The ‘missing link’ to good governance

Many boards struggle to demonstrate their value and contribution to their stakeholders. They are often seen as a necessary expense, rather than a strategic asset. But it doesn’t have to be this way. With good governance practices, boards can become a powerful force for positive change and performance improvement. 
 
What is the ‘missing’ good-practice governance that makes the difference between a board, even one of ‘all-stars’, and a value-adding board? 
 
Poor governance practice by some raises questions for many about the value of governance. Any number of company and organisational failures are attributed to governance. 
 
Fraud, accounting scandals, insider trading, paying executives too much and other organisational failures are attributable to governance failures. 

There is a long list of papers highlighting corporate governance failures at the  highest level, including the likes of Parmalat, Volkswagen, Enron, WorldCom, One-Tel and UK Post Office. Closer to home, add the Pike River Mine disaster. 
 
With this litany of poor governance, is it any wonder that directors and boards can often feel they don’t add value or make a difference through governance practice, including investing in improving it? And it gets worse because there are aspects of our system that reinforce this, including: 

• • An inadequate account taken of the importance of governance boards in funding decisions, notably not-for- profit, for purpose, social services entities. A 2019 Social Service Providers Aotearoa independent study, ‘Social Service System: The funding gap and how to bridge it’, recommended “the Ministry of Social Development, Oranga Tamariki 
    and The Treasury investigate providing sufficient remuneration for provider governance boards and risk committees so providers have access to specialist expertise to support risk management and oversight”. This points to a systemic failure to adequately recognise the value of governance. 
  • A trend to impose legal duties on directors (as officers) that merge the roles and responsibilities of the board and management. The IoD highlighted this trend in a 2019 Boardroom article, ‘Balance of responsibility’ and it has continued since then, including in the Incorporated Societies Act 2022 and  in amendments to the Charities Act. Lumping management and governance into the same basket undermines the role that directors and boards play, and the value of governance. 
  • Directors being seen as simple ‘agents’ of company shareholders and society members. In a 2023 report named ‘Responsible Leadership in Corporate Governance: An Integrative Approach’, Monique Cikaliuk and fellow authors comment on the “. . . economic and legal understanding of directors as corporate agents of shareholder as principals . . .” They say in this view of governance, directors as agents operate within the existing corporate governance framework (that is, a specific social system) and typically are expected to behave in a “reactive, adaptive and transactional” way. In doing so, directors use only “ordinary” capabilities, as Professor David Teece describes them, solely focused on the current operations of a company or organisation, as opposed to dynamic capabilities through which directors and boards help their organisations to adapt to changing environments and take new opportunities. 

These considerations led to ‘the value-adding board’ being one of the Top 5 issues for directors for 2024. We wanted two things to happen with this focus: 

• • The value of good practice governance in the private, not-for-profit and public sectors to be recognised by people within organisations, shareholders, funders and policymakers 
  • Directors and their boards to feel proud of the difference they make through improving their governance practice and to celebrate this achievement 

It seems slightly odd to say this because it seems obvious – good-practice governance and boards do add value. And they add more value than might be suggested by what is outlined above. 

Right up front, the Four Pillars of Governance Best Practice explains why governance matters: “. . . governance exists to help organisations achieve their fundamental purpose, as articulated and subscribed to by their owners (or members) and stakeholders. For companies, this is typically to maximise shareholder value. For other organisations, it may be to ensure they can pursue policy, non-profit, public good or commercial objectives. Directors with a well- developed understanding of corporate governance and commitment to continuous improvement can become effective decision-makers and drivers of performance.” 

Advantages of good corporate governance can include providing organisational leadership; ensuring accountability and transparency; lowering the cost of capital and increasing the value of a company; making investments more attractive, which in turn can lead to growth and more employment; producing better operational performance through better allocation of resources and better management; reducing the risk of financial crises that can have devastating economic and social costs; and ensuring stakeholder relationships are managed. 

If this isn’t value adding, it is hard to know what is. 

This also explains KPMG New Zealand’s ‘What difference can directors make?: Aotearoa New Zealand Directors’ Guide to Climate Governance’. This guide highlights the vital role directors play as overseers of risk and stewards of long- term value. 

At the same time, empirically, it is much more difficult to find examples where there is a link between good governance practice (however defined) and improved organisational performance that bear out the value-add identified in the Four Pillars. 

There is a good reason for this. Stanford University’s David Larker and Brian Tayan noted in a 2023 article: “In the case of corporate governance, many important variables are not publicly observable to outside researchers, forcing them to develop proxies to estimate the variable they want to measure. It is extremely difficult to produce high-quality, fundamental insights into corporate governance because of these limitations.” 
 
Despite this, there is theoretical and empirical research that points to boards and directors adding value in many ways, most of which relate to the existence of a board and, more importantly, practices that are mostly ‘unobservable’, as Larker and Tayan identify. These include:

• • Harnessing the power of a collective of different sets of skills and expertise
  • Having the time to look over the horizon and out of the day-to-day rough and tumble, and managing a company or organisation 
  • Supporting chief executives (and their executive team) who have a generally ‘lonely’ existence and need all the support they can get 
  • Going beyond the compliance ‘tick box’ to focus on outcomes 

The ‘missing’ or least forgotten link to improved company and organisational performance is governance practice. 

What about diversity, surely that also makes a difference? You can have diverse boards, directors who have strong strategic capabilities, directors who have been fantastic leaders in their own right, and directors who are mostly lawyers and accountants who know the law and the accounting rules backwards. These could be seen as boards of all-stars. 

Yet, it is possible to see all-star boards not performing well, not making a unique contribution and, as result, not adding value. Why? Because in the midst of this is the practice of governance that is thought about deliberately and is tailored to the circumstances of a company or organisation, and can be changed to meet changing circumstances. 

Board evaluations, using readily available tools from the IoD; ongoing personal reflection by board members; ongoing mentoring from experienced directors and capability development, including through governance development courses (all of which contribute to members’ continuing professional development), all have a part to play in addressing this ‘missing link’. 

That way we get true value-adding boards that make a positive difference to the way our companies and organisations perform, with benefits for all of us now and into the future.