Knowledge Center: Article

Boards & Governance

Governance - Swimming With The Tide

12/31/2015 TA Mitchell

 cororate governance swimming with the tide

Against the backdrop of an uncertain economic climate, many have raised questions about governance and why is it not delivering what organizations expect. These questions have arisen in many different areas — corporate governance, public sector governance, and regulatory governance, as well as the governance of international organizations and even nations.

Not least, these issues have been front and center of public awareness since the recent events at BP and News International. The governance tide has changed. These very public cases draw attention to the effectiveness of governance at board level and a board’s culpability for actions which happen throughout the organization. More and more organizations are having to evaluate and justify their board performance. However, what has become clear is that issues identified at the corporate level are often mirrored at the managerial level and raise questions about decision making, personal, and organizational responsibility, and the real level of ownership, control, and oversight that is being exercised. The behavior and culture of the board clearly influences governance behaviors further down the organization. To stay afloat in these seas, companies have to be sure their governance model is fit for purpose throughout the organization.

Governance covers the processes of making and executing decisions and how the impact of those decisions is tracked and managed. In this article we highlight the key governance issues faced by many organizations. We also look at some key findings and observations from our work with our clients and with the London Business School, which has been in the middle of the debate on governance issues with one of the authors of this paper. Finally, we highlight actions that organizations and individuals can take to improve their governance quickly and effectively.

A governance system operates at several levels of an organization and the issues and challenges we identify can occur in any one level or in all levels at the same time. A key challenge for the whole system is ensuring the interconnectedness and consistency of decisions cascading down the organization. Aligned with this is allowing the required information to feed up and across the system enabling leaders at all levels to act with speed and knowledge.

How do you know if you have a problem with your governance?

Be it the governance of a transformation project, an acquisition or steady-state management, start by answering these questions — honestly — for yourself.

Meetings. Does it feel like everyone spends too much of their time in meetings and not actually doing anything? Are there meetings you could just not go to and there would be no impact?

Metrics. Do you have initiatives that are rated “green” but fail to deliver what was expected or only go red at the end of the program? Do you have metrics that tell a good story when everyone knows that there is really a problem? Does your customer feedback tell you a different story than your internal measures?

Decisions. Does your organization take too long to make decisions or sometimes never seem to make a decision? Does every decision take two or three sessions to get to an answer? Do you find yourselves always asking for more data, more analysis, and more options?

Execution. Do you leave a meeting unsure about what governance systems was really decided? Do different parts of the organization pull in different directions? Are some decisions forgotten or simply ignored if they don’t fit with individual priorities?

Management. Is there a “gentleman’s agreement” that poor execution will be ignored? Do costs tend to escalate after decisions while benefits fade away? Does the agenda seem more focused on good ideas for the future than making the best out of what’s already been put in place? Is fire-fighting rewarded more than fire prevention? Is there a lack of respect for internal and external scrutiny?

Authority. Is it unclear which group can make which decisions or which area has responsibility for execution? Are policies laid out and yet not clear enough to guide decisions further down or provide management with unrealistic constraints on their actions? Are the real decision makers often not in the room?

If you can answer yes to more than one or two of these questions you probably have a governance issue. Most governance models are put in place and are fit for purpose at a point in time with a specific strategic agenda. As organizations evolve, the model is adjusted and bits are tweaked to reflect changes in the strategic priorities. The risk: We end up becoming slaves to a process that’s no longer fit for purpose.

Balancing systems and culture

There are three things to put in place when designing a new governance model in order to ensure you get the right outcomes, and these can also help you when assessing and redesigning your governance system as circumstances change.

Get the systems and processes right

While this won’t solve your problems and is only part of the solution, many organizations just continue to bolt on additional governance mechanisms. As a result, they fail to get the questions with the right information, at the right time, to the right people enabling them to make the right decisions and implementing them right away. So many organizations result in all decisions floating to the chief executive or boardroom while others have three or four different teams responsible for different parts of the decision.

