CORPORATE GOVERNANCE : Running interference – Governance and over-governance

The conventional pattern of governance in New Zealand is based on monthly board meeting, typically after the 20th of the month. Some businesses reduce the 12 meetings to 11, often at the expense of January following the country’s great “shut-down”.
The monthly process involves the distribution of board papers to directors the week before the meeting. There appear to be range of methods used to set the agenda from those led by the chair following pre-determined strategic governance schedule to those led by the CEO, or on occasions company secretary. The board is then equipped to deal with the monthly agenda and invariably have some input to agenda setting through various means.
However, if – and it is an if on my behalf – the role of the board is genuinely strategic why the need to meet monthly?
The monthly meeting cycle places considerable demands on reporting by the CEO to the extent that the days prior to the papers being distributed are consumed with this task. Further, the CEO’s days after the meeting are also consumed with responding to issues raised in the monthly review of the action plan, operational matters arising, financial reporting and so on.
The monthly meeting cycle, almost universally adopted in New Zealand, may place the board at ease, but also imposes demands on the CEO that are likely to distract them from doing what they get paid to do – drive performance!
If the board’s role is strategic then adherence to monthly reporting cycle is surprising. Strategic decisions are expected to be of considerable importance to the business; are directive of the entire business; are likely to involve the allocation and/or reallocation of resources; could well be expected to require capital input and, therefore, could reasonably be expected to be rare. How many New Zealand businesses are making acquisitions; mergers; disposing of major assets; pursuing new strategic markets; or committing to long-term research and development on monthly basis?
Are we in danger of succumbing to state of over-governance? If the role of the board is strategic, and perhaps that is debatable (although it shouldn’t be) why monthly meetings? Or do compliance activities take up that much board time, or can CEO’s simply not be trusted for any more than four-week window without intense scrutiny?
The Wal-Mart board meets in person four times per year. The board also meets via telephone conference after the Christmas retail season. Acquisitions are approved through phone conferences and directors have full access to all officers of the company. The board of the globe’s largest company in terms of employees (1,800,000) and second largest in terms of revenues (US$313 billion) has little choice in having to maintain strategic perspective. That they do this through quarterly meetings rather than monthly ones should come as no surprise.
The emerging ‘Anglo-America’ model of best practice governance is almost entirely structured to remove the supposed agency that exists between the providers of capital (shareholders) and the users of that capital (management) so it is hardly surprising to observe the conduct of such intense “governance”.
However, we need to reflect on the costs of such repetitive scrutiny: costs that may be easily measured in board time but far more difficult to apportion to that of the CEO and top management team. This may well be better spent on maximising the opportunities to be had through improving performance rather than monthly reporting to the board. If the CEO cannot be trusted for any more than four weeks at time – then get one who can.
Over-governance is not the only concern, or activity for which directors should be aware. In the name of good governance interference is often pursued. Such interference is not just observed in the public sector – and dutifully reported but not labelled as such by the media.
Interference also occurs in the private sector especially when director, directors, or chairs seek outcomes for the benefit of major shareholder, or majority shareholder. Directors’ responsibilities are to the company – to the legal entity; the legal construct; the vestibule upon which we place the responsibility for the creation of wealth.
The Companies Act leaves no doubt in terms of that responsibility, and specifically addresses the case of the governance of wholly-owned subsidiaries. It is surprising then to observe the representative model being used to ensure that subsidiaries, wholly-owned or otherwise, are vehicle for returns to ‘parent’. Especially when other courses of action are clearly in the best interest of that subsidiary. Both discretion and anonymity is essential in the case to which I refer. However, when supply decisions are made for the benefit of the parent and neglect of the subsidiary (to the tune of $3.2 million per annum) then something is amiss. Downright interference.
We have lot to learn about the phenomena of governance. It is to everyone’s benefit that what has largely been secret is increasingly open to both research and debate. But we need to be mindful of fact and fiction, and mystery and reality. We should not refrain from asking the right questions and be diligent in our responses.
The construct of best-practice governance gives serious (and arguably misdirected) attention to the architecture of boards. Sadly much of that prescription lacks any supporting evidence if – and, as noted earlier, it is an if on my behalf – boards are assuming responsibility for enhancing business performance. I have no doubt that shareholders want their investment protected, I also have no doubt that these same shareholders expect that investment to grow (commensurate with both their own and the company’s exposure or appetite for risk).
We need system of governance that creates and enhances trust; we need system of governance that requires (as stated in the Act) that directors act in the best interests of the company. We need system of governance that sensibly assigns responsibility between the board and management in the knowledge that such division of labour must remain fluid. We need system of governance that avoids the temptation to over-govern and interfere. And, most of all, we need system of governance that is focused on enhancing performance.
The research community may well be guilty of lagging behind the development of best-practice governance. However, our increasingly entrenched beliefs towards the impact of independent directors on performance; the virtues in separating the roles of the CEO and the chair; the impact of the independent audit committee; and in New Zealand the merit of the ‘representative’ model simply don’t bear scrutiny.
Some 160 studies have been conducted during the past four decades, of which many have been published in the world’s most prestigious business journals. Yet there is, as yet, no systemic relationship between board composition and its many manifestations – and subsequent financial performance.
My concern with this is that the model could actually be detrimental to long-term business competitiveness.

James Lockhart is director of Massey University’s Graduate School of Business.

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