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The Integrated Governance Lens

09/07/2019 1:55 PM

The Integrated Governance Lens

THE INTEGRATED GOVERNANCE LENS

A critical role

The critical role of governance is more strongly valued today than ever before. Whether the organisation’s directors and leadership group believe this fully, goes to the insight into their governing roles and responsibilities.

The gap between an alignment of the organisation’s governance architecture and practices, and what actually happens day-to-day tells us much. It discloses the effectiveness of its governance framework, settings, basis for improvement and platform for facilitating the forces for integration.

An important reflective question which follows relates to whether an organisation has a lived governance environment, which enables it to achieve its purpose.

Governance objectives

Every organisation needs the know-how and overall capability and commitment of its directors and leadership group to achieve its governance objectives.

While questions of the composition of the board may be raised, just as important are many other aspects including addressing what the directors and collectively the leadership group are doing with respect to the organisation’s processes and how it tracks and has visibility across the whole on these organisational matters. This is to be owned by the organisation’s governance leadership group.

Governance working relationships

What follows is a fundamental question of what is the board’s and leadership group’s governance working relationship with and throughout the organisation, and how its importance is treated?

In other words, from a governance lens, what is happening when one group, area, function, or level is interacting with another – how constructive and positive is this? How do we know? Do we care enough to have articulated what are our expectations? What is expected? And, could it be better? If so, what needs to be addressed?

This requires of course, that those responsible for the whole of the organisation have a level of appreciation firstly that their organisation is but one operational system; and secondly, this shapes and divulges the nature, role and responsibilities, whatever that may be, especially as it relates to relevant others within the organisation, and on a day-to-day basis.

The Global agenda

The critical missed opportunity flagged by this statement is raised when organisations are over-weight in preparing global agendas – however fulsome that may be; but falling short when it comes to the deep and meaningful engagement across and throughout the various organisational levels: be that by country or region, corporate levels, business units, functional teams etc.

There is a risk that each level or natural grouping of people are nurtured in a vacuum, thereby left to develop their own agenda, for want of anything better. This can only lead to what at best can be described as some sort of variation broadly around a theme, but different in too many material areas to really be recognised as having fallen from the same tree.

There needs to be a universally shared and adopted agenda which clearly anchors what is developed throughout the organisation, in whatever area or activity. This not only will ensure the whole of organisation’s energy presence and inherent life force, but it leads to greater alignment of efforts across the organisation and a sense of oneness among all stakeholders.

Information selection

The must now become a regular means for presenting information which allows users to decide what they want to know about the organisation, whether it is a high-level overview or a desire to drill down to whatever level of complexity suits their taste.

Selection is facilitated greatly when an organisation’s directors and leaders are committed to evaluating the true value of the information flow it monitors and utilises. The quality and frequency of information needs greater attention and understanding from a governance perspective than possibly it has currently enjoyed.

This area can only be driven internally and involves the organisation’s governance owners, for any changes to be identified and shepherded through as part of a committed push for change.

In crude terms, the fundamental issue falls to a determination of how an organisation will extend its lived purpose and how the use of valued corporate governance practices and policies across and throughout the organisation will be taken up and executed in a consistent and effective manner.

Culture

Hence acknowledging what is the acceptable appropriate organisational culture within the governance leadership group is important. Then, as required on a daily ongoing basis, demonstrating fair and assertive applying of those values consistently across the whole of the organisation.  This may on occasion challenge the possible differences in local regulations and business, employment, and other operating conditions; yet it is far from impossible to do and might be both logical and essential as a true demonstration of how much those values are taken to heart by the governance leadership group.

It is a fair prediction, that despite protestations otherwise, it is more likely that there will be appearing in the future more regulations and legal requirements that are imposed on organisations. The blunt instrument of regulations and laws in one form or another still remains the perceived solution for much of our organisational governance ills and missteps.

Change is happening

Recent examples of modern slavery, anti-bribery, anti-corruption, and anti-fraud measures indicate an increasing focus of regulators world-wide to intervene further in the governance practices of businesses. Additionally, the emergence of an increasing number of global investors who are actively flagging their effective intervention in those business in which they have funds. This intervention varies depending on how long they have pursued this course of action and the degree of influence they seek to exert. Generally, their intervention can be upfront and visible, to more indirect; and could include the flagging of possible withdrawal of funds or the threat of same, if certain actions or steps are not taken by the target organisation. Often the targeted organisation will positively respond; leading to identification of the “agreed” necessary changes by an organisation’s governance group in seeking to achieve those outcomes for which the funding body wants undertaken.

As these funds are themselves invested in this objective, being highly motivated means, they want results. They have a shorter timeframe in achieving real and lasting change, and do not consider this as a nice to have for some PR exercise nor a tick and flick check box approach. While early days still, nevertheless there are definite signs of real achievements and a momentum is building.

Businesses are therefore needing to address the tension of addressing multiple “stakeholders”, often with seemingly different, but paradoxically the same, agenda.