In looking at the governance model you need to continually reassess and make sure the systems and processes are fit for purpose, streamlined, and efficient. The well-publicized reserves replacement scandal at Shell (settled in 2007) led to a dramatic decline in share price. While there were many reasons, central to them was a systemic overstatement of reserves in an effort to meet the expectations set from above between 1999 and 2004. The systems and processes for challenging and testing the estimates were either not in place or not sufficiently robust. However, the organization’s prevailing behaviors also conspired to hide the true picture. A good governance system uses an appropriate organizational structure, policies and procedures, management information, and independent scrutiny to drive this.

Have a healthy and open culture

All of the research suggests that a critical difference between a 'tick this box and my rear end is covered' culture to one that is high performing and energized is in the quality of the discussion that goes on between the decision makers. The recent Walker Report on Corporate Governance emphasized the importance of the behaviors of an organization to getting the right results. The evidence suggests many organizations have put in systems and processes but still fail to achieve their ambitions. Building the right culture requires building an appropriate mix of skills and competencies, and an approach which values the contributions and perspectives of each team member. It is this diversity of perspectives, with a space for a real dialogue and debate, which yields the best decisions. Once they have been heard, decision makers can agree to differ but can also own collective responsibility for delivering against one decision. Without the debate and without the collective commitment, there will always be too much noise left in the system around alternative perspectives, individuals will fear for their place in the system and execution will be compromised.

Good chairing will make (or break) you

To make it all really work well requires strong ownership from someone focused on the health of the governance system rather than just on getting a favored decision. The chair has a critical role to play. A good board chair is one who can engage the whole team taking into account both the needs of today and the future. A good chair is one who seeks to get all of the perspectives, consolidate them and then ensures consistency of outcomes and implementation. It is not about getting everyone to have the same perspective; it is about aligning everyone behind the decision and supporting the implementation regardless of starting point. In cases where there is a fundamental disagreement, the chair will often need to make the ultimate decision and to be both firm and clear about the way forward. Such moments may be rare, but often occur in a crisis, when the decision needs to be simple, believable, and transparent. For its execution, it will rely on the respect the chair has built for his or her integrity in that role.

SIDEBAR: Governance considerations

BOD refreshment survey large

Start by clarifying the role and purpose for the governance group and its key objectives. Some examples of different governance situations requiring different perspectives include:

Transformational: Transitioning the organization to the new strategic model

Strategic program: Taking a program or project perspective

Product management: Launching, managing and reinventing products

Corporate board: Protecting the interests of shareholders in setting the strategic agenda public sector — within the context of the community and other public bodies

Divisional or business unit: Operating within the overall strategy

Nonprofit or “third” sector: Operating to multiple stakeholders including clients, donors, public sector customers, and external regulators

Where should you start?

Systems, culture and chairing are the essential building blocks to effective governance. But how do you improve governance if you are stuck somewhere inside the system and can’t redesign it from scratch? Our work, which is partly informed by our work with London Business School, has identified eight approaches that can guide an improvement effort.

1. Why am I here?

All governance groups need to ensure they have a clear understanding of the purpose, responsibilities, and authority of the group and its role in the overall governance system. This needs to be backed up by a clear analysis of the level and types of opportunity and risk which the group is trying to deal with. Clarifying these will ensure that the group can spend its time focused on the most critical decisions and ensuring that it has the right information to take them. A recent client found that all of the decisions were rising to the board before they could be implemented. Clarifying principles, purpose, and responsibilities allowed lower levels to work together to get on and deliver against the stated strategic ambitions and framework of the organization without going up the organization for approval on every decision.

2. Review what level we are at

There are different roles in your governance model and being clear about the accountabilities at each level and when to own a decision and when to escalate a decision are key to making things happen at pace. At the top there is accountability for strategic decisions and setting the principles. Within the context of the principles there is accountability for the design decisions, and things that fall outside of the agreed parameters need to be escalated for clarification. There is also the interconnectivity of the decisions with other parts of the organization, which needs to be considered and included in the model. Areas like HR, risk, and finance for example will want to ensure the activities that run across the organization remain consistent the overall organizational policies.

3. Head up, not head down

Good governance is about keeping your head up looking at outcomes, not down looking at the minutiae of data-sets.

So much of governance has been about processes and tick boxes. The risk is always that in breaking down the elements to smaller more manageable ones we focus only on the latter and lose sight of the big picture. Our advice would be to continually check back that the activities and decisions you are making and delivering continually align to the big picture. You will be surprised by how often they don’t.

