The five fatal corporate governance mistakes

Corporate governance is rather like hospitality staff: when it’s good, you barely notice it’s there, but when it fails it can completely ruin your night.

I’ve been a director on ASX boards for twenty years, and in that time I’ve seen five serious corporate governance mistakes that tend to be repeated over and over again.

The overarching principle of good corporate governance is that of robust discussions between people with diverse skill sets. It starts with who we put on the board, as that in turn dictates how the board runs. These are the common mistakes I see in this realm:

1. Selecting for the norm

Board members are often selected in an informal way rather than through a transparent selection process. It’s often a mystery to directors, as well as everybody else in the community, as to how they are selected. It’s human nature to incline towards people like ourselves, but the effect on a board is that we select people who are very normalised on the distribution curve. Outliers, whether in terms of identity, approach to problem solving or skill set, don’t get a seat at the table.

Indeed, when they do, their views are either marginalised or they come under pressure to conform. There’s a tacit pact between board members to all get along, which makes it difficult for a member who wants to challenge the status quo but may fear being labelled as ‘aggravating’. But it is in the challenges to the status quo where we stretch our thinking. Too much amity can mean a lack of rigour in how we make decisions.

2. Taking a narrow or tokenistic approach to diversity

Our tendency to define diversity narrowly, or to limit our attempts at diversity to token individuals, also reinforces the initial problem. Diversity includes both gender and cultural diversity, but it should also encompass diversity of thinking skills and approaches to problems.

Often, a board will realise that it has a lack of diversity, and will appoint, for example, a woman, or a person of colour, or a technical specialist. No one person, however, can have a conversation with themselves and so it’s easy to perceive that person as not having much to contribute. That board is then disinclined to stray from the norm in the future, and the problem continues.

3. Overloading boards with finance people

The financial health of a company is a vital topic, but it’s not the only thing a board should consider. The tendency, however, is for boards to appoint people from a financial background. Finance then becomes the dominant topic discussed by the board to the detriment of other issues.

Where budgets and other financial matters are too preponderant, issues around strategy or technology, engineering or customer experience, are lost. It is for this reason that I include diversity of thinking skills and experience when appointing any board member.

The role of the chair isn’t to be the opinion leader; in fact, that’s almost always detrimental to the board’s governance. Instead, their value is demonstrated in getting the best out of a team of decision makers.

4. Selecting celebrities instead of team leaders

One of the biggest mistakes I regularly see is the appointment of a ‘celebrity‘ chair instead of a true team leader. There’s some great work that’s been done by Elliott Jacques, a Canadian organisational psychologist, on the importance of foresight and systems thinking in the chair role.

The role of the chair isn’t to be the opinion leader; in fact, that’s almost always detrimental to the board’s governance. Instead, their value is demonstrated in getting the best out of a team of decision makers. Put together a good team, make sure that they’re willing to challenge assumptions and bring high capacity intelligence to the table, and you’ll generally have good corporate governance.

5. Narrowly focused remuneration committees

Remuneration committees very often focus only on the rewards to be allocated to the senior management team. That can lead to large pay disparities, which have implications for the company culture as a whole.

A 2014 study by Harvard University and Chulalongkorn University researched showed that Australians believe CEOs should be paid 8.3 times what the average unskilled worker earns: in fact the ratio is closer to 93 times.

Remuneration reports make the reward structures visible to all staff, and where there are huge disparities between senior and other staff, there is a risk that lower paid employees will feel that their organisation is not treating them fairly.

That gives rise to practical risk management considerations. Mobile phones mean that every employee is a potential journalist who can take a photograph or record an incident at any moment. Disaffected employees can present a danger to the company culture, or to the company’s clients.

Remuneration committees need to widen their scope and address cultural and motivational issues throughout the organisation, especially the fairness of the reward structure.

Great corporate governance requires the board to take smart risks

For great corporate governance, the board must be willing to take smart risks. That means thinking outside the norm in who they appoint, daring to challenge the status quo within the board, and using greater diversity of approach in thinking strategically. When we play it too safe, our corporate governance suffers.

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