Is governance a dirty word?
Having recently been involved in a project to change a governance model, as well as the fortune to attend a seminar hosted by OutStanding on unlocking board potential, I was interested to discover that governance is regularly perceived as being ‘bad’ or ineffective. It struck me that whether it’s a management/leadership team, a transformation programme, or a corporate board, in times of increased risk there can be a temptation to turn to governance as some sort of silver bullet to address a multitude of corporate sins.
For me, there is enormous danger that it isn’t just this old fashioned way of thinking, but a more fundamental and misguided understanding of both why things are the way they are, and how we might get things to be the way we want them to be. If you think governance will address an underperforming board member, or you’re using governance to force issues to the fore that are not being addressed, then it might very well work – but governance in this case is being used as a weapon, and that’s not really what I think it’s there to do. Business has been using governance as a tool to plug the gaps rather than to add value in its own right. So when people use the word governance they often mean something else, and this has muddied its use and definition.
My second observation was that governance is a victim of gradual evolution and heavily influenced by the most powerful people within it (often the Chairperson or leader). Their beliefs and values will of course shape and limit the governance, but governance (often a byword for control) has a propensity to be tweaked and managed over time rather than being specifically designed and then monitored for effectiveness or success. A lack of purposeful design would tend to indicate that we don’t understand why we want/need that governance in the first place.
So here I am again, dumping my thoughts onto e-paper, and once more unsuccessfully attempting to distil my thoughts on the subject into something more succinct. So perhaps grab a cuppa and have a read of my mini-novella on governance…!
To my mind governance should be a structure you put around the world in order to enable – sometimes it’s the enablement of strategy, sometime the enablement of appropriate risk mitigation, and often it’s to enable quick and efficient flow of information ratify and challenge strategic/management decision making.
Good governance addresses the balance of the power struggle between compliance, risk, reward and value – too tight or too loose and the outcome is the same; you’ll frustrate your strategic aims. Governance is about selecting the right balance of those factors that will maximise the effectiveness of your business strategy.
But that balance between risk and reward was, and remains, a choice – governance will never be able to take away that paradox, and you can’t mitigate risk to the nth degree through tightly controlled governance and still expect that innovation will flourish. We have to take some risks if we’re going to maximise our achievements, but taking on too much risk might result in the opposite of what we’re trying to achieve.
So what does good governance look like? Well in the spirit of the idea that governance needs to be suitable to achieve the right balance depending on the organisation, I believe it’s a pick and mix of the following (none of which are rocket science you’ll be pleased to hear). Realistically, good governance is about optimising the specific combination of your needs – but more importantly, connecting with exactly how that governance will impact your risk or reward accordingly.
1) An understanding of your strategy and risk appetite
A strategy without a risk appetite means you’re sailing without a Captain. How can you choose what direction to go in if you haven’t bestowed the operating environment with a context of the direction(s) you’re willing to go in and the mode of transport you’re willing to take?
More fundamental than this however, is a requirement to define what strategy means to the governing body. The definition of strategy can mean many things to many people (such as setting vision and tactics, being a leader in industry, or the where and how to win) so it’s vital to set out the parameters of what it is or isn’t so you having a reference point for the governance to hang off.
The irony is that CEO’s often struggle to articulate well what they mean by strategy. The Boston Consulting Group (BCG) conducted some research on board effectiveness and from this identified 10 golden rules of board management – number 1 was to agree the primary purpose of the board, its role in strategy, a definition of what strategy means in this context, and the expectation of individual behaviours. Without these things governance has no properly defined jurisdiction.
Connected to this, of course, is once the direction has been set have we also set some parameters around the risk we’re willing to undertake on our journey to get there? The critical element being that governance is not a response to risk in itself but an enabler of risk management.
The purpose of having both the strategy and risk appetite together is that provides a framework to determine what then would be a proportionate response to risk management scenarios. Understanding proportionate response gives you a yardstick against which to measure how effective your governance is, and whether it meets the ‘too tight/too loose’ test.
