In a recent Post article, Rob Campbell—economist, trade union leader, experienced director and chair—takes aim at the ‘cult of governance’.
He writes that, “when I look objectively at business or community organisations now, I find very seldom indeed that the addition of a board is really in the best interests of the activity” and concludes by noting that he always tries to steer young people away from a governance career to applying skills more directly in management.
A bold set of statements. Is he right?
It would be wrong to dismiss outright observations from someone with such a depth of boardroom experience, ranging from the Bank of New Zealand through Guiness Peat Group, Accident Compensation Corporation, Summerset Holdings, Sky City and others. An interesting line up for someone Robert Muldoon once called an ‘undercover communist’.
Campbell suggests that part of the problem is the assumption that ‘everything should be run like a business’ and that the commercial model dominates our thinking. The dominance and suitability of the commercial model is certainly worth questioning but a glib phrase such as ‘run like a business’ is simply too loose.
If that means a degree of discipline, then yes, being run like a business is not a bad thing. One of the most useful definitions of governance is from John Carver, ‘the creation of the right benefits for the right people at the right cost’. [1] That applies in any context—commercial, not for profit, and any shade in between. Our work spans all forms of entities and without exception every board is necessarily very interested in the entity they govern not going broke and hence being able to continue delivering on its purpose. Simple business discipline.
Agency theory [2] makes an appearance in the article. In governance, the principals (owners/shareholders) put in place an intermediary agent (the board) to represent their interests through the necessary oversight of the operation of the business. Campbell suggests that this is in part because there is a perception that management can’t be trusted. That’s a somewhat negative perception and not conducive to a constructive working relationship between board and management. However, this may be true in some circumstances. Self-interest is a powerful driver within human nature.
The role of the board is to take the place of a group of remote equity owners for whom effective oversight of a complex commercial entity is very difficult. It is even more difficult in a charitable trust environment where the owner equivalents are technically the beneficiaries of the organisation’s activity. They have no representation and no say at the table.
In agency theory, the principal and the agent (board) as a sub-set of the owners are deemed to share common interests, seeking the same outcomes. Interestingly, one step down—when the board is the principal and the CEO is the agent—the same alignment is not so readily assumed. This means the principal (board) must maintain a detailed knowledge about the impact of the agent’s activities. The absence of a board would result in a very loose and vague regime of oversight and require an extraordinary level of trust in management. That is why Campbell is on more solid ground when he criticises governance as he observes it in practice. “They (boards) become mechanisms for delay and prevarication amongst management who spend time gaming them as much as being accountable to them.” Here is the trust issue in a nutshell.
We agree that a board that is unclear about what it is there to do, how it should add value and that doesn’t stick in its lane will frustrate management and waste time. As Campbell notes, even experienced boards often fail to meet commercial objectives and exercise adequate oversight of compliance. But that, he suggests, is in part due to a model that is not well suited to the task. Now that is something worth discussing but in his short article, he does not posit any alternative models.
There is no guarantee that boards, even those comprising experienced individuals, will necessarily work as an effective governance group. Generally, that is because the basics are not in place. Absolute clarity on what success looks like and rigour in monitoring the journey towards it are often sadly lacking. Boards then fail to be clear about what is important to them, both the steps needed to shape the future and what they should be monitoring to evaluate progress. Campbell is right that too often boards are scrambling around on irrelevant issues, wasting the time of intelligent people by discussing the wrong matters at the wrong time.
But, as he notes, accountability is needed and in most contexts the law stipulates this takes the form of some kind of governing board. So, we can’t do away with them but should be able to make them function better. Boards come in many stripes and should be shaped appropriate to context. Sometimes expert advice is all that is needed. In other contexts, relatively passive prudent fiduciary oversight is all that is required. Start-ups with equity holders around the table are different again.
But should smart young people be actively discouraged from a governance career, as he suggests? If we are to have boards then, almost without exception, they could do with some younger smart people. But they need to understand what this thing ‘governance’ is and is not, and how they can add value individually and collectively.
If our boards can’t deliver on that simple goal, then maybe Campbell is right—we need to find another model.
Notes
- Carver, J. Boards that a Difference. Jossey Bass. 3rd edition. 2006
- Agency theory
