The Chief Executive has to go
There is a word I rarely heard in the early part of my career that I hear all the time these days – ‘governance’. It’s a nuanced concept and one which can provoke some hostility, partly because of the small industry that has grown up around corporate governance and risk management over the last two decades. Conrad Black, the Canadian head of Hollinger International, on discussing a new appointment to his Board is quoted as saying, ‘I hope he’s not one of those corporate governance zealots’. Much later, Mr Black served 3 years in prison for fraud – so it goes.
Good people can function well even in poor governance systems, but the best governance in the world won’t protect you if the quality of the people within it is poor. People are more important than governance.
It follows that any system of governance has one critically important role above all others: the removal of the Chief Executive. This is as true for the ‘star’ CEO of a large company as it is the leader of a small community group. Other governance roles are important to a healthy, functioning organisation, but secondary.
This power of removal is why there is tension in the relationship between the Chief Exec and the Chairman of the Board (or any governance committee). To function well the relationship needs to be so close the Chairman can never truly be called ‘independent’. Nevertheless, as Chairman, you cannot be the Chief Exec’s friend. The power in the relationship is too uneven because, if things go wrong, the Chairman will have to be chief executioner.
Good governance encompasses other, less dramatic, roles such as independent scrutiny, external experience and networks, stakeholder communication, and due diligence on the really big decisions. I recommend a ‘true friends will tell it to you straight’ stance for non-executives. Investors should give a wide berth to companies with combined Chairman/CEO roles or companies where a large proportion of shares is held privately or has restricted voting rights. The risk that the company is being run for a benefit other than yours is too high.
However, I quite like Conrad Black’s quote because there is a point at which too much oversight weighs down the effectiveness of decision-making. There can occasionally be a strand of lawyerly pernicketiness to governance that ignores the big picture and gets everyone bogged down in points of principle of questionable importance. And the limitations of a non-executive director make boards where non-executives vastly outnumber executives – the norm in most publicly-quoted companies and charities – dangerously light in terms of knowledge of what’s going on in the business they are responsible for. UK corporate governance has evolved into essentially a two-tier board structure within the legal framework of a unitary board.
Stripped of embellishments, governance is simply a word that means ‘how decisions are made’. In private companies, it is quite rare for governance to be unclear. In the public and charitable sector sometimes less so. Such organisations are not in complete control of their revenues can therefore never be fully master of their own destiny, especially if operating in a politicised industry such as education or healthcare. Because the potential for uncertain governance is substantial, public sector organisations and charities spend much more time on governance-related matters than do private companies.