By Dr Lawrence Loh – Deputy Head & Associate Professor of Strategy & Policy at the National Univ. of Singapore Business School
Organisations have been deemed to be managed for quite some time. The field of ‘management’ has been sufficient to carry many companies through and managers just needed to go to business schools to learn the act (or the art) of so-called management. But of late, a brand 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 a clear distinction between management and governance. In fact, there is a prescribed division of labour between the players involved in 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 seems all is well; good governance and management are accepted norms at good corporations.
But it is interesting. When any corporate mishap happens, fingers point first to governance. It is 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 there is failure.
Indeed, with the entrenchment of the criticality of governance, never before has the process of becoming a company director been as onerous as it is now. Qualified and competent people seem to shun getting onto 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
I think it is necessary to re-examine the original intent of corporate governance. Companies are formed as they are more efficient ways of organising business activities than being mere proprietors. More notably, 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 – this is the well-known principal-agent relationship. Corporate governance exists to ensure managers do not abuse their authority for their own interests, which may be different from those of the owners.
In short, corporate governance is the check-and-balance mechanism to ensure the alignment of interests between managers and owners. Such is the fundamental mandate, the rudimentary charter of governance.
“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”
When 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 and 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 that are intrinsic to themselves. These include board issues, such as 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 often have 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. There is a serious congestion and it serves only to distract the board. We run the danger of having corporate governance often merely chasing its own tail.
Action for results
So what can be done? With so much to do in governance, how should boards ‘manage’ (it seems ironical that to govern effectively now, boards have to manage, not just govern)?
- Perspective: First, boards should have a sense of perspective. Stick to the basics; stay true to the very purpose of corporate governance. Avoid being side-tracked 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? It is good to forge some shared understanding and consensus.
- Priority: Second, amongst the vast array of pressures and requests, it is important to know what the critical ones are. Stress on these. Know what is most important. What is urgent is not always 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 its real work on the big issues, the big picture and the big impact. For example, it is worth having a more focused committee that deals with compliance per se. This committee can oversee the regulatory requirements and ensure that the laws and codes are handled by the company appropriately. Naturally, this is a board committee that 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.
- Platform: Third, to broadly guide the discharge of the board’s responsibilities, it will be 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.
- People: Fourth, in the overall scheme of things, the most final arbiter of good governance is still people. Get the right people on board. There are no processes and procedures that can replace human judgement. Otherwise just have a rulebook and all is well. Indeed, if everything can be captured in a rulebook, there is no need for the act of management, or even governance. On a related note, 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 onto the 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.
Beyond the four guiding pillars above – perspective, priority, platform and people – good governance should be undergirded 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.
The best interests of the company are indeed best served in the long run not by a complying board, but by an ethical board.
About The Author:
Dr Lawrence Loh is deputy head and associate professor of strategy and policy at the National University of Singapore (NUS) Business School. At the School’s Centre for Governance, Institutions and Organisations, he leads the corporate governance ranking projects with various strategic partners in Singapore and ASEAN.