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August 2018: Governance | Due Governance

The Changing Face of Governance

Has governance ever been in the news as much as it is in 2018?

Perhaps this is just the natural evolution of the economy.  When the industrial revolution arrived, there wasn’t much of a need to talk governance.  When the economy is driven by a handful of industrialists who hold all the capital – governance is a non-core issue.  But as the industrial revolution has turned into a sales and marketing revolution, a new term has appeared in boardrooms around the country – ‘social licence to operate’. 

My background is as an institutional investor.  So traditionally I’ve only needed to take one mindset to the job.  Managing risk and returns.  But when I switched to work for a government owned investor 15 years ago, things became slightly more complicated.  It is important to manage risk and returns where some of the risks include making the front page of the daily paper for all the wrong reasons.  On reflection though, this is not an enormous change in mindset and one that has more recently become formalised with the language of socially responsible investing.

Others with a different base mindset would interpret socially responsible investing and talk of a ‘social licence to operate’ as part of a different trend.  One that never focussed on the needs of asset owners, i.e. shareholders, in the first place.  This is the trend that folks like David Murray (AMP) and Graham Bradley (HSBC) are pushing back on.  And on behalf of asset owners I say – rightly so, but to a point.

Any extreme view is likely to be wrong.  Mandating the social licence to operate in a set of ASX Corporate Governance Principles is an extreme view.  Only focusing on maximising returns to current asset owners is also something of an extreme. Just ask Volkswagen shareholders if they are happy about the decision to maximise VW sales by producing cars that met the emissions test (rather than producing cars that met the emissions standards). 

Of course, it is not unheard of to formalise or even legislate an extreme point of view.  The superannuation industry for instance is mandated to operate for the sole purpose of ‘providing retirement benefits to members, or to their dependants if a member dies before retirement’.  How can a listed company simultaneously meet this sole purpose test and meet the obligations to their shareholders to maximise returns?  The two are not mutually exclusive, but you can see how it can be difficult to achieve both simultaneously. 

So how can Trustees and Directors navigate their way through this ever-increasing minefield of expectations?  We believe good governance already tries to take all relevant factors into account – simultaneously. 

Good governance

A journalist can expect to have an editor review their work.  It shouldn’t be hard to make the case that a good process is one where the person doing the checking is different to the one who performed it. 

Separation of responsibilities is one of the core principles behind good governance.  The people who are providing the oversight and governance need to be independent of those performing the work.  An extension of this is that it needs to be clear what the overarching purpose of the organisation is, and how every individual is contributing to that.  Whether that be in making recommendations, making authorisations or just providing a cross check.  This is why Trustees and Directors can do their best work by asking questions, rather than by giving instructions.

But what questions to ask?

Corporate psychologists will point out that as individuals we all have our own specific cognitive strengths which in turn translate to the kind of questions we ask.  Some people naturally focus on exploring the options that are available to them, while others are likely to focus on the people or processes required to complete a task.  It turns out only a small subset of people are likely to focus on risks. 

It is unlikely for any one individual to cover off all the bases – and without a well organised framework and culture it can be impossibly difficult for a group of people to make sure they ask all the right questions.  Unfortunately, without the right people asking the right questions, it is human nature to neglect what’s not already on the table.

This is why having a group of divergent thinkers around the table is so important.  Cognitive diversity can start with some of the obvious visible things (like gender, educational background and even tenure), but these things are only relevant if the individuals in the group are likely to ask different kinds of questions.

So what kind of topics should directors be focusing on?  With so many public failures being exposed lately, there are increased calls for Board’s to ensure their organisation is operationally compliant. Others say no, its focus should be on strategy while other say it's culture.

Who would have predicted that 2018 would see the word ‘governance’ to be part of the hubbub both at cocktail parties and in pubs? However, consideration of the questions a board should be asking is not new for governance thinkers such as Bob Tricker.  The Tricker model is one of the tools that directors can use to ensure the board covers off all the issues everyone is talking about these days, from compliance and accountability to policy making and strategy development.  And along with additional questions relating to culture and capability, the Tricker Model represents the framework that our Ask system is based around.

Figure 1: Tricker Governance Model

And as David Murray would no doubt agree, the CEO is at the centre of the whole process.  But as Murray’s predecessor at AMP knows, the buck doesn’t really stop with the CEO.

- James Dick

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