David Isaac, Chair of the UKs Equality and Human Rights Commission, stresses that any board should be perceived as useful. Therefore in defining the above the exec must buy in, and the organisation must equally know and understand what it’s about.
Strategy and risk appetite are the foundation on which to build the governance.
2) Diversity of thought
No matter what governance you have, ultimately you are limited by the people who operate it. Having diversity of thought across those governing and those doing-the-doing is paramount to maximising the effectiveness of governance.
Diversity of thought can be a minefield to navigate with several competing sub-issues to consider:
a. Diversity of thought needs a reference point. If you have 20 diverse people with 20 different voices you still need a common context to harness that power. When everyone disagrees all the time because they think so differently, the effect can be just as paralysing as overplayed governance.
b. Personal motivation and passion are important in the way diversity of thought manifests itself through the governance. The Chairperson is the biggest influencer of board culture and operation - to be effective in a governance role individuals need to have the personal motivation and passion to want to be effective. Anyone who isn’t appropriately incentivised will most likely display inappropriate behaviours or be too easily persuaded/influenced by others thereby losing the most important aspect of good governance - independence. If governance becomes a club where everyone panders to a Chairperson’s personal vanity project, then the lack of diverse thought will lead to a lack of effectiveness.
c. Diversity and inclusion interventions to assist with diverse composition of the board need to be genuine in order to be effective. Just because someone is from a D&I population doesn’t mean they’ll speak up when it’s most important to. The culture of the governing body will substantially affect this.
d. However you define what level of diversity of thought is required for the ‘perfect’ governance, non-executive directors are cited as adding more value to the strategic debate. This is mainly because time constraints and a limited understanding of the business/industry allow them to be more focused, and arguably give them the remit to ask more pertinent questions without feeling constrained.
So, in balancing the need to have diversity of thought alongside retaining the ability to make decisions efficiently in a common context, individuals should ask themselves 2 questions when encountering challenges in governance:
How diverse am I really? (Am I just thinking like everybody else?)
Can I back my position up with reason, logic and data? (Am I a lone voice because I’m wrong, or is everyone else’s thinking not diverse enough?)
The right mix of diversity of thought will provide an objective point of view, and will support the governance and decision making processes. The wrong mix has the potential to encourage paralysis of governance effectiveness.
Diversity of thought can be either an inhibitor or catalyst for governance effectiveness.
3) Management information and meeting styles that support decision making
Throughout the research undertaken by BCG the practical aspects of good governance were heavily linked to both appropriate management information and having well-structured meetings to maximise the effectiveness of the time that people spend together.
“If you get the business model or strategy right, you can achieve a huge amount, even with average management – and on average, management is average”
The point of this quote (which I love) is that just because something looks good, doesn’t mean governance should stop. Really great governance should point out that things could be even better if there is space to do so, even when things are going well.
The collective view at the Outstanding seminar was that the governing body needs information from sources other than internal management information. Perhaps obvious, but without decent external information and benchmarking it can be hard to know whether you are on/off course. Clearly it’s business 101 not to focus only on the internal.
In order for this information to be most useful it needs to be supported by a good meeting hygiene and proactively striving for high quality information:
The agenda should be actively managed to focus on the long term. If it’s being tied up with short term thinking then take these things off the agenda. Unless it’s a serious issue that needs drawing to the governing board’s attention it is the job of management to remedy and think short term.
The best way to improve clarity, objectivity and pertinence of information provided to governing boards is through a systematic and sustained approach in order to embed new behaviours. Alastair Flannaghan from BCG noted that the best Chairs are usually those who are draconian in the operation of the meetings, for example:
Limiting the number of pages a paper can be
a. Quality screening of papers in advance by the secretary and rejection of any that are insufficient
b. Removing items from the agenda which are not ready to be seen
c. All papers to be pre-read in advance, no additional material to be walked into the meeting
d. Anyone who hasn’t read the paper cannot ask questions about anything which would be covered by pre-read
And if you’re going to have high quality information, and you understand what the strategy and your risk profile is, then all of this must be underpinned by a simple set of subjective and objective KPIs. In order to govern most effectively you need well understood and connected measures against which to make assessment of headline performance.
