Who will guard the guards?

Who will guard the guards?

Who is watching over boards as boards watch over management?  Of course in theory Boards are accountable to the shareholders/stakeholders but how can they get assurance that people they have appointed as their guardians are doing a good job?

The evolution of governance follows an interesting path.  It started around the time of the Wall Street crash in 1929.   However, it wasn’t until the late 1960s that the word ‘governance’ began to emerge in relationship to the workings of boards.  The major reason for setting up boards was that in the main owners were unsure that they could trust management and the owners wanted to keep their figure on the pulse, even it was at a distant.  Until the late 1970s early 1980s boards met and worked quietly keeping an eye on the company as it grew, but it was management who retained the power and responsibility for driving the business forward. 

Of course there were fewer corporations and those that existed were generally smaller in size than today’s organisations and so the owner-management relationship was not as distant as it is today.  During that time you would have most likely found the founder of the company taking on the role of the board’s chairman while his son/s was stepping into a managerial role.  However, as companies grew so did the number of shareholders.

It was shareholder unrest in the late 1980s that drove considerable change mainly following the 1987 share market collapse.  Clearly shareholders were seeing the salaries of managerial staff rise and large bonuses being paid for short-term gains achieved and sometimes doing anything to make a dollar without consideration for any of the longer term consequences. Shareholders recognised that impact on their investment in the long term and strongly expressed their dissatisfaction.

 In response Adrian Cadbury leaded up a UK team to seek ways to bring more transparency and accountability to the then emerging discipline of ‘governance’.   During the balance of that decade three other major committees also added to the debate and across the water in the US considerable work was also being directed to ‘managing management’.

It could be argued that what we have today is a similar situation to that which occurred before the 1980 changes accept that we can now ask who is watching over boards as boards watch over management?  Of course in theory Boards are accountable to the shareholders/stakeholders but how can these parties gain some assurance that people they have appointed as their guardians of their investment are doing a good job and looking after their investment ?

The past eighteen months has taken its toll on many investors yet it appears few of the decision-makers are being held accountability for the low return to the shareholders – the actual owners of the businesses.  Is BridgeCorp the only corporate that should be appearing in Court?

 Boards, like management are appointed to ensure the business runs smoothly on behalf of the owners –board members are not usually the owners of the business unless the business is a relatively small to medium sized enterprise.

Recently reviews of boards highlight many interesting results: we come across chairs of boards who are chairs of the Audit Committees, a board that does not value the Chief Executive yet the stakeholders believe he is doing a brilliant job, or boards working ultra vires as they have not considered what their purpose really is or their constitution is in need of a review.

 There are also board directors who turn up but make little contribution – I know of one that has never visits the plants so has little understanding of  how the business works at the coal face so how can she form an independent view of what needs to be done at these sites. 

The one that amusing me the most are the directors who vote for extended board tenures, when really every board needs an injection of ‘fresh thought’ every so often.  We, at Valeo International, advocate for a three year rotation with one third of the board replaced each year. This is not because those directors are not necessarily doing a good job but that a board needs to be challenged with new thinking in this very fast changing world that we now operate in.  Ten year tenures are far too long.

This lack of understanding and/or adherence to good governance practice brings into question the working of many boards – do they fully understand their obligations, do they work within best practice and are they working in the best interest of their shareholders or as in the case of Contact Energy appear to be acting in their own self interest.  

So who is “guarding the guards” – CCMAU is monitoring State and Crown-owned enterprises and there are organisations such as the Charities Commission that may take on a greater role once there initial task in realised.  But in general many boards, trustees, local  councils continue to operate in a manner similar to that of management when it was operating in the 1980s; that is no one really reviewing their performance while the boards themselves being unaware of their own shortcomings not doing anything about improving their own practices. 

It is time for shareholders and others to start demanding an independent review of how the guardians of their investments are carrying out their obligations.  So stand up ‘keepers of the guards’  and lets ensure  level of governance continues to be raised – the thought is intriguing.