Key principles to ensure good corporate governance: Part 1

Ducks in a row

Corporate governance has evolved over the years in line with the many challenges posed by government policies and as a result of the corporate scandals seen around world. Unfortunately, it seems that most of the advances in governance guidelines come only after a corporate controversy has exposed another ‘kink in the chain’.

We may sound like a broken record at eShare as we constantly raise the importance of corporate governance, of which we are strong advocates. We firmly believe that it is absolutely vital to the successful running of companies no matter what the sector.

In this two-part blog series, we will be looking at the key principles contributing to good governance and examining how organisations have been getting them wrong. The principles covered are recommended by most corporate governance guidelines, including those by the OECD.

Capability

The first principle, and the most logical place to begin with, is the capability of a board and the CEO. We need to ask whether the board members have the right mix of skills, experience and ability to manage and monitor the company effectively?

Recently, we have seen the capability of Mike Ashely, CEO of Sports Direct, called into question. Ashley was interrogated by a Parliamentary Committee about his company and MPs declared that Mike Ashley was not, in their view, a “fit and proper person” to be a director of such a large company.

In front of the Committee, Mike Ashley admitted that the £2.2bn company, which he founded 34 years ago has “outgrown him” and that he probably does not have the ability to manage it. “It’s like being a tiny inflatable one day, and in control and the next you wake up and you’re on an oil tanker”, he said in response to questions about whether there needed to be a review of Sports Direct’s corporate governance.

Finding the right individuals for your board is one the most important parts of building a well governed organisation – but it can often be the most challenging. The aim should be to bring in members that complement your board’s existing skill set while, also providing a combination of new abilities and experience.

Mark Nadler, co-author of the book ‘Building Better Boards’ advises “you want people who understand the business and the industry that you’re in so they can think strategically”. Therefore, it is common practise for companies to bring in retired or former CEOs and those with extensive managerial experience.

Choosing a board member should be more than just the hard skills– and instead we should also consider soft skills such as communication, flexibility and openness given the amount of collaboration required for a board to be effective.

A recent survey by KPMG of 2,300 directors and senior executive investigated the issues of building a capable board. Only 39% of the UK directors said they were satisfied with their board’s combination of skills and experience.Unfortunately, 82% of those surveyed said there was a barrier when finding suitable directors due the lack of choice of those with the right amount of business experience and ‘specific expertise’.

Integrity

A board has to lead, or at very least – be seen to lead, the company to conduct itself in a fair and ethical manner. For the board to be effective it should be concerned about its integrity inside and outside of the boardroom.

A good board, and most vitally the CEO, must lead by example and should set an ethical tone for the entire organisation. Regrettably, it is becoming an all to common occurrence to see leading CEOs appearing in our media and infront of Parliamentary Committees for all manner of shame and greed. See our previous blog examining the growing trend of CEO scandals.

But it doesn’t have to be a scandalous act, like bribery or fraud, that can affect the integrity of the boardroom. An ever growing topic of discussing is that of CEO pay, with a worrying trend of CEOs receiving a high salary plus massive bonus regardless of how poorly their company is actually performing.

In October 2015 TalkTalk suffered a cybersecurity breach that led to profits being halved with costs up to £80 million and a loss of 100,000 subscribers. A cybersecurity breach always has severe reputational repercussions for your organisation, but what brought the board in to disrepute was the subsequent pay rise the firm’s Chief Executive, Dido Harding, received in the aftermath. Her pay was almost tripled from the year before the breach to to £2.8 milion. This was hardly an incentive for CEOs and boards to take cybersecurity seriously.

While Mrs Harding did take positive steps to redress the situation, by donating around £200,000 of her bonus to charity, the entire situation has arguably left a black mark against the leadership of the company.

Moving away from scandals, another important principle of maintaining integrity and ethics in the board is the need to have a gender and ethincially diverse boardroom. Though having a diverse board is not just “ethical” in terms of equal rights, it can also be beneficial to the way in which the board conducts itself as well.

Speaking at a summit last year, Lynne Anne Davis, President of Asia-Pacific at FleishmanHillard said ethics and integrity are strong factors in female leaders, which are crucial when it comes to misconduct issues at board level. She claimed that “When we’re talking about corporate fraud, I have a very, very hard time imagining a woman perpetrating that kind of fraud.” And continued “Male executives are statistically more likely to carry out fraud than females.”

According to research from index provider MSCI, companies with having ‘higher than mandated percentages of women on their board’ are actually less likely to be hit by governance-related scandals and controversies such as bribery, fraud or ‘shareholder battles’.

Matt Moscardi, senior analyst at MSCI, said the findings show a board with few or no women should be a red flag to investors.

Part 2

In part two we will cover the governance principles of accountability, sustainability and leadership and highlight how companies like Volkswagen and BHS have been the guilty culprits of failing to follow these principles.

at eShare Ltd eShare has posted on & filed under Governance Practices.

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