Thursday, 01 March 2018

Good Governance Gone Bad

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Good Governance Gone Bad

Did you hear about the BP oil spill in the Gulf of Mexico in 2010? What about the 2015 Volkswagen emissions scandal? Poor working conditions at Sports Direct and the collapse of BHS? Unless you’ve been living under a rock for the past decade, the chances are these headlines won’t be news to you. 

What you might not be aware of, however, is that at the heart of these stories lie some fundamental governance failures. A lack of oversight by senior management or questionable decisions taken by a company’s board of directors can lead to disastrous results.

We’ve written about company secretaries and their role as governance professionals before. Sometimes described as ‘the conscience of an organisation’, the role is undoubtedly an important one. Having a seat at the boardroom table means that company secretaries are privy to otherwise confidential meetings. They are exposed to the highest-ranking individuals within an organisation and to the most far-reaching decisions that they make.

“You are part of shaping what corporate governance looks like, not just for your company but for the FTSE and for other private companies, which I think is quite unique”, says Adaeze Okike, senior chartered secretary at Aviva plc. She adds: “One of the best things about my job is seeing the impact of good governance on the business”.

“If applied fairly, honestly and appropriately, good governance can directly contribute to long-term business sustainability” says Caroline Sibanda, company secretarial assistant at EY. “More accountability and greater transparency ultimately improves trust in corporations”.

At first glance, it’s not obvious what good governance actually is. It’s certainly not something which is easily defined (the UK Corporate Governance Code legislation is extensive!) and it is seldom celebrated. Good governance is, in a sense, invisible for it ultimately manifests itself in the smooth running of an organisation. Most of the time we only become aware of good governance by its absence.

“We’ve seen examples of bad governance recently”, says Adaeze. “For example what happened in BHS and Sports Direct. This can have an impact on employees and customers”.

It is usually only when such a story is uncovered that we are made aware that there has been a failing in the governance of that company. As Tesco chairman Sir Richard Broadbent said of the retailer’s accounting scandal in 2014: ‘things are always unnoticed until they have been noticed’. So it is with good (and bad) governance.

Take Sports Direct, for example. In 2017, the sports retailer was accused of a multitude of failings in relation to its working conditions. These included forcing workers to work unpaid overtime and creating a culture of fear whereby staff were afraid to take sick leave for fear of losing their jobs. There were even allegations of permanent contracts being offered in return for sexual favours.

Following an investigation, a report by the Business, Innovation and Skills Committee stated that Sports Direct founder Mike Ashley had to be held accountable for the company’s failings. It was suggested that Ashley, a frequent visitor to the Shirebrook warehouse where the unsavoury practices were commonplace, must have long been turning a blind eye. That, ‘or there were some serious corporate governance failings which left him out of the loop’ asserted committee chairman Ian Wright.

In 2014 it emerged that Tesco had overstated its pre-tax profits by £263m as a result of a failure by the retailer’s finance chief, managing director and food commercial head to correct inaccurately recorded income figures. The result was that £2bn was wiped off Tesco’s share price and all three men were charged with fraud by abuse of power. The subsequent trial was interrupted four months in when one of the defendants suffered a heart attack, with the Serious Fraud Office set to decide whether to continue the trial imminently.

It shows that seemingly minor governance failures, such as accounting mistakes or not paying minimum wage, can fast turn into high-profile issues. And the consequences for an organisation, both financial and reputational, can be significant.

“There is a gap between governance in principle and governance in practice”, says Caroline. “While legislation and voluntary codes guide companies towards appropriate conduct and hold them to a high standard, the most significant onus is on companies themselves to, not only abide by the law, but fully embrace the spirit and intentions underpinned them. I would encourage a continued focus on how current governance practices may be failing to fulfil their intended purpose and determine the necessary and appropriate actions to bridge the gap”, she suggests.

And it’s not just corporates. One of the reasons behind the collapse of charity Kids Company in 2015 was poor governance. The charity’s board had failed to properly address risk, set the strategy and keep the executives accountable. The situation was exacerbated by the dominant and rather difficult personality of the CEO and founder of Kids Company which led to a lack of internal challenge.

So where do company secretaries come in? Good governance is supported and enabled by company secretaries. Through their daily responsibilities they directly contribute to creating an environment which supports good decision making and which avoids creating a scandal of the aforementioned proportions.

“At this stage in my career, one aspect of my role that contributes to good governance is ensuring compliance through the timely and accurate filing of company accounts, confirmation statements and Persons with Significant Control information for display on the public register”, says Caroline.

Of course company secretaries can’t take it upon themselves to prevent these total corporate failings alone. But their seat at the board gives them a privileged and panoramic view usually reserved for those at the very top. And there’s a lot to be said for that. Perhaps there’s a reason they’re referred to as the conscience of an organisation.

Last modified on Friday, 02 March 2018 12:26