Corporate governance: Get the balance right

Business leaders could be forgiven for feeling that they have been weathering a storm over the past few years. When the deluge came, dotcoms sank leaving a flotsam of debts, ebbing profits revealed that the accounts at firms including Enron and WorldCom were holed beneath the water line and most of the world’s major economies were teetering on the brink of recession.

Today the sky is brightening. The forecasts are better than they have been for years, and it’s time for business leaders to begin looking beyond their defences to future growth.

But as Steve Marshall, chairman at Queens Moat Houses, said in his speech at the CIMA annual conference in November, there is a fine line between conforming to the rules and increasing shareholder value.

‘Pressure may be on financial managers to become process police. The danger is that this only takes care of the risk of process disruption and value disruption, but where’s the growth stardust going to come from?’ Marshall asked. ‘We could all end up in very tiny graveyards if we’re not careful.’

Nobody is suggesting that business should not learn from its mistakes.

Strong and transparent corporate governance is key to rebuilding confidence in corporate accounts. But the issue today is striking the right balance between security and growth. Firms that have concentrated their efforts on avoiding risks must now start to focus on identifying and managing these risks. In a nutshell, risk is essential to growth.

The principle may be easy. The practice is far more difficult. This is why the International Federation of Accountants (IFAC) and CIMA have spent the last year researching the causes of success and failure in 27 businesses round the world. Their findings have just been published in a report called Enterprise governance: getting the balance right.

Far more than just theory, the report is based on real-life examples of both success and failure and so offers practical guidelines for boards keen to add shareholder value while avoiding the mistakes of the past.

To coincide with the report’s publication, CIMA has produced a strategic scorecard aimed at helping firms to maintain their focus on all the different strands that are essential if their strategies are to succeed.

Good corporate governance does not guarantee success. It doesn’t create value, although it potentially stops the destruction of value. It ought to be sitting on the bedside table of every chairman, CEO, CFO, chair of audit committee and chair of remuneration committee to remind them about what you must do to make business succeed.

The research, based on 27 case studies across 10 countries and a wide range of sectors, determined early on that there were four key corporate governance issues that underpinned both success and failure – culture and tone at the top, the CEO, the board and internal controls. But you need the combination of all four to succeed.

The report also highlighted a strong link between conformance and performance management. But while corporate governance is the responsibility of the audit committee, most firms had no equivalent body monitoring their performance.

Companies often failed because of poorly implemented or articulated strategy.

In particular, two key danger areas emerged. Boards were often left behind at times of dramatic change and did not pay enough attention to external factors.

Interestingly, each of the strategic failures in the case studies involved a failed acquisition. The companies had either paid too much for a firm or had failed to implement the acquisition effectively.

Risk management is key and the research found that poor strategy and inadequate strategy implementation was a result of boards failing to ask the right questions. There are many reasons why, but the fundamental question boards need to ask is: ‘who is asking the tough questions?’

But the case studies also demonstrated good practice. In particular, most successful firms showed evidence of proactive risk management, and a tendency to view risk not as a necessary evil, but as an opportunity.

Success is hard work. Strategy is a living thing, not something you just pin up on the wall and leave. These days, the board has to do more than just hear a report on how the business is coming on.

This is where the CIMA strategic scorecard will help. The individual elements contained in it are by no means revolutionary. However, the scorecard should enable boards to focus on all the key criteria for success and ensure they continue asking all the right questions.

All the important issues relating to an organisation’s strategic process are on one sheet of paper. The strategic scorecard forces boards to consider where the company is now, what its options are, how it will implement the options it chooses and how it will manage risk.

But appearances can be deceptive, and while the strategic scorecard may look fairly straightforward, just like the balanced scorecard, the amount of time required to put it into practice cannot be underestimated.

No one is saying there should be less emphasis on corporate governance.

But there should probably be more emphasis on best practice in business governance and performance, covering areas such as the acquisition process.

Corporate governance becomes important when performance starts to slip.

Management accountants, while not the only players who must be involved in enterprise governance, are vital to its success. It’s their job to promote the principles in their organisations because they are the people responsible for forward planning and resource utilisation. And while the process may include IT and finance, it must be owned by the board or it will not work.

The reputation of the accounting profession is short on credibility right now. Management generally has been tarnished by financial scandals. Enterprise governance is about aiming to restore credibility in internal and external reporting and corporate management. The fact that it is being driven by IFAC gives it worldwide relevance.

  • ‘Enterprise governance: getting the balance right’ can be downloaded from Bill Connell is chairman of IFAC’s professional accountants in business (PAIB) committee and chairman of CIMA’s technical committee.

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