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Corporate Governance gets a grade of C+

Corporate Governance gets a grade of C+

The litany of high profile debacles should have raised the awareness of the need for excellence in governance to avoid such failures in the future. Enron, Worldcomm, Nortel are names that have come and gone with questions about the value of the Board of Directors. Questions have also been raised about the effectiveness of governance at venerable organizations such as the SPCA and Toronto Goodwill. Over the years there have been studies, reports, new regulations such as the Cadbury Report, the Saucier Report (Beyond Compliance: Building a Governance Culture), and the Sarbanes Oxley Act of 2004. We have seen the establishment of formal governance educational programs for the corporate and the not for profit sectors. You can get over 600 million hits in google with the word “governance” so there is no lack of information. Enron went bankrupt in 2001, the Saucier Report was issued in 2001, and the Sarbanes Oxley Act was issued in 2002 – each of these were supposed to be a wakeup call to demand that governance be taken seriously and practiced with effectiveness by the people holding the Director position. So why in 2019, some 18 years later and thousands of dollars spent on education for Directors, did corporate governance get a grade of C+?

In December 2019, the Institute of Internal Auditors and the University of Tennessee-Knoxville issued their report “American Corporate Governance Index – Failure to Make the Grade.” While the results are derived from a survey of Chief Audit Executives at publicly listed companies in the United States, there is learning for Boards of Directors at organizations in Canada – publicly listed, crown corporations, not for profit organizations.

Out of eight principles for good governance, the survey indicated that Boards achieved a score of B for four of the principles: understanding the stakeholders; understanding that the Board is to act in the best interest of the company while balancing the interests of other key stakeholders; providing for a healthy company culture; and ensuring that corporate disclosures are in compliance with legal requirements. The grade of C was achieved on the other four principles: interaction among key stakeholders, management and auditors; ensuring the company has a sustainable strategy focused on long-term performance and value; ensuring that the information it receives is reliable to enable its effective oversight; and providing information to enable stakeholders to evaluate if its corporate governance is effective. 

There were subsets to the principles. Worrisome items noted was the grade of D assigned to the Board taking action to determine if information presented to them was accurate and complete. Over my two decades of consulting in the governance arena, I can verify that indeed this is an issue. It is important that there be a ‘trust but verify’ relationship with the CEO and management team. If the information which the Board receives is incomplete, inaccurate, or lacks timeliness then the ability of the Board to conduct its oversight and the ability of the Board to make effective decisions is severely impaired. There is a difference between information and “informative” information. I have reviewed Board packages which have run in length of hundreds of pages only to find the material to be full of “stuff,” not necessarily the material which a governing body requires to fulfill its responsibilities. I have seen various Board packages containing material which can be described as cryptic, or some that are overflowing, some that only give the information which takes the Board through a path to arrive at the conclusion which the CEO wants it to arrive at.

Another item which achieved a low grade was the relationship with the CEO. The results of the survey noted that more than one third of Directors are not willing to offer contrary opinions or push back against the CEO. Indeed the CEO is the subject matter expert in operating the organization but the Board of Directors needs to exercise its role and bring its knowledge into the discussion. Why else have a Board of Directors? Constructive dialogue is important – not passive nodding of heads.

It was noted in the survey that Board evaluations are weak because the Directors evaluate the governance practices themselves. This mechanism generally is a check the box exercise and represents the Directors evaluating themselves on how they perform the governance duty. This is not a very robust system for evaluating those at the ‘top of the house.’ A mediocre methodology results in mediocracy that will, over time, fail the organization. There are few Boards willing to be subjected to a fulsome governance audit. I have performed governance audits for Boards and while it is an extensive exercise it provides valuable insight which can propel the advancement of governance for the benefit of the organization which in turn benefits the various stakeholders.

So here we are, 18 years post the Enron debacle and various studies conducted by capable individuals crying out for Boards of Directors to actually carry out a productive role. But the resulting grade is C+. While most Boards will look inwards and say “it isn’t us, it is them” that needs improvement, I can say based on consulting with Boards and having served as a governance expert on three litigations suing Boards, that almost every Board needs to critically evaluate its functioning and make changes to improve the value of the governance role.

Fay Booker is principal of Booker & Associates, a consulting firm focused on promoting excellence in good governance and enterprise risk management. You can reach her at fbooker@bookerandassociates.com.

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