The curse of corporate governance

CORPORATE governance refers to the system of rules, practices, and processes by which a company is directed and controlled.

It encompasses the relationships between a company's management, its board of directors, its shareholders, and other stakeholders. The primary goal of corporate governance is to ensure that a company operates ethically and responsibly while creating value for the shareholders.

Shareholders, as the company's owners, wield their influence over its management through both annual general meetings and extraordinary meetings.

Shareholders influence the direction of a company through their voting rights, which are typically proportionate to the number of shares they own. They can vote on major corporate decisions, such as mergers and acquisitions and changes to the company's board members. The board of directors, often chosen through shareholders, makes strategic decisions, sets company policies, and appoints executives to manage the business.

Therefore, shareholders indirectly influence the company's direction through their choice of directors. In some cases, especially where institutional investors or activist shareholders are involved, they can exert significant pressure on management to make specific changes in strategy, operations, or governance, thereby shaping the company's direction.

Despite significant investments in training and education for board members, both new and experienced, along with legislative efforts to implement corporate governance best practices, instances of poor corporate governance persist. This observation raises the question of whether these initiatives are falling short of their intended purpose. Regardless of many organisations conforming to established corporate governance structures and adhering to accepted standards of operation, including regular board meetings, director time commitment, audit and remuneration committees, codes of ethics, and appropriate board composition, some companies still experience corporate governance failures.

• Editorial independence is sacrosanct at AMH
• Caledonia seeks to raise US$13m
• Understanding Econet’s planned rights offer
• Business Opinion: Competition for entrepreneurial business

Both well-performing and poorly-performing companies have adopted many of the practices considered to be corporate governance best practices. A study of company boards revealed no significant differences in composition between those who experienced governance failures and those with a reputation for effective governance.

The unfortunate reality is that the majority of training and effort has been directed towards board structures, committees, and board charters. In contrast, the crucial aspect of board dynamics has been overlooked.

Instead of addressing the fundamental need for boards to collaborate towards shared objectives, the emphasis has been on enforcing procedural norms. Jeffrey A. Sonnenfeld’s What Makes Great Boards Great - Harvard Business Review emphasised that the most effective corporate boards operate as cohesive work groups.

Members of these boards are characterised by mutual trust and are not afraid to challenge each other. They actively engage with senior managers and directly address critical corporate issues. This dynamic is noted as a key factor in their superior performance.

There is no significant difference in the frequency and attendance of board meetings between companies that have experienced corporate governance failures and those that are considered to be well-run. Although regular attendance is crucial for individual board members, it seems to have minimal impact on a company's overall success.

Some people are erroneously pushing the mantra that board members with a significant shareholding in a company are more vigilant in promoting the company's interests. Data from the Corporate Library indicates that board members with substantial stock holdings are not necessarily more vigilant guardians of corporate interests.

In the case of Enron, most board members held significant equity yet failed to prevent the company's collapse. Both companies that have experienced corporate governance failures and those that are considered to be well-run often employ highly skilled and qualified individuals as board members.

In fact, many companies that have failed have highly qualified financial professionals on their boards. An analysis of the board composition of the most and least admired companies on Fortune's 2001 list revealed no significant differences in terms of board structure, committee composition, or director characteristics.

Despite the prevailing practice of holding exclusive board sessions without the CEO present, some successful companies have embraced an inclusive approach, demonstrating their commitment to open and transparent communication. This suggests that board structure alone may not be the determining factor in corporate success.

Despite the widespread implementation of board committees as a cornerstone of good governance, financial and accounting scandals continue to plague public companies.

A survey conducted by the National Association of Corporate Directors (NACD) and Institutional Shareholder Services (ISS) revealed that 99% of public company boards have audit committees, and 91% have compensation committees. Yet, these committees have not been entirely effective in preventing financial misconduct.

Regulatory compliance alone does not guarantee the formation of effective boards. Instead, it is the interplay of board dynamics, characterised by trust, collaboration, and open communication, that ultimately determines board effectiveness.

A breakdown in trust among board members can manifest in the establishment of clandestine communication channels between board members and management, and that can cripple the Board and ultimately affect the performance of the company.

In a well-functioning board, the CEO maintains open and transparent communication with the board members, providing timely information and trusting their expertise.

This fosters a culture of collaboration and eliminates the need for secretive back channels, ensuring that board members have direct access to relevant personnel for addressing any questions or concerns.

Another frequent source of dysfunction arises when political factions emerge within the Board. This breakdown often occurs when the CEO perceives the Board as an impediment to their agenda and actively foments the formation of factions, manipulating them against each other.

As they say, "good board governance can't be legislated, but it can be built over time".

Establishing an environment where individuals feel safe and comfortable being open, honest, and transparent with one another is crucial for fostering a healthy and productive group dynamic.

This can be achieved by creating a culture of mutual respect, trust, and psychological safety, where members feel encouraged to share their thoughts and opinions without fear of judgment or reprisal.

"The highest performing companies have extremely contentious boards that regard dissent as an obligation and that treat no subject as undiscussable,” Kathleen Eisenhardt and L.J. Bourgeois said. This summary is at the heart of what makes good boards and leads to better-performing organisations.

• Nguwi is an occupational psychologist, data scientist, speaker and managing consultant at Industrial Psychology Consultants (Pvt) Ltd, a management and human resources consulting firm. — https://www.thehumancapitalhub.com or e-mail: mnguwi@ipcconsultants.com.