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    Wither accountability?

    Accountability Corporate Governance Decision Making Ethics Governance Tough Questions
    During June, I spent most of my discretionary time reviewing articles about corporate scandals and failures, as reported in the mainstream media and academic press, and discussed on social media. They made fascinating reading, not only for the summaries, but also the amount of finger-pointing and defensiveness—an indication that accountability was missing in action in most cases.
    Consider the Carillion, Wirecard and Petrobas cases, all mentioned in a recent Financial Times feature article (paywall, sorry). The discussion concentrated on the accounting and audit professions; the questions being whether they should have detected the problems, and whether ethics should be a consideration. These are good questions, but they sound a little like positioning an ambulance at the bottom of the cliff. Disclosures, in the form of annual reports, audit statements, and various ESG-related reports, are necessary. But they are just that; disclosure reports. And the more complex the reporting and disclosure requirements, the more time management and the board needs to spend preparing and checking reports, to meet expectations. And with greater focus on reporting and compliance, the greater the likelihood that accountability will become discretionary.
    Accountability is one of four foundational elements of corporate governance. There are two aspects, namely, boards are charged with holding management to account, and they need to provide an account to legitimate stakeholders. (The others are the formulation and approval of corporate purpose and strategy; policymaking; and, monitoring and supervising management, to ensure the company is operated and strategy achieved within prevailing statutory and regulatory boundaries. Together, these four elements comprise the Learning Board Framework, a proposal described in The fish rots from the head, a book written by Bob Garratt, a doyen of corporate governance and board work, circa 1996. The LBF is the single-best approach to board activity that I have come across in my twenty-five years of board and governance practice and research, bar none.)
    As in life, enduring success in business (meaning, achieving and sustaining high levels of organisational performance) can be attributed to many things. These include, inter alia, a great idea, a clear and coherent strategy, excellent execution, capable and highly-motivated people, forces of nature, timing, effective leadership, luck (yes, luck), and more besides. Yes, success has many sources, even to the point of being idiosyncratic. 
    Failure is different. Even a cursory study of corporate failures reveals several common themes, most of which can be readily traced back to the boardroom:
    • hubris
    • ineptitude
    • malfeasance
    • incompetence
    • questionable ethics
    • corporate governance misunderstood
    • wrong expertise mix
    • weak engagement
    • lack of time
    Almost all of these themes emerge from poor behaviour and a leakage of accountability. Knowing what to do is one thing, knowing how to behave (and behaving) is quite another. Fortunately, help is at hand. Insights from research suggest five underlying behaviours are necessary if boards are to contribute well. These include strategic competence, a sense of purpose, active engagement, collective efficacy and constructive control. If any one of these is absent, the likelihood of the board exerting any meaningful influence or adding any value drops to nought. (If you want more information on this, please get in touch.)
    One final comment: The role of director is founded on trust—the fiduciary responsibility. And from this flows accountability—in role and in relationship. If boards place a low value on accountability, by not holding management to account for the achievement of operational and strategic goals; rubber-stamping advice from suppliers such as lawyers, accountants and auditors; or, not providing a candid account of performance to shareholders, regulators and other stakeholders, they deserve ​what comes their way.
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    Are TLCs important, or are they NMP?

    Accountability Corporate Governance Decision Making Governance Integrity Performance Strategy Sustainability Tough Questions
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    The opportunity to embrace a transport technology that is cleaner, quieter and considerably cheaper to operate (than petrol or diesel alternatives) is attractive—once the initial purchase price hurdle leapt. The purported benefits seem to be significant, but does the reality match the rhetoric? As with any proposal to embrace system-level change, the costs of moving from one technology to another are far from trivial. If an assessment is to be complete, the total lifetime costs (TLCs) need to be considered; that is, the sum total of all costs incurred over a product/system’s lifetime (includes manufacture, operation, disposal).
    In the case of electric vehicles, what of the economic, environmental and social costs of extracting metals for battery ingredients; logistics and manufacturing; replacement of batteries when they are spent; battery disposal; and, of upgrading the power generation and distribution network to provide adequate electrical power to recharge batteries? Many of these are being quietly ignored, it seems. Not my problem, some argue, as if out of sight is out of mind. This short article argues that when the TLCs are factored in, the benefits associated with a seemingly compelling technology (in this case the adoption of electric powered vehicles and other devices with battery power packs) may not be as great as what has been claimed.
    And so to the purpose of this muse, which is not to argue the benefits or otherwise of adopting electrically powered vehicles. Rather, it is to table an issue often overlooked by board of directors considering so-called strategic projects: total lifetime costs.
    When faced with a strategically-significant proposal, boards first need to check for alignment, by testing whether the proposal is contributory to the corporate strategy (spoiler alert: often linkages are tenuous). Assuming it is, directors should satisfy themselves that total lifetime costs have been included. Only then can the question of whether the recommendation should be embraced or rejected be debated.
    Why might this be important? Directors are duty-bound to act in the best interests of the company. That means taking all relevant information into account. 
    If boards ignore externalities, or abuse the social, environmental and economic capitals consumed in the operation of the company, the governed company is unlikely to endure over the longer term. And in so doing, directors may be exposing themselves, unwittingly, to legal challenge as well.
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    Is ESG a harbinger of something big, or just a TLA?

