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It's Easy to Fake Good Governance... Until it Isn't

Overlooking bad governance is surprisingly simple; right up until the organization comes face to face with a crisis. So, what can organizations do to avoid surprises?
February 19, 2020

Good or bad, governance exists in every organization. As such, the question for organizations is never about whether they have a governance system, but rather how high the quality of that system is.  A wake of highly publicised scandals and other organizational crises, has everybody talking about governance. However, it is still unclear whether organizations truly understand what it means to have good governance.

The board of directors is too often like a bunch of skaters on a frozen lake making all sorts of nice arabesque figures, but what’s really going on in the lake nobody knows.

The Quest for Better Governance

Organizations like the John Molson School of Business (JMSB) and the Institute for Governance of Private and Public Organizations (IGOPP) focus on researching, teaching and improving governance, and helping organizations to analyze their governance and understand the steps they need to take to improve it. Governance best practices exist, and many have been widely accepted and implemented throughout most Canadian organizations. These include guidelines like having a separation between the Chair and the CEO, or having board members that are primarily independent from the company. Practices like these are first-tier, and most organizations agree with them and tend to follow them.

Yvan Allaire

However according to Yvan Allaire, Executive Chair of the Board of Directors at IGOPP, there are also second, and even third tiers of best practices which are still making their way into companies. These are the newer or less obvious practices that haven’t caught on with the masses yet, but they are just as important for achieving the goal of improved governance in organizations. “We’ll never achieve perfection,” Allaire says. Instead, it will likely be a continued, gradual improvement that can only be carried out by ongoing conversations, research, and education.

A Value-creating Governance

What IGOPP has defined as the goal for governance is to achieve value-creating governance. Allaire describes a scenario that he says can be common in governance. “The board of directors is too often like a bunch of skaters on a frozen lake making all sorts of nice arabesque figures, but what’s really going on in the lake nobody knows.” Boards that are oblivious to the goings-on of the company are vulnerable to crises, and are more likely to be caught by surprise.

It is safe to say that the widespread implementation of first-tier best practices has helped to improve governance in general. Improvement is good, but it doesn’t mean the job is done. “We still have a lot of boards taken by surprise by events that they didn’t see coming, and by all kinds of crises that they might have been able to avoid,” Allaire says. Of course all crises cannot be avoided, however, in addition to the way a board prevents crises, an important characteristic is the way they prepare for and handle those that do occur.

Boards must be both legitimate and credible. Legitimacy looks at how a board has been selected. Who makes that decision, and what gives them the authority to do so? Credibility, on the other hand, comes from the knowledge and experience each individual board member has. The looming question is: are appointed individuals able to give informed feedback and make a valuable contribution to the company?

You won’t have real value-creating governance if you keep delegating compensation.

Weaknesses in Governance

Board members are too often  told that the board’s job is “noses in, fingers out.” However, this is a faulty way of looking at governance. The saying defines a type of governance that is separated from management by some kind of boarder. “Yes, when everything goes fine, and it’s smooth running,” says Allaire. “But as soon as you start feeling that there are issues, and important issues, I think the board has to cross that line very quickly.”

Criteria used for board appointment often lacks rigour.  Historically, any experience was considered sufficient. “We tended to say well, we have people with business experience, we have a couple of CPAs and a couple of lawyers and so on and so forth until we have an experienced group. Experienced in some way, yes, but not experienced in that particular business,” says Allaire. The type of experience a person has is an important distinction.

Another weakness in governance comes from the tendency of boards to push the task of assigning compensation off to consultants. The problem with this is that consultants don’t necessarily make decisions that are right for the company, they generalize it with a cookie-cutter solution, and make decisions based on what they think management wants to see. Allaire believes this is a glaring problem. “You won’t have real value-creating governance if you keep delegating compensation,” he says.

Whilst boards should not be delegating compensation-related tasks, they should be delegating information related tasks. What tends to happen when management is in charge of presenting potentially negative information to the board is that they will put a positive spin on it. As a result, the board is not getting accurate information. By outsourcing the collection of information, boards can ensure that the reports they receive are accurate and bias free.

Preparing Boards

Education is an important way to take the idea of value-creating governance and turn it into reality. In partnership with IGOPP, the John Molson Executive Centre (JMEC) is delivering a series of workshops that share with both current and potential board members the best practices that will help them contribute to this goal.

By dispelling myths and introducing crucial concepts in governance – like law or corporate finance – these workshops are designed to help new board members get well on their way to being a big part of a value-creating governance in their organizations.

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