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Global Governance Advisors

When is Corporate Governance Important?

Posted by Brad Kelly on May 20, 2019 9:00:00 AM
Brad Kelly
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Most of you should be (figuratively or literally) familiar with Murphy’s Law: “Anything that can go wrong, will go wrong,” and throughout history, this saying has been validated time and time again. Therefore, if you ever wonder if or when corporate governance should be considered important, the simple answer should be “ALWAYS.”

Board members can get complacent. Its easy when things are going well, flowing, fool proof. Organizations can ride positive waves for years, which can feed this sense of complacency. However, many boards have fallen prey to the sudden impact of Murphy’s Law. For example, I don’t think the Board at:

  • Barings Bank was prepared when it discovered that a single futures trader had racked up huge unreported debts for years;
  • Lehman Brothers and Bear Stearns were prepared for the impact of the subprime mortgage crisis (nor anyone else for that matter);
  • Goldman Sachs was prepared when a well performing executive, Greg Smith, suddenly resigned in 2012 - penning a scathing New York Times letter and subsequent tell all book on his view that the company’s culture was “toxic and destructive;” and
  • Facebook was prepared to be pulled into public hearings after it discovered that their platform had been secretly used by foreign powers to influence election outcomes.

Likewise, Boards are not always prepared when top performing executives resign for greener pastures, or data systems experience internal glitches or are breached by hackers. Nevertheless, all these examples show that numerous things can and do go wrong within organizations and Boards need to make sure they are governing properly and sufficiently prepared.

A key duty of all boards is to consistently apply and exercise prudence in all its dealings in order to mitigate or minimize risk. This is not an option; it is a fiduciary obligation. And as a result, Board members need to make sure they, first and foremost, understand what good governance is, and then ensure that they are adhering to their understood governance best practices to the best of their abilities. Naturally, Board members don’ know what they don’t know. Therefore, as a general check list, risk mitigation activities outside of the normal strategic oversight of finances and operational strategies, should include annual:

  • Education and training initiatives;
  • Reviews of charters and mandates;
  • Reviews and adoption of enabling, best-in-class, technologies;
  • Updates on compliance and regulatory changes;
  • Review of Board effectiveness and composition (including skill inventories);
  • Reviews and updates of key policies and procedures:
    • Communication
    • Succession
    • Code of conduct
    • Whistle blower
    • Anti-fraud
    • Discovery of errors or illegal acts
    • Risk Appetite frameworks
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Because things can and do go wrong in organizations, and because sometimes these misfortunes can happen outside of anyone’s span of control or preparedness, I suggest every board be prudent and adhere to a variation of the traditional Scout Motto:

“Always be prepared to the best of your ability.”

If you always treat governance as important, consistently update your understanding of good governance and governance best practices, and always strive to assess and improve your preparedness and abilities, be assured that you are acting in the best interest of your stakeholders, following prudence, and ensuring that your Board is ALWAYS prepared to deal with anything Murphy’s Law wishes to throw at you.

Topics: GGA, Corporate Governance, Best Practices