    Accountability Corporate Governance Effectiveness Governance Societal Wellbeing Sustainability
    The June solstice is almost upon us. Davos, the World Economic Forum's annual meeting of elite political, academic and business leaders (some would say, talkfest), is over for another year. Private jets have returned to base, and the thoughts of leaders (in the northern hemisphere, at least) are turning to summer holidays and, with it, relaxation, reading lists and an opportunity to cogitate. Meanwhile, leaders south of the equator press on, for the June solstice marks the onset of winter.
    Metaphorically, the June and December solstices are signposts: ​marker pegs that signal pending change.
    Over the past couple of years, I have been watching intently one signpost in particular, wondering whether it might portend a change in relation to board work, or whether it might be a mirage that can be ignored. ESG, a three-letter acronym for environmental, social and governance, was coined in 2005 by a group associated with the United Nations. The stated goal was to put pressure on companies to think beyond financial indicators as the primary indicator of business performance, and to report accordingly. 
    A veritable industry of so-called experts (many self-styled) has emerged in recent years, all claiming to help businesses respond well to ESG demands and expectations. Many business leaders, activists, politicians and directors’ institutions have latched on too, themselves motivated by various self-interests. That interest in operating sustainably and improving reporting is high is no bad thing. 
    However, to date, evidence to support the proposition that the embrace of ESG leads to better performance is yet to emerge. Indeed, cracks are starting to appear. Several critical thinkers have called out ESG as offering less than what has been claimed. Some have gone as far as asserting that ESG is a ‘solution’ looking for a problem (read: wasted effort). Whether it is or not remains to be seen. However, there is cause for concern: discussion has reached the point that advocates have deemed it necessary to make counter arguments, to defend ESG. That several different definitions of the term are circulating doesn't help. Boards also need to be very alert and ask probing questions, to ensure they continue to discharge their duties. In particular, boards need to assess whether ESG proposals are conducive to improved business performance, and if ESG is a harbinger of substantive change in the way businesses need to operate or yet one more TLA, a fad that will ultimately be consigned to the history books and, in time, forgotten. 
    That questions are being asked—openly—should be a catalyst for political, civic and business leaders to check that the aspiration (claim), intention (strategy), actions taken and resultant outcomes are aligned. On the evidence to hand, ESG is unlikely to be a panacea. Thus, a level of scepticism in relation to the purported benefits of ESG is warranted. ​​​
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    The case to SEE beyond ESG

    Accountability Corporate Governance Decision Making Performance Sustainability
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    ESG and sustainability are hot topics in business and, increasingly, civil society. Hardly a day goes by without one or both being mentioned in newsfeeds and across social and mainstream media. Since the term ESG was first coined in 2005, and more so through the coronavirus pandemic, researchers and commentators have promoted ESG as the answer to what have been held up as great issues of our time—issues such as changing climatic conditions; the impacts of fossil fuels; population growth; modern slavery; the excesses of capitalism; geopolitics; and, more besides.
    Shareholders are starting to acknowledge companies should be doing a better job, in terms of appropriately stewarding the resources used in the operation of their business and fulfilling their duties. Institutional investors in particular are applying direct pressure to refocus board attention and business priorities to tackle the great issues—their underlying belief is that ESG-based approaches provide more sustainable long-term value creation.
    What is one to make of these developments?
    Evidence to support claims that ESG-based investments outperform other investments is yet to emerge. The  question of why this might be the case remains open. It could be that investments have been poorly placed; expectations are unreasonable; measurement systems are inappropriate; and, probably, more besides. ​​​Of these possibilities, the spectre of inappropriate measurement systems looms large. 
    A couple of years ago, Ethical Boardroom, a magazine read by tens of thousands of board directors, advisors and executives, commissioned an article on the matter. I concluded that a measurement and reporting framework founded on the three main capitals used in business would probably provide a more informative and complete measure of sustainable business performance than ESG. A copy of that article follows. If you have any comments and suggestions on this, including criticisms, please do let me know—either in the comment box below or, if you prefer, a private message.
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    On directorship: Distinguishing signal from noise

