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What now for governance?

September 14, 2016

Theresa May’s pronouncements on reforming the governance of big business, controversy over the failure of BHS, continuing revelations from the Panama papers and the publication of the Financial Reporting Council’s deliberations on corporate culture and the role of boards mean interesting times for corporate boards. The confluence of these events along with Brexit and the implications of a Trump presidency will challenge the best of them.

May is responding to a perceived public demand to address what some see as an unacceptable face of business. There is nothing new in the extraction of wealth from an established business by its directors nor in efforts to hide money or avoid taxes. The BHS story and the Panama papers simply remind us it is still happening. Nor is there anything new in attempts to prevent such things and unfortunately it seems unlikely that the latest ideas by our new prime minister and the FRC will be any more successful than previous efforts. Her words may remain just words, they might not become policy and if they do policy might not be implemented. She may think that talking tough is sufficient: perhaps, in political terms, it will.

May’s proposals at first sight seem like a breath of fresh air to those frustrated or angry with how big business seems, in their eyes, to benefit a few people at the expense of many so her intention to give more power to shareholders and employees will be appealing. Giving shareholders a binding vote on executive pay looks like a way to empower shareholders but would be difficult to introduce as it could require other legal changes and it could have unintended consequences in the relationships between boards and shareholders. Similarly the idea of having employees represented on boards would increase board diversity but would employees want to take on the potential legal liability that goes with board membership? And would it mean boards run companies better? Volkswagens employee representatives on its board did not stop the emissions scandal. The effectiveness of non-executive directors can be limited by a lack of detailed knowledge of the business. Employee will have a very detailed knowledge of their work area but could be equally ignorant about other parts of a company unless there is a process for other employees to inform them. It would be naive to think that employee representation would make boards better. But it could help if board Chairman use the change constructively – particularly in helping boards to be more aware what is going on with their companies.

What is needed is for reforms to change behaviour for the better. The FRC report on culture, in trying to turn culture into a process or set of tasks, fails to help people in understanding human behaviour – why people do what they do and when and in what circumstances. This is a pity as that surely is why any board should want to learn about culture. The FRC talks about the importance of values and ethics but does not seek to understand why employees might not heed values statements or ethical codes and, by extension, why attempts to establish a culture may not work or have unintended serious consequences.

For work on culture to have any value for companies it must address why people do things and when and that requires understanding what motivates and incentivises people. It is necessary to understand the business model and consider what its continuing success depends on and, within this, how people are motivated and incentivised. Most boards want to do the right thing for their companies, their shareholders and their employees. More instructions to be ethical will be less helpful than changes which remove incentives to cheat and improve incentives to do the right thing.

Some foresight would be also helpful including in making sense of the politics. Scenario planning brings rewards. It sensitises people to what might happen, and gets them thinking creatively in how to address issues. It also gets them doing systems thinking, understanding cause and effect better rather than incrementally simply reacting to one event after another. This prepares people for uncertainty so they can embrace it rather than recoil from it.

Doing these things – thinking about incentives, thinking about scenarios then acting appropriately-should make boards and their companies more resilient and better able to thrive in a post Brexit and possibly Trump environment.

Written by Paul Moxey, SAMI Fellow.

The views expressed are those of the author and not necessarily of SAMI Consulting.

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