Is this what F. Scott Fitzgerald had in mind when saying: “The test of a first-rate intelligence is the ability to hold two opposed ideas in mind at the same time and still retain the ability to function.”

Of more recent times, Stacey Nagle Partner, Deloitte Canada stanagle@deloitte.ca commented:

Reporting requirements for publicly listed companies are set by different bodies— the accounting standards boards and the capital market regulators. Their rules are written from different perspectives, sometimes duplicative, and organizations can be overwhelmed by the amount of information they’re required to disclose. While they have to meet the regulatory requirements, they also need to tell a clear story for their shareholders and stakeholders and doing both isn’t easy.

It isn’t easy

However, adopting a mature governance framework and ensuring that the organisation’s governance leadership group are onboard will mean that the fundamental platform and embedded operating practices can and will serve all bodies.

Even the regulatory bodies and government disagree around whether there is a need for more regulations; or is it really more a matter of ensuring that the regulators need to be more rigorous in their implementation of those present rules as these are adequate to manage the problems.

In all this the finger too often can be pointed to the weak link of the present legal system; a subject dear to the writer’s heart. It emergence as a major issue in this field deserves an article on its own.

The right question would seem to be whether having the toughest of rules in place can affect the changes that so many are now seeking from the governance leadership group of businesses?

There is a significant group of people saying that rules are but one element of the governance equation.

Getting the balance right

Equally attention is now cast over the steps needed for the shaping of an organisation’s behaviour.

As Claus Buhleier, Mannheim David R Hawley Director, Deloitte UK suggested in the Directors’ Alert “Through the eyes of the board: Key governance issues for 2015”:

There has been a tremendous increase in regulatory pressure since 2008, and while organizations need to respond to this they cannot afford to neglect social and media pressures, which have also increased. There’s a big opportunity for them and their boards to proactively demonstrate that they have not just responded appropriately to new regulatory requirements, but that they’ve also adapted to changes in the mindsets and values of the organization’s wider stakeholders.” (our emphasis)

The challenge for all governance leadership groups is to acknowledge the emergence of the forces for converging of an organisation’s stakeholders i.e. regulators and law makers, employees, business partners, the local community and customers, in seeking to hold a presence in the shaping of the organisation’s operating environment.

Ultimately the core challenge of every governance leadership group is to answer how they will effectively operate with the new regulations / laws, as well as the new and emerging stakeholders interests and sometimes demands.

The Edelman Trust shows just how critical it is for all organisations to quickly come to terms with this new operating dynamic. To do anything less may see the demise of the business or at best the going into decline. No body it seems assumes anything. There is the pressing need of proof, the authenticity factor is at play.

A simple example of all of this is played out with an organisation’s staff. Where there is a lack of or indistinct sense of purpose and values, then their connection to not only the organisation but the work they are expected to do, is weak or essentially non-existent. Many studies show large numbers of disengaged staff who turn up but are not tuned in and switched on.

An experienced director’s thoughts

In a recent interview of Sir Winfried Bischoff with Anji Kurian of the Governance Institute of Australia, Sir Win comments:

Of course, boards must always remain supportive of their management. But, there is a tendency for boards to identify with the success of the company and to wax eloquent on the brilliance of management. And when the company is doing badly to think first about of how they can get rid of the CEO.

‘I think it should be the other way round. When you are doing well, the management ought to be reminded that some of their competitors are also doing well. The market may be in their favour.’

The board’s key role is to provide principles-based governance rather than a compliance-focused one. (our emphasis)

Culture is a central theme and the whole question of purpose of the company. It has also put greater emphasis on the famous s 172 of the Companies Act 2006, which makes it the directors’ duty to promote the success of the company in a way that benefits a broad group of stakeholders.

‘There are people out there who in fact have a pretty good view, a better view than we have as a board.’

And this is what links it with the UK Stewardship Code. The Financial Reporting Council, of which Sir Win is the chair, is currently undertaking an update of the Stewardship Code following a public consultation, which ‘aims to increase demand for more effective stewardship and investment decision-making which is aligned to the needs of institutional investors and clients’.

Sir Win has always believed that boards must actively engage with stakeholders and shareholders.

‘Wisdom does not just reside with ten or 11 board members. There are people out there who in fact have a pretty good view, a better view than we have as a board. So it makes sense to listen and engage. Their proposals may in fact be something we haven’t thought about, or thought seriously enough about it or the analysis has not been done nearly as well by our management.” (our emphasis)

Conclusion

In all this there is of course the need for accountability. Hence, ultimately both as individuals, as well as being a participant of the collective governance leadership group, there must be genuine accountability to addressing the demands of the stakeholders.

As it would appear to be still in its infancy, the governance leadership group needs to move from banner chatter or a set and forget mentality, there must ultimately be a framework offering a clear-cut connection between what the governance leadership group does and the primary levers of performance.

DISCLAIMER: This article is general ONLY in nature and is not advice

For more information contact Damien Smith on smithdj@enterprisecare.com.au or 0418 325 781.

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