To survive in the long term, companies must learn from the wider implications of the Hampel report, write David Band and Allan Blake
The corporate governance debate has largely focused on such issues as the vacuum of accountability, the control of board power and disclosure. But this tendency - continued with the recently-published Hampel report - leaves underdeveloped the notion that applying true corporate governance principles can lead companies to become more competitive in the international market-place.
In particular, it should be realised that whereas the process-based approach is rather dry, a style of governance that sees changing the boardroom as a way of making the whole company more effective has the potential to inspire all companies.
It takes us beyond the business of audit and control, into a perspective that sees corporate governance as a vehicle for improving the performance of companies. Supporting this approach, Professor Arthur Francis put forward a simple but devastatingly profound theme in 'Improving the UK's Industrial Competitiveness: Do we Know How and Would we Know if we were Succeeding?' He argued that the UK isn't itself uncompetitive; individual UK companies are. Their mode of organisation and operation is outdated, and their 'organisational architecture' has become ossified, he wrote in the October 1995 edition of the RSA Journal. There is 'a major problem about the competitive performance of UK companies. It is individual companies that become uncompetitive, and they do this because over time they get locked into management practices and organisational arrangements that become increasingly outmoded. Other countries industrialise, new firms are set up that compete with old firms elsewhere, these new inns have new forms of organisation and management, designed for present circumstances, and unless the old firms re-engineer they are out-competed ... [It] is the competitiveness of UK firms that needs improving, and not the competitiveness of the UK. Those improvements come from transforming the way firms are organised and managed. It is primarily a management problem and not an investment or a technological problem.'
James Collins and Jerry Porras also support this approach. They show that organisational dynamism is a key requirement of the enduring company. In Built to Last (1994), they say that '... all products, services, and great ideas, no matter how visionary, eventually become obsolete. But a visionary company does not necessarily become obsolete, not if it has the organisational ability continually to change and evolve beyond existing product life cycles ... Similarly, all leaders, no matter how charismatic or visionary, eventually die. But a visionary company does not necessarily die, not if it has the organisational strength to transcend any individual leader and remain visionary and vibrant decade after decade through multiple generations.'
An approach to corporate governance that focuses on performance rather than conformance can help companies to step back and assess capability at the very top of the organisation; to assess whether or not they are fossilised, competitive or uncompetitive. Try this simple test, if you are a director, an employee or a shareholder in a company:
- Do you think that the quality of the people that you have on your board of directors affects the performance of the company? YES/NO
- Does the company monitor the effectiveness of the board and of the individual directors in relation to its corporate objectives? YES/NO
- Does the company ever consider changing the composition of the board or its structure to increase its effectiveness in relation to its corporate objectives? YES/NO
- Does the company look outside the 'network' of associates to try to find a match for a director specification? YES/NO
- Is the monitoring of individual director performance linked into a senior management development programme and remuneration policy? YES/NO
If you answered 'no'' to any question, then your board of directors has little autonomy and is not really operating properly. There may be an autocratic entrepreneur in charge, or a dominant holding company using the board as a 'puppet' board. Why have a board at all, and pay out salaries to people who cannot improve performance? All these questions relate to how the company is governed. Companies can use the principles of corporate governance to assess whether the process of ossification is preventing them from responding to the challenge that those principles present.
The pressure for all companies to scrutinise their governance structures will increase, as part of the regulatory and political price to be paid for trading with the privilege of limited liability. It is, in fact, an opportunity for companies to see corporate governance as not just an add-on to the annual report, or a tick-box exercise. The issues involved have a direct effect on the enduring nature of the company and its likelihood of success. It must develop a framework by which the full variety of companies can move smoothly through the different stages of their development, identifying and building the organisational strength required at each stage. This includes an assessment of how the structure of the board, and the skills and attributes of the individual directors, must change.
The Hampel report is important, but it is only a part of the picture. Because corporate governance is so closely linked to the international success of companies, the Hampel report's input must be seen as incidental to the wider discussions that are taking place in some of our top groups of companies. Many of them realise the potential that can be unlocked by ensuring that the structures at the top of the company, including their subsidiaries, meets the highest standards of governance. They will run at a pace in advance of whatever report is commissioned next, because they have to in order to compete internationally. The major opportunity that must not be lost is to cast the net wider across companies who will still see corporate governance as an irrelevance or a minor irritant, but whose importance to the economy cannot be overstated.
