Why effective governance must start with clarity of purpose and intended impact

As this issue was being prepared, New Zealand’s Auditor-General John Ryan reported to one of Parliament’s Select Committees that many government agencies are producing “a lot of rubbish” in their performance reporting, leaving ministers and the public unable to judge what they are achieving in practice.

According to one report (paywalled) Ryan referred to the ‘classic’ example being government agencies regarding it as sufficient to report that they had ‘drawn the money down in accordance with cabinet guidelines’. Likewise, agencies would typically report that they had ticked off ‘project milestones’. But what the taxpayer had received in return for achieving those milestones was not necessarily reported.

Another report (also paywalled) expanded on Ryan’s explanation, suggesting the problem is that much of this kind of performance reporting is based on a culture that encourages a ‘rose-tinted-glasses’ view of the world. How government agencies approach performance reporting is the student’s report equivalent of saying they sat an exam or handed in an essay, without giving a mark or saying if they learned anything. It was suggested that one problem with this is that “issues are hidden until they are blindingly obvious”.

While agreeing with the A-G’s conclusions, we hasten to add that this practice is just as common in other kinds of organisations, including in the private sector. The problem starts with strategic plans that are almost universally couched in terms of ‘what we are going to do’ rather than ‘what we are going to achieve’. Then, unsurprisingly, the performance reporting that follows describes effort and activity with scant documentation of impact.

At the governance level, it is essential that performance expectations are framed in terms of outcomes or results directly related to organisation purpose (why the entity exists) and the outcomes (benefits) it must deliver. These expectations must be set out set out before a strategic plan (on how to deliver those benefits) is prepared.

We go into this in more detail in Why your current strategic plan is probably of little use as a governance tool.

Compounding risks

Ram Charan’s advice on organisational issues is always worth considering. In this recent newsletter he gives us another reason to doubt the utility of the kind of risk register many boards still rely on as the focal point for their consideration of risk.

Using three kinds of risk (brand risk, financial risks and geopolitical entanglements), Charan illustrates how they are part of a growing trend of compounding risks that are not merely additive but multiplicative. They (and/or other kinds of risk directly applicable to your organisation context) accumulate and intertwine, creating complex threats that can have far-reaching implications for your organisation.

He offers strategies to mitigate compounding risks, arguing that their nature requires us to be more agile, foresighted and strategic in our approach. We must anticipate, adapt like never before and act decisively to navigate these challenges. What is more, the ability to manage these risks effectively can be a competitive advantage. Read in conjunction with the KPMG report also referenced in this issue.

Risk oversight: Reassessing board and committee structure

The rapid expansion of risks in cybersecurity, generative artificial intelligence, climate change and so on has been a catalyst for many boards to look hard at how they are organising board work and director recruitment and education.

KPMG recently convened a conversation with the lead directors of Fortune 100 and other large companies about these issues.

Three key takeaways emerged from the conversation:

• Given the velocity of change around risks, boards should periodically re-examine their board and committee oversight structures to determine whether changes may be needed.
• Coordination among committees and committee chairs and communication between committees and the full board are critical.
• Reassess the skill sets of the full board and committee members to help ensure effective oversight of emerging risks. Consider whether to add additional directors, bring in third-party experts to educate and/or advise the board and/or committees, or create an advisory board to bring focus to an issue.

The challenge of taking a corporate position on political and social issues

Pressure from staff and other stakeholders to take positions on social/political issues is likely to continue. Something we learned in 2023, however, was that organisations face dangers when they wade into social and political controversies without thinking through the potential consequences.

For example, we had US university leaders forced to resign because of the way they handled their institutions’ positions on the Israel/Hamas conflict. The issues involved have historical antecedents that run deep and strong. They extend and have implications far beyond the immediate protagonists.

Another significant example was from the annals of the so-called culture wars. The third-quarter 2023 results for AB InBev, the company formerly known as Anheuser-Busch, revealed a 13.5% decline in revenue due in large part to a steep drop for sales of its Bud Light beer. The purveyors of the (previously) favourite beverage of many US consumers associated itself with a social media influencer who chronicled her transition from male to female.

The facts are detailed in Why Are Corporate Boards Doing the Opposite of What Consumers Want?, a Directors & Boards article by Kimberly A. Whitler, Julia D. Mahoney and Mary Kate Cary, along with a wide discussion of the challenges facing boards going down the identification with social issues route.

What do you think? Does the experience of Harvard University and AB InBev serve as proof that it is best to avoid commenting on or even aligning your organisation with certain pollical and social issues? Or might a company, for example, be able to look past the possibility of potential revenue losses to achieve further progress on diversity and inclusion? Does it benefit in ways other than the financial? Is the nett benefit (or cost) worth it?

How women improve decision-making on boards

A recent Harvard Business Review article by Margarethe Wiersema and Marie Louise Mors reports research involving women and men directors at more than 200 publicly traded companies in the US and Europe. The authors highlight that the presence of women improves the quality of boardroom discussion in several ways because, in particular:

• women directors come to board meetings well-prepared and concerned with accountability
• women are not shy about acknowledging when they don’t know something, are more willing to ask in-depth questions and seek to get things on the table.

The authors acknowledge the qualitative nature of their study does not allow an assessment of the impact of women on company performance but say that their findings suggest that the presence of women may indeed improve corporate governance and lead to better decision-making.

While noting that the authors make broad generalisations, these are consistent with our observations and experience.