Corporate mishaps and failures have resulted in boards and governance receiving increased public interest. Despite considerable attention, confusion over what governance is, the role of the board, and how governance might be practiced has resulted in more questions than answers. So, what do boards need to do if they are to become more effective?
In this podcast, Dr Sabine Dembkowski, Founder and Managing Partner of Better Boards, discusses the essence of good governance with Dr Peter Crow. Peter holds a doctorate in corporate governance and strategy, has served on the boards of private and family-owned companies and has an extensive international record advising board.
"We're working in an environment where we're what we're trying to achieve is a little bit camouflaged"
Peter starts by acknowledging that boards have a multitude of pressing issues. In addition to these issues are stakeholder and activist expectations and compliance demands. So the environment outside the boardroom is extremely dynamic and board work becomes more and more challenging.
"The hurdles are many"
Peter explains that he is regularly asked three questions that have not changed significantly in over 15 years. These are: what is corporate governance, how should it be practiced, and what is the role of the board? The first hurdle is understanding the job, as there are often multiple different understandings of the role of a given board. The second hurdle is the statistic that one in six directors understands the business of the business. Worse, he relates that only about one in 20 boards have a single united view as to the overall purpose of the company.
"One size fits all, or "best practice" is deeply flawed"
Peter jokes that things would be fine if boards were made up of something other than people. He describes the problem that the board does not run the company; that is the job of the Chief Executive, and the executive team's job. The board's job is to make decisions and then ask the Chief Executive and their team to implement them. While he recognises some universal principles, he believes "best practice" is deeply flawed and should be replaced with "best fit."
"I wish that some of these corporate governance codes would be shortened greatly"
Peter relates that when a problem arises, the lawyers or regulators become involved, and the reaction is to design more regulations or add to the code. The goal is to help boards do their job properly, yet counterproductively, this focuses boards more on complying with the regulations and codes, leaving them with less time to do the rest of their job (which is value creation).
"If a board is to have a positive impact in a sustained way three things are necessary"
Peter describes the balance between value protection, compliance, and value creation. Peter says that if the board is to have any impact on the future performance of the business in a sustainable way, then three things are necessary. Firstly, strategic competence. The second factor is activity and engagement. The third factor is behaviour. Peter believes that this is like a multiplication equation. If any of these elements are missing, the likelihood of the board adding value can drop to zero.
The three top takeaways from our conversation are:
1. Governance is an activity, not a legal framework or structure, although the laws and regulations are important because they define the boundaries. However, they are not governance themselves. It's about steering and guiding the organisation.
2. Boards can make a difference.
3. Effectiveness is a function of what directors bring, what boards do, and how directors act and interact.