fundamental purpose of the board. Drill deep into the question "why are we here?" Use that to forge a shared understanding and consensus.

2) Priority

Amongst the vast array of pressures and requests, it is important to know what is critical – what should take priority – and put the stress on these. Know what is most important. What is urgent is not always what is important. Win the big war, not the small battles.

To effectively prioritise, it is necessary to form all the dedicated mechanisms that can free up the board to do real work on the big issues with the big impact.

For example, it is worth having a more focused committee that deals with compliance per se. This committee can oversee regulatory requirements and ensure that the laws and codes are handled by the company appropriately.

Naturally, this committee reports to the board - it should be chaired by a board member and include other board members in its composition. Given the technical nature of the work, however, it may be proper to bring external professionals into the committee.

3) Platform

To broadly guide the discharge of the board's responsibilities, it is useful to have a working platform. This can be a functional framework that maps the key points of risk in the company, with particular emphasis on reputational risks.

Other categories of business risks pertaining to finance, operations and technology may also be included.

The objective is to know where the vulnerabilities are. These are the weak links that the board should be particularly concerned with.

Ultimately, the board's role is about risk management, especially identification and mitigation.

4) People

Finally, get the right people on board. Above all the best arbiter of good governance is still people and there are no processes or procedures that can replace human judgment.

It is strange that when companies recruit new employees, the process is often very rigorous and elaborate. There is every duty of care in ensuring the right people are taken in.

Yet getting directors on to the company's highest governing body is often very casual. It is not that the potential board members should be subject to a whole gamut of interviews and tests. But at least, we should really improve on the "buddy system" of bringing in new directors.

Ethical foundation

Beyond these four guiding pillars above – perspective, priority, platform and people – good governance should be underpinned by a strong ethics base.

There is perhaps no need for a special committee on ethics as this aspect should be already addressed across the board. It should pervade the entire company beyond the board.

A board can spend all its time controlling each and every detail of the company, but it will still be difficult to be able to catch all problems. Go for the long haul, weave instead the ethical fabric and build the ethical foundation.

In the long run the best interests of the company are indeed best served not by a compliant board, but by an ethical board.

A version of this article appeared in Ethical Boardroom, Spring 2015

Author Profile

Associate Professor Lawrence Loh is deputy head and associate professor of strategy and policy at the National University of Singapore Business School. At the School's Centre for Governance, Institutions and Organisations, he leads the Governance and Transparency Index project which annually ranks all companies listed in Singapore.

Most Read


A change of path for Singapore Airlines

With the rise of upstart competitors bringing new challenges in the aviation industry, what can SIA do to maintain its leading position?


Tainted milk: Unravelling China’s melamine scandal

Five years on, Associate Professor Vivien Lim looks at the interplay of factors that contributed to the crisis.


A failure of focus: Lessons from Kodak

Where it went wrong for a once mighty American industrial icon, and how other firms have got it right.


The Art of Collaboration vs The Art of War

The contrasting leadership philosophies of Zheng He and Sun Zi, and their relevance to today's business world.


The impact of superstition: Writing on the wall

Superstitions might seem a harmless quirk, but when they start to affect asset prices they have an impact on national development and welfare.