CORPORATE GOVERNANCE : Self-taught Governance – As I see it

In the archives of Just Water’s head office lie over 300 monthly board or management reports. They spell out the inner workings of Red Eagle Corporation, Just Water International, Just Water New Zealand, Aqua-Cool, Clearwater Filter Systems, Bartercard New Zealand and Buro Office Chairs – all businesses in which I have had an interest over the past 20 years.
To me, they not only record the histories and plans of these companies, they also express corporate governance in action.
Directors often get distracted with the legal compliance aspects of governance and forget that there is business which needs to be governed. Considering that the board’s two principal functions are to hire and fire the CEO and approve the budget, attention needs to be paid to the growth of the business.
And while directors are not there to handle day-to-day operations, they do need to get sense of how the business is run, as bad CEO will hide problems from the board.
When back in 1981 I joined public company as chief executive, I found myself in an organisation that was both clearly insolvent and with recent unqualified audit report. I went to the auditors and asked how they had signed the accounts. They told me that as one of the directors was senior partner in large accounting firm, they thought he would have pulled the plug if they thought it wouldn’t survive. I then asked the directors how they expected the company to survive, and they said “well, we got clean audit – it’s now over to you to keep it that way”.
The problems were that directors really didn’t realise what was going on, the standard of monthly accounting was appalling – and included many inaccuracies – and the company had fallen into the trap of relying totally on the incumbent chief executive.
Directors need to get the smell of business. Like dogs, they need to wag their tails when the good results are being presented – and keep smelling the lampposts for the bad stuff.
For this reason, there need to be both formal and informal ways that senior management can communicate with directors.
The formal approach relies on board papers. Many boards only look for summary report from the CEO, as they have so many legal governance issues to address. I personally feel that reports from senior management, incorporated in the board papers, give senior managers the opportunity to communicate with the board, and most importantly the observant director will very quickly sense if there is something that he or she is concerned about, that the board should be addressing.
The informal way is to make sure that directors are invited to company social functions where few drinks will make any employee speak his or her mind. good CEO who is proud of what they are doing should be delighted that directors are taking an interest in the company outside of board meetings. Board members should not tolerate steps by their chief executive to prevent intermingling with staff and would be wise to see such manoeuvres as warning sign of possible poor performance.
A simple definition of governance is “the systems and processes in place for ensuring proper accountability and openness in the conduct of an organisation’s business. company’s board of directors has ultimate responsibility for governance of company.”
There has been recent criticism of boards being too conservative and risk-averse, often seen as result of the preponderance of lawyers and accountants who are directors.
To some degree this has come about from some of the creative accounting and legal decisions made pre-1987, and more latterly Enron. However, these are the exceptions, and we shouldn’t bog ourselves down with negatives when business is all about acting positively.
The late John Fernyhough, former lawyer and businessman, was director of one company of which I was chief executive. Looking at commercial legal matters, he would say “here are the legal issues”, and then, with glint in his eye, say “now let’s have look at what the commercial odds are of those issues arising”.
I feel it is similar matter with corporate governance. Directors can go overboard protecting themselves against claims when the commercial reality is that there have been no claims on directors for making an incorrect decision. Directors need to recognise that growth comes from taking risk and they must take responsibility for growth first and foremost.
Just Water International is the only company listed on the New Zealand Stock Exchange where the directors have fixed term: maximum of five years for the chairman and four years for the directors. The reason? Many directors of companies are there for the outing for the month and although well-intentioned, do not add to the organisation’s growth but become more concerned about the accounting and legal governance aspects of the business.
It is true that limiting directors’ terms in office means organisations lose their experience. But if growth is the company’s governance mantra, the different dynamics that new director brings far outweigh the negatives.
If I had my way, I would ban the word governance from the corporate vocabulary – it implies bureaucracy. I would advocate the use of the words “corporate growth”, as that is the objective of companies. Obviously there is an understanding that the directors operate within the parameters set out by the law.
I would make all directors subject to fixed contracts of maximum of five years. This should have the desired effect of spreading good corporate growth objectives. It also allows bad directors to drop off company Christmas card lists.
Boards need to be small to be effective: Large boards tend to have herd mentality while small ones allow everyone to say their piece.
Corporate governance can be interpreted in many different ways. In New Zealand today it seems to be treated as bureaucratic gag on businesses to grow. It is up to individuals in companies to see accounting and legal governance as merely parameter in the pursuit of increased shareholder value and growth.

Tony Falkenstein is chief executive of publicly listed Just Water International, company he founded in 1987.

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