Governance more than compliance

A good example of the confusion that still exists in some quarters on the role of the board as a matter of good corporate governance is an article by Brian Gaynor, "Directors need entrepreneurial spirit", published in an Auckland-based newspaper on September 30.

Mr Gaynor castigated New Zealand directors generally for excessive concentration on the avoidance of mistakes, compliance with rules and the minimisation of risk at the expense of a commitment to business value. Mr Gaynor then characterised "corporate governance requirements" as a concept that was completely separate and distinct from that of entrepreneurial vision at the board table. He asserted that an emphasis on corporate governance detracted from building business value.

It is true that the performance of many New Zealand companies has plumbed the depths in recent years, but it is difficult to lay the blame automatically on poor board governance. Studies have shown that, while good governance does not guarantee good performance, it makes it more likely. Moreover, poor board governance makes poor company performance even more likely.

Over the same period many New Zealand companies have prospered under strong board leadership and effective management, notwithstanding ensuring that their legal and compliance responsibilities have been faithfully discharged.

I think Mr Gaynor does the New Zealand director community a disservice with his broad, simplistic and disparaging observations.

A more sophisticated analysis of board performance would commence by strongly rejecting Mr Gaynor's observation that corporate governance per se is a bad thing, in that it is a compliance-based approach to a company's direction that necessarily detracts from entrepreneurial endeavour and the skilled assumption of business risk.

Such a definition of the governance of a company's affairs is not accurate.

For this definition, Mr Gaynor cites an Australian manual on directors' duties and decries the lack of guidelines for directors' business requirements.

It may be a surprise to Mr Gaynor, but directors' duties are but one facet among several corporate governance forces and business guidelines for New Zealand directors do, in fact, exist.

The Institute of Directors in New Zealand has 42 separate statements on director best practice. Of direct relevance to Mr Gaynor's complaint is the statement published last year on the role of a board in adding value. This best practice statement makes it clear that a board's fundamental purpose is to add value to the company it serves.

A board must do four basic things.

First, it must understand and approve a company's purpose and strategy. An effective board reins in managerial hubris and adventurism while encouraging the skilled assumption of business risk to generate wealth for shareholders and value for the company's stakeholders.

AdvertisementAdvertisementSecond, it must operate effectively as a high-performing team within a functional culture to make the best possible decisions. Simple behavioural human qualities of trust, respect, candour, professionalism, diligence and commitment characterise the best boards.

Third, it must hold management to account for its performance against the company strategy and it must act promptly and thoroughly when required to ensure this. Effective boards pick up on early warning signals, avoid organisational drift and act decisively to fix problems.

Finally, an effective board ensures a company is always solvent and operates in accordance with best practice, within prevailing mores of acceptable commercial behaviour and in strict compliance with the prevailing legal environment.

These four pillars of board operation define good corporate governance as it relates to a board of directors and they extend far beyond a microscopic and introverted focus on compliance.

An analysis of recent corporate performance using these four pillars of good governance would be a more robust and rigorous exercise than Mr Gaynor's approach.

An effective board ensures the company focuses successfully and consistently on that fundamental purpose. In doing so the board adds essential value.