    Accountability Corporate Governance Effectiveness Governance Performance Value Creation
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    The role and contribution of the board of directors in companies has become a source of fascination for many; curiosity growing with each corporate failure or significant misstep emanating from the boardroom. 
    On paper, the role of the board is straightforward: to steer and guide the company towards agreed objectives. The legal framework within which directors operate is both stable and adequate, duties are specified and the principles are clear. So, what could possibly go wrong?
    Guidance to help boards govern well is not in short supply. Many researchers have postulated the configuration of the board is material to effectiveness and outcomes; some say the key lies in board process and policy; and yet others point to boardroom behaviour. Consulting firms and directors' institutions have proposed models too. While these proposals are enticing, failure studies and other analyses suggest none provide surety in terms of helping boards operate effectively in practice. 
    One of the reasons reliable guidance remains elusive is that board work is far from straightforward. Long-term studies of boards informed by direct observations of boards in session are few and far between. And, boards need to consider many things, debate options, weigh up risks and, ultimately, make decisions—all within an environment characterised by ambiguity and change. And if that is not enough, the board does not operate the company, the executive does. 
    If a board is to have any hope of discharging its duties, much less govern well, a solid foundation is crucial. That means directors need to understand their role and duties, and make sense of information.
    • Role clarity: Boards that struggle to exert much influence beyond the boardroom tend to be confused about their role. Privately, a significant number of directors have volunteered they have become confused over the role of the board, what corporate governance is, and how it should be practiced. They say competing recommendations, each claiming "best practice", tend to obfuscate not enlighten. Further, many directors do not know (or, more charitably, cannot recall) the duties they owe. These shortfalls are an indictment on both directors themselves and the institutions that claim to represent them. How can a director discharge his or her duties well if they do not know what they are?
    • Making sense of information: Directors are bombarded by information as a matter of course—and volumes of data and levels of prescription are only heading in one direction: upwards. Executive teams have a propensity to produce retailed reports, as if to pre-empt questions or because they think it is required to satisfy compliance needs. Boards will drown in the detail if they are not careful. If the board thinks the executive is presenting too much detail, it needs to say so. ​Externally, lobby groups present arguments requiring boards to prioritise various interests or activities over others, and to make disclosures, in relation to ESG and sustainability in particular. Some groups have gone further, arguing for changes to the fundamental purpose of the corporation. Most proposals are well-intended responses to prior corporate missteps and failures, but some seem to be motivated by ideological preferences. Distinguishing what is material to the board's work and duties, from what is not, is a foundational skill for any board hoping to be effective.
    If a board is to exert any meaningful influence beyond the boardroom, directors first need to understand the duties of a director and role of the board. Competence gaps are not tolerated in medicine or engineering: No one would expect a doctor to use a carpenter’s tools, or accept crayon drawings from an engineer. And yet such acceptance is tacit amongst directors and shareholders. What is more, if a director transgresses, the likelihood of being held to account before the judiciary is relatively low. A commitment to professional development, and the professionalisation of directorship, are proposed as mechanisms to close the competence gap.
    Once in the boardroom, directors need to apply their collective knowledge and expertise, maturity and wisdom as they consider information, distinguish signal from noise, and make decisions. If that can be achieved, the likelihood of the board making an effective contribution greatly is enhanced.

    The gap between the board's provision of steerage and guidance (i.e., governance) and business performance has been at the core of my work over the past two decades, motivating my formal research, practical enquiry and contributions as a director. If you would like an update on recent progress, please contact me.
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    Morally-accountable governance?

    Accountability Corporate Governance Decision Making Integrity Performance Tough Questions
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    Much has been made in recent weeks of the invasion of Ukraine by Russia. Social and mainstream media has been awash with commentary, both about the situation on the ground, and of various moral and ethical issues arising, not to mention significant geopolitical and balance of power impacts. 
    The Western world has rallied in support of Ukraine. Governmental–, corporate– and community–level responses have been announced and taken including accepting refugees, providing humanitarian support, and organising fund-raising and community support. Governments have imposed economic and trade sanctions as well. Many companies have decided to withdraw from the market. Others have chosen to remain, for a variety of reasons. Some, who initially held the line, have subsequently changed their mind after feeling the effects of a backlash. Directors have resigned from boards too, signalling they have no interest in continuing to serve on the boards of Russian companies. ​
    To say the situation is fluid and outlook is uncertain is an understatement. In cynefin–speak,  the appropriate descriptor is 'chaotic', meaning rapid response is appropriate: searching for the 'right' answers is futile. 
    Despite the ambiguity and uncertainty, directors must continue to make decisions, to govern. In a crisis, most boards, rightly, focus on the here and now. Strategy and strategic initiatives are put to one side, and accountability may languish too. All available resources are applied to understanding and stabilising the situation.
    But after the heat has subsided and the situation is brought under control, boards need to take stock. They owe a duty of care (to themselves but also shareholders and legitimate stakeholders), for both their actions and those of management. Were the decisions made and actions taken during the crisis appropriate given the information to hand and prevailing situation at the time?
    The review may find the board operated within statutory and regulatory boundaries, and that decisions taken in averting the crisis were reasonable. But what if decisions and actions are found to have crossed moral or ethical boundaries? Where should accountability lie? The question of moral accountability cuts across  personal and professional reputation, organisational culture, and market confidence.
    And to the future, where should the board's moral compass point, what conduct is appropriate, and how should the board's actions be assessed?
    • ​What moral standard should directors be held accountable to (if any)?
    • What might morally-accountable governance look like, in practice?