Self-Taught Governance: As I See It: Many of the Nation's Best Practitioners of Corporate Governance Are Graduates of the School of Real Experience, Having Picked Up Their Lessons along the Way. What Are Common Misconceptions about Governance? and What Are the Particular Characteristics of Governance in a New Zealand Context? Tony Falkenstein Shares His Thoughts
Falkenstein, Tony, New Zealand Management
In the archives of Just Water's head office lie over 300 monthly board or management reports. They spell out the inner workings of Red Eagle Corporation, Just Water International, Just Water New Zealand, Aqua-Cool, Clearwater Filter Systems, Bartercard New Zealand and Buro Office Chairs--all businesses in which I have had an interest over the past 20 years.
To me, they not only record the histories and plans of these companies, they also express corporate governance in action.
Directors often get distracted with the legal compliance aspects of governance and forget that there is a business which needs to be governed. Considering that the board's two principal functions are to hire and fire the CEO and approve the budget, attention needs to be paid to the growth of the business.
And while directors are not there to handle day-to-day operations, they do need to get a sense of how the business is run, as a bad CEO will hide problems from the board.
When back in 1981 I joined a public company as chief executive, I found myself in an organisation that was both clearly insolvent and with a recent unqualified audit report. I went to the auditors and asked how they had signed the accounts. They told me that as one of the directors was a senior partner in a large accounting firm, they thought he would have pulled the plug if they thought it wouldn't survive. I then asked the directors how they expected the company to survive, and they said "well, we got a clean audit--it's now over to you to keep it that way".
The problems were that directors really didn't realise what was going on, the standard of monthly accounting was appalling--and included many inaccuracies--and the company had fallen into the trap of relying totally on the incumbent chief executive.
Directors need to get the smell of a business. Like dogs, they need to wag their tails when the good results are being presented--and keep smelling the lampposts for the bad stuff.
For this reason, there need to be both formal and informal ways that senior management can communicate with directors.
The formal approach relies on board papers. Many boards only look for a summary report from the CEO, as they have so many legal governance issues to address. I personally feel that reports from senior management, incorporated in the board papers, give senior managers the opportunity to communicate with the board, and most importantly the observant director will very quickly sense if there is something that he or she is concerned about, that the board should be addressing.
The informal way is to make sure that directors are invited to company social functions where a few drinks will make any employee speak his or her mind. A good CEO who is proud of what they are doing should be delighted that directors are taking an interest in the company outside of board meetings. Board members should not tolerate steps by their chief executive to prevent intermingling with staff and would be wise to see such manoeuvres as a warning sign of possible poor performance.
A simple definition of governance is "the systems and processes in place for ensuring proper accountability and openness in the conduct of an organisation's business. …