Corporate Governance DNA

Once upon a time corporate boards were populated by those who were expected to do little more than show up for meetings, agree with the agenda and discuss what it proposed. It was an era when Irving Olds, a former Board Chair of Bethlehem Steel pronounced famously that, “Directors are like parsley on fish - decorative but useless”. That view persisted for a long time but changed dramatically with the dawn of the twenty-first century, a time when the world was still recovering from the “irrational exuberance” of the dot com era. After years of believing the pronouncements and forecasts from large companies there was public shock and amazement at the outrageous behaviours of those leading a flock of large public companies, with Enron, WorldCom, Tyco, and their ilk among the most notorious. The unravelling of those companies galvanized the outrage of investors and as the proverbial horse galloped down the lane, regulators put their shoulders to the oversight barn door and pushed the Sarbanes-Oxley Act (SOX) of 2002 into place. SOX imposed both new and expanded accountability standards for the boards, management, and auditing firms of all United States (US) public companies, plus a few specific provisions for private ones. The Economist published “The Real Scandal” on July 17, 2002, and it stated that: “There is one big issue that should now attract more attention: the governance of the public capital markets, and especially the role played by auditors. The capital markets, and indeed capitalism itself, can function efficiently only if the highest standards of accounting, disclosure and transparency are observed.” Suddenly, the topic of corporate governance graduated from decoration to main course. The accounting profession busied itself implementing Internal Control and Financial Reporting (ICFR) and certification of the financial records by executive officers became the law for large public companies. It suddenly became important for directors to join associations devoted to the education of corporate directors and such organizations began to flourish. Lengthy and expensive programs in director education filled classrooms, seminars and courses appeared and the inevitable governance consultancies sprouted. Books were written, and governance became such a popular topic that it made guest appearances at cocktail parties! Who knew! The world, or at least the North American part of it, took great comfort as all of this activity seemed to indicate that the governance issue was now firmly under control. Sadly, it was a delusion. All was not right with the world. Many issues remained and some boards, unfortunately, still practiced “tick the box” corporate governance without customizing their behaviours to the individuality of the corporation and its world. This book was undertaken roughly two decades after SOX made its debut, at a time when the business world was aghast at the antics at Theranos and Bridging Finance. They were widely disparate in many ways with Theranos in the US and Bridging in Canada, different market sectors and business models, different regulatory regimes and so forth – but - they shared the flaw that brought them to these pages, a fake it until you make it attitude, aided, and abetted by poor corporate governance. In common with a litany of historic gaffes, both corporations had enviable boards. The Theranos Board had included Henry Kissinger and there had been an all-star cast of backers including US Treasury Secretary George Schultz, media tycoon Rupert Murdoch and America's richest family, the Waltons. Bridging Finance was busily building a similar blue-ribbon board when the reality of its problems became painfully visible. In spite of the oversight of directors with starry credentials, the management of both Theranos and Bridging were somehow allowed to run amuck. Such shenanigans were and remain compelling reason to write these pages. The authors are of the view that good management and good governance have so much in common that a greater recognition of their overlapping processes and methods is a defining attribute of board effectiveness. We expect that our readers will agree that board oversight and management guidance are applied under different circumstances, for different reasons and with different constraints, and that they are aligned and focused on the organization’s purpose and strategy. Fine – but their behaviour while pursuing those goals is at least as important as reaching them. The fundamentals at the core of good governance are a universal necessity but not a sufficiency as effective governance for every corporation demands an appropriate and situational blend of “governance DNA.”