What happens when the board fails the business?
Governance is on everyone lips these days and all look towards the c-suite to implement it. But what about boards?
There isn't a shortage of guidance for governance in South Africa. Local organisations can reference the excellent King IV governance framework and the Companies Act, while public sector entities should primarily follow the Public Finance Management Act and the Municipal Systems Act.
Governance is also increasingly a priority for company secretaries, accountants and auditors, though, as recent events reveal, these alone don't encourage good governance practices.
Current operating environments are also making it harder to keep on the straight and narrow, explains Denice Manganye, Managing Partner at e-SEK: "CEOs and boards face a fast-paced world. Prospering in today's rapidly moving business environment is more challenging than ever. Increased competition and increasingly demanding customer expectations require a strong service-based and customer-driven approach. Refining past practices to realise greater efficiencies no longer ensures organisational success and drastic change is required to meet today's need for quality and service. CEO and boards' strategic and tactical decisions must be weighed carefully, but it often doesn't feel like there is enough time to do so."
This, in part, may explain a blistering collection of governance failure examples. At a global level, many are not impressed with US President Donald Trump's brash cowboy-style management approach that is often at odds with the institutions under him. These actions are causing risks for organisations across the globe, which can interfere with sustained governance. In an era of trade wars and Brexits, there is a lot to worry about and governance might be falling to the wayside as a result.
South Africa hosts ample signs of deteriorating governance. The internal shenanigans at SARS, the PIC, Eskom, Transnet and the State Capture Commission of Enquiry have all exposed shocking shortfalls in governance and ethics. The private sector is not immune: Steinhoff's dangerous manipulations, EOH's failure to spot compromising deals inside its silos, food safety shortfalls at Tiger Brands, even the large fines MTN attracted after failing to implement legislation requirements in Nigeria... these are all in effect governance failures.
The high prevalence of cartels in the country is another sign of ailing governance. At present, the Competition Commission has reported 313 cases, 146 of which are cartel-related(1). Hundreds of millions of rands in penalties have been issued already, yet it is still the tip of the iceberg.
Public sector audit findings(2):
* At national level, there was a regression in audit outcomes, with the number of clean audits decreasing to 23% of the total audited population compared to 30% in the previous financial year.
* Unauthorised expenditure increased by 38% from the previous year to R2.1 billion, 86% of which was a result of overspending.
* Fruitless and wasteful expenditure increased by over 200% from the previous year to R2.5 billion.
* Irregular expenditure continued to remain high at R51 billion. This total includes the irregular expenditure of those auditees, where the AGSA had completed the audits after the cut-off date of this report (R5.4 billion). It is worth noting that the R51 billion excludes the SOEs that are not audited by the AGSA, whose total irregular expenditure totalled R28.4 billion.
Bad boards mean bad business
The onus of governance is often placed on the CEO and their lieutenants, a topic touched on in a previous article: Get the visibility a CEO deserves. But, boards share a big part of the responsibility as they approve high-level decisions and strategy. In many of the above cases, boards failed to apply the oversight that could have stopped governance failures and subsequent damage to their organisation.
Boards are typically comprised of astute, smart and experienced individuals. So why does such a high calibre pool fail in a fundamental duty?
"The problem in a boardroom is often the balance of power," explains Cindy Dibete, corporate governance specialist and e-SEK business associate. "Do the bullies get their way? You can put down a dissenting view for the record, but a board is a lot like a school ground. If you want to create change, you need the facts and to win the right support. But boards can often leave the facts to other parts of the business and they just end up rubber stamping decisions. That's when you have a bad board; and bad boards lead to total collapse of corporate governance."
Boards can become rubber stamps, usually because some individuals dominate proceedings and keep getting their way. It also reveals breakdowns in important relationships, Manganye explains: "For a company to be healthy, the relationships between different parties need to be evaluated and revisited. The ties between the chairperson, the board, the exco and the auditors should be looked at. If these are unhealthy, there will be governance problems."
Know what you don't know
Not all board decisions and resulting company actions are intentionally malicious. Let's face facts: if a board and company leadership are set on taking dubious action, no system will stop them except for exposing their malfeasance.
Yet many governance failures are due to ignorance and a lack of insight into the business. Here, technology can play a valuable role by integrating insight across business silos and aggregating these and making them visible to business leaders. It's a paradigm often applied to the c-suite, but this level of visibility is crucial for any board that wants to perform in the new business era.
"Restoring corporate governance with ethics needs ethical leaders who are empowered by information," says Manganye. "We must create leaders who can operate in a multilateral world and have the information to encourage good internal institutions."
The boon of the 21st century is that modern technology can create this ability to stay informed. As mentioned earlier, the right software platforms can be layered across business operations and drive the flow of information. In the case of boards, this means getting away from outdated quarterly reports with narrow scopes, and introducing interactive dashboards that offer insight as needed. The net effects include board members that are more informed (and can counter boardroom dominance), as well as closer ties between the board and company activities.
Creating such a single truth is very effective and can enhance the value of the board. It helps to ensure strategic alignment with board choices, as well as develop good board succession plans to ensure continuity, says Manganye: "This is a fast-moving world that needs integrity and reliability. Doubt is the enemy of good business, so the challenge is how do we remove doubt? If the board is informed in real time, it can act faster."
(1) Competition Commission Annual Report
(2) AG 2018 report