Culture Over Structure

In May, joint committee on corporate governance established by the Canadian Institute of Chartered Accountants, the Canadian Venture Exchange and the Toronto Stock Exchange issued its bulky report on the subject.
Entitled ‘Beyond Compliance: building Governance Culture’ the paper is yet another dismissal of board box-ticking. It promotes board culture over structure and canvasses the rapid changes which increasingly have made governance both stimulating, and fraught. The report says quantum increases in computing power and the extraordinary advances in com-munication technology are creating new business and forcing existing businesses to adopt new business models. In addition, intellectual capital is now increasingly being recognised as key asset and organisational and governance models are being forced to adapt to questions of how to value, acquire, manage, retain and leverage knowledge.
But over and above all that, there’s one enduring characteristic of governance — human nature with all its strengths and foibles. It leads the report into discussion of board culture. Too often says the paper, the relationship between the management and the board is regarded as “compliance oriented relationship”.
“Meetings are not designed and resourced to allow the board to look forward, to consider strategic developments that affect the business, to understand the business risks and how they are being managed, and to perform its coaching role by challenging management in constructive and positive way.”
In this culture, managers often see the board as necessary evil rather than value-adding partner. Management’s objective is to get through the next board meeting with good report and without substantial challenge or controversy. Similarly says the report, boards can react by taking on too little responsibility or trying to do too much.
“The challenge boards face is how to fulfil their functions effectively, in way that adds value to the corporation. Meeting this challenge depends primarily on culture, which is in turn shaped by people, processes and structure. There are many reasons why it is extraordinarily difficult for boards to govern well,” says the report, which explores some by comparing the ideal, to the real world.
“In an ideal world there is respect and trust between management and the board… board members would be absolutely clear that they are accountable to the shareholders and their actions would be appropriately aligned with shareholders’ interests… “
Then, in sentence of biblical length the report proclaims: “On continuing basis the board would operate with management in an atmosphere that could best be described as ‘constructive challenge’, where access to relevant information is assured, where opportunities for real dialogue exist and where the dividing line between the responsibilities of the board and management is clear and is respected by both directors and senior managers…”
Directors would be men and women of integrity, competence and judgement and in their careers would have shown leadership and independence of thought. But, says the report, in the real world few companies have governance regimes which come close to the ideal. The lack of healthy governance culture is major reason, but there are other issues. The report says these include selection bias in establishing the composition of boards and the ‘asymmetry’ of information between management and boards. The report notes that there are no regulatory or structural remedies that can deal with the culture of governance.
“What is required is common appreciation by management and the board of their respective roles, mutual respect for each party in carrying them out, continuing open dialogue and communication, and strong leadership within the board.”
All of these are ideals too, and the report inevitably returns to what it calls “real world issues”: few boards have clearly articulated statement of what they expect from directors in terms of either contributions of competencies; director selection is critical; so too is resourcing and proper information flow.
“Management will always have more information than the board… it is challenge for the board to ensure it gets adequate and meaningful information,” says the report.
“There are many incentives for management to withhold information of various kinds. No one likes to be the bearer of bad news, and this is particularly so when one is informing those responsible for monitoring performance.”
These incentives are always more powerful in situations where there is governance culture which is unhealthy says the report. Understanding the challenges are essential if boards are to progress beyond compliance and build healthy cultures of corporate governance. Recognising that regulation can only do so much, the report says it is critically important for the role of the board to be clearly articulated and understood. The first formal recommendation of the report and the one which it regards as its most important, is for board charter setting out all its responsibilities.
*The report was used in May in Ernst & Young presentations in Wellington and Auckland.