Published on: 27 September 2015

Stepping beyond the summer of (boardroom) malaise. But how?

In recent months, news of another round of corporate scandals (Mintzberg thinks 'syndrome' is a better descriptor) have dominated our newspapers and Internet news feeds. All seem to be failures of corporate governance: HSBC, FIFA, Toshiba and, most recently, Volkswagen. While failure is nothing new, why have these failures occurred and why now? What's happening (or, more probably, not happening) in our corporate boardrooms at the moment?

While each case is to some extent unique, an interesting pattern starts to emerge if we stand back a little and take a holistic view of several failures together: a well-regarded business, with both a strong trading record over an extended period and great brand equity commensurate with its public reputation, hits turbulence leading to failure or scandal. Questions are asked, investigations follow, significant irregularities are exposed and fingers are pointed. Eventually the spotlight is turned onto the board. All roads lead to Rome, after all.

The seemingly steady flow of failures has seen a great malaise descend over the business and investor community during the northern summer. Measures developed to reduce the incidence of failure (including the OECD corporate governance principles and various in-country codes) have not had the intended effect. Indeed, they have rung hollow. To the casual observer, the situation seems to be bad, possibly hopeless. However, glimmers of hope are starting to appear.

In the past six weeks, I have asked all of the director groups that I have spent time with for their opinion—as a litmus test of sorts. A strong majority of the 350+ directors across several countries (England, Eire, USA, New Zealand and Australia) say things need to change. Most think that current conceptions of board practice and corporate governance are not helpful if the goal of business is value creation; and that strategy needs to feature more prominently on the board's agenda. While most of the commentary is anecdotal, it is consistent with emerging research.

Could this small sample of emerging and established directors of mid-size businesses be the vanguard of change? I've begun exploring ideas with several boards—on the assumption that the answer is yes. However, this is a case of the more the merrier so please get in touch if you want to 'join the party'.

6 Comments

Lloyd Russell - 1 week ago

Another thought provoking article that highlights for a robust discussion on three critical areas 1) true board and executive diversity, 2) risk profiling and 3) the three levels of governance - corporate, operational and values

Della Reynolds - 1 week ago

Capitalism requires continual growth so boards are asked to increase profits and cut costs on a perpetual basis. No account is taken of finite resources. In order to achieve the impossible some feel compelled to cheat. With the preponderance of 'light touch' regulation the risks are low, but over time the muck comes to the surface and the scam is exposed. No matter. Pay off the CEO give out some compensation and as long as the profit made is above the costs incurred its a job well done. What is missing in these corporate structures is a moral compass.

Peter Crow - 1 week ago

Good point Della (moral compass), although a strong moral compass is not a pre-requisite of growth and profit, nor does it necessarily lead to growth and profit. I know of many companies that do not achieve year-on-year growth (apart from CPI-level movements) yet the leaders are guided by a strong moral compass. Similarly, as you assert, many companies seek growth at the expense of ethical or moral conduct (however ethics and morals might be defined).

On capitalism and finite resources. My understanding of capitalism is that it is a system in which ownership tends to be private and 'profit' is an important goal. In contrast, state ownership is a characteristic of socialist variants. Resources remain finite, regardless of the 'system' and whether profits are retained or distributed more broadly across the population. In that sense, neither capitalism nor socialism are necessarily good or bad. Mild forms of both can and do work well. The problems come when forms become more extreme, as they did before WW1; with fascism; with communism; and, most recently, with some religious forms.

Finally, my experience and that of many others, is that high levels of regulation, be it to 'control' market forces or to give the state 'power', are rarely sustainable. Ultimately, the invisible hand of the market rises up, as it did with the actions of the Bolsheviks, the fall of communism and the Arab Spring, to name a few.

Duncan Noble - 1 week ago

I think we have to look beyond how these companies govern themselves to the larger question of how they are governed by society. What the VW scandal highlights is that we collectively trust corporations too much and that this trust is misplaced. As the saying goes, "In God We Trust, the rest must bring data". Clearly we need to tighten up the whole emissions regulation system, and the overall approach to how we collectively govern these immensely powerful corporations.

Peter Crow - 1 week ago

Indeed, the default response to problems is to regulate. However, increased regulation is probably not the 'best' answer. Sarbanes–Oxley; Dodd–Frank; and, the recently updated UK and OECD codes are regulatory responses to problems. While they were/are intended to define hard boundaries and introduce limits, they failed to do so effectively. History tells us that companies and individuals find ways around 'the system'. The important point to note from this though is that a strong focus on compliance means, by definition, the future gets little if any attention. Economic growth, the fuel for improvements in societal wellbeing, depends on companies and company leaders looking to the future not defending the past.

[I'm not suggesting this topic is easy or straightforward, or that my answer is sufficient, or even that an answer exists.]

Della Reynolds - 1 week ago

"Finally, my experience and that of many others, is that high levels of regulation, be it to 'control' market forces or to give the state 'power', are rarely sustainable. Ultimately, the invisible hand of the market rises up, as it did with the actions of the Bolsheviks, the fall of communism and the Arab Spring, to name a few."

The idea that 'market forces' will automatically control the corporate world (therefore light touch regulation) is a myth. The market is not a free market, but is influenced by political ideology and other factors. For example, the government give out subsidies which skew the market place, then they retract them on a whim and push start ups to the wall - solar/green industry a good example here. You have unofficial cartels such as those in the energy market keeping prices artificially high when world prices for raw materials fall. Not to mention food distributors who would rather dump perfectly good food in order to prevent a fall in market price. The market isn't fair - which is why you need regulation. Without regulation we all take part in a giant game of Monopoly with eventually one winner and every other player bankrupt.

"Economic growth, the fuel for improvements in societal wellbeing, depends on companies and company leaders looking to the future not defending the past."

Economic growth depends on innovation and creativity. Doing different things in a different way. But what happens to creativity when everyone is expected to sing from the same corporate hymn book. We could have moved away from oil based industries a long time ago. Hemp is one of the most versatile products on the planet, yet we make it illegal to grow. The big boys don't give up their power easily. So we continue to do what we have always done except that we need to produce more at a lower cost. We set targets and sanctions for those who don't achieve them. But someone always pays the price either the environment, animals or the workforce. That extra has to come from somewhere.