Corporate Governance – what is it?

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“Corporate governance should be the next item on the agenda of every single board meeting in the country.”

That was Treasurer Scott Morrison following APRA’s scathing report on the board of Australia’s largest bank, the CBA. APRA found that there was an insular culture with inadequate oversight by the Board of emerging risk. The directors had become complacent and had insufficient oversight on management.

This is the latest in a series of reports and enquiries that have shone a light on the poor corporate governance practices of Australian boards both for profit and not for profit.   We have had:

  1. The Banking Royal Commission’s revelations about the failures of the AMP board;
  2. The enquiry into the problems on the Board of the NSW branch of the RSL that began with inappropriate payments to Directors; and
  3. The report by the Royal Commission into Institutional Responses to Child Sexual Abuse which identified the lack of accountability, particularly within hierarchical church institutions, as a contributing factor to the mistakes that were made in responding to allegations of abuse.

How does this happen when there are more Directors than ever before who have undertaken some type of formal training such as that offered by the AICD and a plethora of tools and programs for Board’s to use?

In an effort to identify the link between governance practices and performance, the AICD commissioned a review[1]of the research into this elusive connection. Amongst the key findings of the review was that:

  1. Research does not provide any conclusive links between governance practices and performance;
  2. The outcomes of research are contradictory and provide little assistance in identifying good governance practices; and
  3. There are no readily identifiable causal connections between governance practices and outcomes.

In summary, the research conducted to date does not help Boards identify governance practices that will lead to the outcomes they want. So, if the academics and experts can’t help, how does a Board, particularly a volunteer Board in the not for profit sector, go about adopting good corporate governance.

Here are my thoughts on what the problems are and how they can be addressed.

Lack of Understanding

Too often organisations purchase a governance manual or set of policies and think that is the job done.  They don’t understand how to apply those tools nor, more importantly do they understand what they are meant to achieve.

At its core, governance is about holding organisations and the people that run them to account.

It is the systems, structures and policies that control the way an organisation operates, and the mechanisms by which the organisation, and its people, can be held to account.

Integrity, transparency and accountability, risk management, culture and ethics are all important elements of good governance and can help an organisation meet its objectives.[2]

Successful organisations set high standards for themselves and are governed by a Board that is prepared to champion those standards and ensure the organisation strives for continuous improvement.

Lack of Questioning

It is essential the Directors are prepared to question and challenge each other to ensure rigour is applied to all decision making. They should also be prepared to question and challenge management.

This does not mean nit picking over minor details in reports, it requires careful consideration of the issues, thorough preparation for Board meetings and being prepared to raise the difficult issues. Not simply going along with the Chair or the CEO.

Respectful debating of issues requires a balance and can only be achieved if there is mutual respect at the Board table. Highly conflicted Boards are dysfunctional and serve no one but equally a Board on which everyone always agrees is unlikely to confront the difficult issues.

Lack of Diversity

The best decisions are made when there is a diversity of views considered.  This cannot occur if Directors all have the same gender and are about the same age, and have similar backgrounds, education and experience.

Complacency

Success can often lead to complacency with Directors thinking that as all is going well there is no need to check so carefully or question so closely. The experience at the CBA has shown that this can be a dangerous time and Directors can never rest on the laurels.  To quote the Treasurer again, “it is not a retirement job; it is a very serious job”.

Complacency can manifest itself in Directors who think they have done the course, or have the qualifications and therefore know all they need to know about their role. Being a Director is like any professional position, it requires continuous learning, keeping up to date and always being prepared to improve your skills, decision making capability and knowledge.

Auditor

Too few Boards take the opportunity to talk to the auditor and invite the auditor to address the Board and answer questions. That is a missed opportunity. The auditor can provide valuable insights into risks and has a wealth of information and knowledge about an organisation that can greatly assist Board decision making.

If you would like more information on these important issues, please contact me.

 

[1] Ford, G & Rooney, J 2016 ‘Emerging themes of corporate governance and firm performance, AICD Governance Leadership Centre

[2] Report of Royal Commission into Institutional Responses to Child Sexual Abuse Volume 16, Book 2

Joanne O'Brien

An expert with years of experience in, and passion for, advising the not for profit sector in all aspects of their operations from creation, management, mergers and governance through to risk and compliance and beyond, particularly in the aged care sector.