Pitfalls Of Profit At Any Cost
‘Systems and structures can provide an environment conducive to good corporate governance practices, but at the end of the day, it is the acts or omissions of people charged with relevant responsibilities that will determine whatever governance objectives are in fact achieved’
- (HIH Royal Commission, 2003)
This statement was made by a Royal Commission way back in 2003, yet the behaviour of many public and high profile organisations during 2017 would suggest that we have learnt little from the debacles of that time or that we have simply chosen to ignore the learnings in pursuit of monetary returns.
This month’s article provides a simple but effective framework for those who choose good governance over higher profits at any cost.
Setting the scene
The application of good governance practices is a matter of depth, not width.
Irrespective of the type of organisation (non-profit, for profit), size (ASX-listed or community organisation) or sector, the governors of all organisations have the same duties and responsibilities – the only differentiator is the depth of that responsibility. This was first acknowledged in our legal system when the trial judge, Justice Tadgell, in the case of The National Safety Council in 1991, stated: “there is nothing in the Code [now the Corporations Act] to suggest that the standard to be expected of a part-time non-executive director of a company not-for-profit is different from the standard expected of any other director of a profit-making company; both are required ….to exercise a reasonable degree of care and diligence in the exercise of their powers and the discharge of their duties.”
Nothing has happened since to diminish this statement, rather the responsibilities have generally become more onerous as a result of common law decisions, an increase in legislation and regulations, and changing community expectations.
Systems and structures
The following key elements are fundamental to good governance and, if Boards diligently and systematically address each of these, then they will be able to demonstrate that they have acted in good faith and in the best interests of their organisation. The components are:
- The strategic plan: where are we going, how we will get there and how will we know if we are on track to achieving our goals. What makes our business unique and how will we sustain our business model over the long term? The establishment of these expectations is critical to the successful leadership and management of all organisations and the board must play a role in this process.
- The risk management plan: what is our appetite for risk, what is the likelihood of adverse events occurring and what is the likely impact on the business should any of these events occur? The risk management plan is the outcome of a process that a cross section of the organisation participates in; thereby ensuring the best result possible is achieved. The challenge is to develop strategies to mitigate and manage these risks.
- The performance management framework: how is the organisation, the CEO and the board itself tracking against the expectations agreed on at the start of the year? How does the scorecard look against the performance benchmarks set and then how can we improve performance from what we have learnt during the review period?
- Stakeholder engagement: no longer can an organisation operate with its sole purpose being customer/client satisfaction. Whilst this obviously sits high on the priority list, we ignore other stakeholders at our peril. Other stakeholders include regulators, the government, special interest groups and the community in general. Furthermore, the rise and rise of the digital age and social media means these groups/individuals now have an unshackled and instant voice that can generate both good and bad exposure and must be managed accordingly. A stakeholder engagement plan is a good place for a Board to start.
The second component of good governance is the development and establishment of the right organisational culture. Culture has many explanations (Google the word and it will be all in front of you!), however, a couple that resonate with us are, “the way things are done around here”, and, “how people behave when the boss is not around”.
Suffice to say, without the right culture that determines and authorises behaviour through clearly articulated expectations and standards, then the business will be subject to the whim of individuals and driven by attitudes and actions that may or may not align with what the board and the leadership team see a fundamental to long-term success.
2017 was littered with organisations that have, in the aftermath, noted that the prevailing culture was the root cause of their problems and these organisations are now faced with creating a new environment that enables the business to achieve their goals, but not at any cost.
The key questions for a board on this matter include:
- Has the board been involved in creating and articulating the preferred culture that will underpin expected behaviour?
- How does the board know if everyone in the organisation understands these expectations?
- What is in place to provide evidence to the board of actual performance in this area?
Creating and maintaining the right culture is a difficult process, and one that the board must show strong leadership in and incorporate into its governance responsibilities.
Remember, good governance is a journey, not a destination. A constantly changing external environment (social, economic, technological and legal) means we must have an adaptive business model in place to succeed and this refers to our governance practices as well – both are fundamental to business sustainability and relevance over the long-term.
For further information, go to www.governancetoday.com