Fixing the right problem

Gillian Lees's picture

It's always the same.  Major corporate problems raise questions like 'where was the board?' or 'why didn't the shareholders complain more about what was going on?'  And then there is a great flurry of governance activity designed to improve the effectiveness of non-executive directors (NEDs) and encourage shareholders to take a more active interest in the companies that they 'own'.  This is certainly what we are seeing at the moment with the Walker Review of corporate governance in financial institutions and the Financial Reporting Council's review of the UK Combined Code.

The FRC has just published all the responses that it received (see - there are about a hundred of them, including one from CIMA of course, and I am slowly ploughing my way through them.  Many responses indeed look at issues such as improved training for NEDs, increasing the time commitment required and whether NEDs should have their own dedicated secretariat.

But at a conference last week at Cass Business School, which considered whether corporate governance could make a difference at financial institutions, one speaker (and somebody pretty influential and authoritative at that) questioned whether boards could actually make much difference at all.  Perhaps we simply expect too much of them.  What matters far more is the competence of the executive management.

It's a thought.  And then I read Balfour Beatty's response to the FRC.  They argue that we need to recognise that inherently unmanageable complexity arises principally as a result of executive over-stretch.  If a NED cannot grasp the business of a group in a sector they are familiar with in say 25-35 days per year, then Balfour Beatty argue that this indicates that the executive team is not really in a position to manage it.  That's an interesting rule of thumb.

By definition, the debate on corporate governance has to focus on board effectiveness and it is surely right that we find ways to help boards govern as well as possible.  But in all the current debates about how to prevent corporate crises in the future, it strikes me that there has been very little thought in the public policy arena about management as opposed to governance.  How do we ensure high levels of management competence in public interest companies?  At what point does an organisation become too complex for anybody to manage?  These are serious questions worthy of public discussion - not just the subject of management books that you can pick up at the airport.  If we want to find the right solutions, we have to address the right problem.

Just think of the following.  In the UK, much has been said about the former CEO of RBS, Sir Fred Goodwin, but I guess that the bulk of the commentary has been about his remuneration.  In comparison, you have to look harder to find much thoughtful discussion about his actual competence, training, management style, the team around him - and all the other factors that tell you how he actually managed the business - the good bits and the bad - along with a comparison with other CEOs!  Has anybody looked at whether RBS was inherently unmanageable so that nobody, however competent, could have managed it?  Let me know if you can find the evidence that proves me wrong!


Fixing the right problem.

But who has the problem? Over the past say 30/40 years there have been the recognisable corporate disasters. Where do you want to start Rolls -Royce, Lockheed, ...........Enron.....Arthur Andersen..........RBS. So the overwhelming majority of corporations simply get on with business as usual. Did HSBC screw up? Or KMPG? Presumably those organsisations that do not hit the headlines have a cultural integrity that emphasises doing the right things right with energy to contiual improvement. So after 25 years some entities are still in the FTSE 100 but what happened to the others, like football they were relegated, the team was ineffective. Cliff Moggs