4. Check who is accountable

Recent McKinsey & Co research, highlighted in the book Beyond Performance by Scott Keller and Colin Price into organizational performance and health, cited lack of accountability as the single biggest contributor to poor performance and health. You are two times more likely to fail if you are unclear about who is accountable for what. Make sure you and everyone involved in the governance model knows who is accountable for what. Some will need to make and own the decision, others will need to know and execute the decision, and still others may provide information that will help to shape the decision. A recent client had more than eight groups and 50 individuals responsible for getting a product to market with each group having a different role in the process so that in six years no truly new product had been brought to market. By reexamining their accountabilities and streamlining the processes they were able to launch four genuine new products in under 12 months.

5. Reward honesty and bravery

London Business School is undertaking research on disclosure and transparency in organizations. It has found that there is often a significant disincentive to disclose information, or more importantly, an incentive to cover it up as long as possible. This is especially true where that information has a negative impact on something of importance to your bosses or the company’s owners — for example an effect on shareholder value. This means that critical risks or issues are often hidden until it is too late to act. One of the current findings from the investigation into the disaster in the Gulf of Mexico is that BP executives suffered from a culture that avoided candor. What is needed is a culture of support and challenge that encourages the issues are put on the table for the collective leadership to see, hear, debate, and respond proactively to before it is too late. Start by recognizing and rewarding those who bring difficult issues to the table.

6. Change some of the players

Good governance is not a horse race but a team game where everyone has a part to play. It is about full participation and utilizing the full strength and capability of the team to win. Diversity of perspective is as important to the debate as a shared purpose for the organization and the teams. Start by looking at who you do have in the group, what they bring, and what is missing in terms of expertise, background, and behavioral style. Making a few changes to get a better mix of people can transform the effectiveness of the group. The importance of the right non-executive board members is of particular focus.

7. Make the model easy to communicate

Good governance models just make sense. For governance to work, it must be clear, consistent, and transparent to the rest of the organization. If decisions don’t make sense to the non-participant and aren’t communicated well, they won’t be understood, they will be often overturned, and rarely implemented. Conversely, simplicity aids good communication and is a vehicle for momentum and energy. Start by drawing your governance model and trying to explain it to someone from a different business. If you can’t, you have a problem.

8. Take responsibility, make decisions

In many governance systems a habit develops of avoiding decision making — of kicking it upstairs or delegating it to those with less power to avoid it, or creating delay. A good example is a “Go Live” meeting where the project sponsor asks the team members whether it would go live or not rather than making a judgment on the facts presented. A better question to might be, “When we go live, what is most likely to go wrong?” Now you know the real risks and can manage them proactively. Another example is referring decisions up to the board when a subcommittee has better understanding and information. These are some ideas to apply to your own governance model for getting things decided and done. How do you stack up? Where should more effort go?

Warren Buffet said it best when he stated, “It is only when the tide goes out that you know who was swimming naked.” At high tide it is easy to assume that your governance model is doing its job when it is not. Without a regular review and refresh, it is easy to be complacent and allow governance to decline or be subverted rather than to be valued for its role managing risks and delivering strategy. At a healthcare trust, the ambition to lower waiting lists, alongside other changes, led to a litany of patient failures resulting in the deaths of between 400 and 1,200 more people than would have been expected in a three-year period. On the other hand, a major banking company has attributed the company’s survival primarily to its "prudent internal control and risk management mechanism.” When others were making risky investments, and decisions to proceed were made by individuals without a sound understanding of the risks, bank leaders stuck to their model. When the tide went out they were dressed appropriately.

The timing to address effective governance could not be better. The recent failures of so many organizations in financial services, media, oil, health services, and other industries has put the governance debate firmly on the agenda. In increasingly uncertain times, companies need to have efficient and powerful ways to make decisions, make them quickly, implement them at pace, and manage their outcomes. Those who hesitate, make repeatedly poor decisions, or fail to execute them effectively are unlikely to thrive. Swimming is always better than sinking.

We also thank StevenTaubman for his contribution to this article.

TA Mitchell Principal +44 20 70754000