In the wake of high-profile corporate collapses in New Zealand and overseas, there has been lot of talk about what constitutes ‘good governance’. Greater public accountability for any enterprise is good thing. But in the public debate about business ethics, it’s important not to lose sight of the core business of governance, and that is to deliver world-class performance and results – to create sustainable ‘new value’. To do that successfully, we have to discard the traditional rule book and design new road map. But can we have good governance without rules?
It seems contradiction, but if we break down good governance into its component parts, the logic becomes clearer. We can identify four pillars of good governance – conformance, performance, strategy and leadership. Conformance is all about being legal, and there is clear set of rules for the game laid out in legislation such as the Securities Act, Companies Act and Resource Management Act. These laws and regulations determine the behaviour of the enterprise irrespective of its type.
‘Following the rules’ or conformance then is an initial prerequisite for good governance. But it will not of itself create new wealth and value. To put it another way, conformance is like having pumped up football – it allows you to play the game but it doesn’t mean you’re going to win.
Creating real value for all shareholders and stakeholders is achieved through performance (delivering today’s business), strategy (designing tomorrow’s business) and leadership (taking all key stakeholders with you). In these aspects of governance, there are no hard and fast rules. It all comes down to what is right for the particular situation. Directors have to be able to put themselves in each specific context and facilitate strategies, implementation plans and leadership models to suit. In other words, directors have to be ‘situational schizophrenics’.
Take two similar-sized companies in the same industry sector, one coming out of three-year decline and the other out of three years of steady growth – they’re completely different animals. Directors have got to be able to identify and clearly grasp the implications of the true reality that faces their enterprise. And then they need to think their way forward. Creativity, ideas, strategic perspective and experience become paramount. To give full play to these, directors and senior management must be allowed significant flexibility within tight and understood set of conformance parameters.
This ability to identify and positively focus on reality and to maximise creativity is among the key concepts identified by Jim Collins in his book Good to Great. Collins wanted to know why so few companies have consistently outperformed the US stock market and he analysed the handful that had successfully done so over 15-year period. Other key attributes he identifies include leadership, getting the right people on the bus in the right seats, and business model that generates true economic value and can be best of breed.
So how do enterprises get hold of these precious ‘value creating’ governance skills? Or to continue the metaphor, now the football is inflated, how do you actually win the game? The composition of board is critical, in terms of individual skills, experience, competence, perspectives, motivation, relationships and how directors work as team.
In selecting board members, context is crucial. First, consider the current situation of the enterprise. Secondly, identify the strategic environment the enterprise faces. This will include assessing the competition, market trends and regulatory framework. You might conclude that the enterprise can’t survive in the current situation, in which case hiring experts in the current field will not solve the problem. Directors with wider perspective, who are comfortable with transformational change, and have strong strategic perspective, are needed. Thirdly, analyse the skills, experience, motivation and commitment of the current board members. Out of that analysis, the gaps will be self-evident – around skills, experience, perspective, commitment and motivation and relationships that they bring. Then comes the challenging part: finding candidates who can fill the gaps, rather than simply appointing someone that you know.
Creating value is not based around simple rules. It is based around getting the right individuals in the team to deal with the particular situation in which the enterprise operates. This has powerful implications for succession planning, upskilling and strategic scenario analysis. When you get out onto the pitch, you want to be sure that you have anticipated all possible scenarios to maximise the team’s chances of success. But don’t let flat football ruin the game.
Adjunct professor Neil Richardson teaches on the Waikato Management School MBA programme. He is also chairman of Optical Holdings, Visique Optometrists, Norris Ward McKinnon Lawyers and New Zealand Home Loans and director of Endace Technologies and Prolifix Electronics.