One of the more interesting pieces of advice I encountered was centred on the challenge for governing body members to be able to assess information quickly and understand it. It was recommended that board members should occasionally get ‘back to the floor’ to gather their own front line intelligence from the business, without being escorted by management!
For information to be appraised as being of high quality the true litmus test was whether it was understandable to the individuals, whether standard formats and conventions were used for papers, and whether it obviously linked to the headline performance.
It was pointed out that where risk and compliance was concerned there was a substantive link between boards that have too many or too large papers being presented. So if you are being overwhelmed with information it may well be because the board is too focused on risk and compliance. In these situations it’s important to take stock and assess what the value add of the papers is and whether meeting a quality standard would improve the effectiveness of the board operation.
Management information and meeting style are the key ingredients to effective governance.
4) Performance measurement and continuous improvement
For governance to remain effective long-term then surely the idea that we should review the performance of those governing is a given. In the BCG research however the number of boards who had their own performance formally appraised was incredibly low.
How do the governors independently review their own performance?
Governance is not a single set of rules and processes to control strategic delivery, it is a structure put around people to ensure maximisation of that strategy. So if the people are no good, so too will be the limitations of the governance to be effective and the governors to assess their own performance.
In my view governance should be continuously reviewed for effectiveness just like any other business process. If we’re not making regular assessment then we cannot say for sure whether it is really keeping the strategy honest.
The BCG golden roles for board effectiveness include a recommendation that a well-rounded and personal induction plan is a must for those in positions of governance so that they understand the context and can add value – the rules of the game as it were. It is also essential that there is regular assessment for the performance of the governing body, and not just by those that govern, but from an outside perspective.
Dr Ann Limb, Chair of The Scout Association, was evangelical about having objectives relating to the delivery of good governance for all those in governance posts. People are much more likely to deliver if they’re held to account and by the mere fact of performance being under scrutiny. It doesn’t have to be heavy handed, it needs to be adequate and proportionate.
Performance measurement and continuous improvement are needed to maintain good governance.
5) Don’t be afraid to shake your governance
Whichever often misquoted saying you prefer it does remain a truth that the electric lightbulb/car was not invented through the continuous improvement of the candle/horse. Governance is not an exception, and sometimes there is merit to be had with starting from scratch, with what you don’t know, to try something and see if it works.
Things going wrong are undoubtedly a catalyst for change – bigger stable companies won’t make changes as quickly – so if the governance doesn’t seem to be working it’s probably a good time to try and understand why. Overhauling governance is an opportunity to address your strategy, and should not be seen as a threat to risk management but as an enhancement (if you get it right).
In the end governance is an approval process – the board approves endorses and leads on strategy but doesn’t create or design it. Good governance challenges the business to be its best it can be, and therefore good governance must be continuously improved in order to be effective.
Shaking and road testing helps to expose strengths and weakness in governance, assuring its robustness.
So perhaps nothing controversial in the above however the research undertaken by BCG revealed that there is still a chasm between the inward and outward perception of governance, and how that plays out in reality.
When participants in the BCG survey were asked what the role of the board was 33% agreed that strategy was a major role. Only 11% answered the same for compliance governance and risk, 5% said adding value, and 6% said assessing the performance. However, contra to this, when asked what the board spent most of its time on the majority said that there was a much bigger increase in compliance and risk compared to other areas.
Throw in a question about whether they thought the board added value to the organisation and the picture becomes more confusing. Only 33% thought the board added value to a great extent, 22% were confident that the board added value, and a whopping 44% thought the board added value to a lesser extent.
So when boards are still not getting the balance right by their own admission, it’s undoubtedly worthwhile looking at your own governance composition.
The optimum mix for governance will depend on what’s right for you and the aims of your organisation. However what the business needs is probably not the governance you’re operating today unless you’ve forensically analysed what it does, how it performs, and then made a proactive decision about how you want it to look. Good boards don’t allow risk and compliance to overshadow value generation, but they do respond proportionately and manage proactively.
Governance needn’t be a dirty word if it’s being deployed in the right way.