09 December 2019 by Dr Karl George MBE
The Governance Framework describes a principled-based approach for every organisation to consider how well they are governed and enables them to apply those principles and explain how they have used them
What do we mean by Governance 3.0, the third generation of effective governance? How do we bring together governance principles from different sectors and geographic territories? Would a Quality Mark for governance be beneficial? These were some of the questions raised during the launch of The Governance Framework at the Hyatt Regency in Birmingham recently.
Those able to beat the train cancellations, floods and chaos on wet roads from seven organisations which had already completed their assessments received their Quality Mark at the event. This first cohort of recipients included Housing Associations, an NHS Trust, a national charity, a Building Society and a Tourist Board from the Middle East whose representatives flew in for the event demonstrating the cross sector and international reach of the new Quality Mark.
Peter Swabey from The Chartered Governance Institute and Sir Michael Lyons, a former Chair of the BBC Trust, fielded questions from the audience and host Kevin Johnson after my presentation about the Future of Governance.
Generation 1.0 was characterised by the Dominance Hierarchy tendencies (it makes sense if the choices that confront a group are simple and a leader makes decisions when everyone falls in line) that were demonstrated by Robert Maxwell.
A DTI report in 2001 described him by saying: “he was a bully and domineering personality but could be charming on occasions”. This style of leadership does not work at a strategic level where there are many complicated and inter-related dynamics with which to contend.
The resulting Cadbury Code, published in 1992, recommended that no single individual should have unfettered powers of decision making. Non-executive directors (NEDs) should be introduced to boards and the role of the chair and chief executive officer (CEO) should be split. Generation 1.0 governance, developed in the 1990s, encouraged independent directors, fully functioning and independent audit committees.
Generation 2.0 was epitomised by the Enron era and was described as wilful blindness. This is where if there is something that you should have known, could have known but chose not to know then you are still liable. Organisations are accountable to their stakeholders and for their long-term sustainable success.
Although Sarbanes Oxley was seen as the antidote in the US for the corporate failures of the early 2000s with a rules-based approach whilst the UK has maintained a principle-based approach, there was a common requirement for governance through this generation to ensure that no matter how complicated organisations were, there should always be transparent disclosure of information.
Users should be able to interpret through integrated reporting what is happening over and above profit, including impact on the environment and employees. The company’s efforts through CSR are examined through environmental, social and governance factors (ESG).
Boards in Generation 2.0 are independent unlike the early generation 1.0 boards. They are starting to become more diverse in terms of functional and professional skills, but have some way to go in other forms of diversity. This generation has developed sophisticated and comprehensive ways of analysing information and data, but it is primarily historic information that is considered through an array of key performance indicators and dashboards.
Generation 3.0 is now emerging after reviewing the circumstances that led to the demise of the world’s largest travel company. Thomas Cook had been trading for 178 years before its collapse in September 2019. It was the victim of a perfect storm: climate change resulting in hotter summers in the UK; more customers booking directly enabled by the growth of the internet and the death of a holiday maker being spread quickly across social media. These factors on top of financial restructuring meant the business could not cope.
Boards of Generation 3.0 not only need to be functionaly diverse but gender diverse and drawn from different backgrounds so that they are able to tackle not one ‘black swan’ event but several ‘black swan’ events occurring simultaneously.
Cognitive diversity and greater generative governance are the order of the day. The technology age is having a real impact on Generation 3.0 with boards needing to embrace the use of Artificial Intelligence (AI), big data and the merging of bio and info tech. The baby boomers and Generation X board members are becoming more and more redundant and a different type of skillset is required to manage real time manipulation of information and the navigation of a disruptive, rapidly changing and truly global business environment.
The twelve principles of the Governance Framework resulted from a study of twelve different codes of governance from across sectors and geographic jurisdictions. While it is important to acknowledge that the idiosyncrasies that occur in sectors are what make them different – and that some of these differences are necessary to safeguard the business and stakeholders – the principles of governance are applicable across all sectors and are the basis of clear thinking and evidence-based decision making.
There may be variations in the level of detail required to be applied to certain principles and practices based on size and complexity, but overall there can be a framework which, if applied in any sector, will offer stakeholders assurance that good governance structures
are in place.
There are four core areas in The Governance Framework: Compliance, Transparency, Impact and Behaviour which means:
• good governance takes place when you ensure that the resources for leading the organisation are appropriately put together and clearly documented
• the board must be competent, which means the members should be collectively able to demonstrate the right level of skills, diversity of thought and display an understanding of their strategic role
• a well-governed organisation will also consider the needs of all stakeholders; it will have an ethical, performance-driven culture; it will manage risk at a strategic level and make effective and timely decisions.
Once these elements have been achieved – which the Framework describes as the compliance drivers – we look to the board to move from conformance to a more performance-focussed role.
Transparency covers board papers that are clear and concise and external stakeholders who are kept informed and involved in the delivery and development of the strategic objectives. A competent board is transformed from undertaking an oversight and foresight role by their behaviour becoming more reflective, providing and sharing insights from their collective experience whilst avoiding dysfunctional behaviour. Boardroom dynamics improve when there is a collegiate and professional atmosphere mixed with a healthy level of tension.
To demonstrate good governance, the execution of the role of a board member extends beyond the monitoring and scrutiny of corporate objectives and takes on a more engaged perspective, taking stakeholder impact into account. Good governance moves from outputs to outcomes. This comes in determining the impact on the workforce, customers and other stakeholders and considering how they execute the vision for the organisation, the culture and how they are impacted by its purpose.
Together, these four parts constitute The Governance Framework. It is a governance assessment service designed for private and public sector organisations of all sizes. It combines self-assessment with expert independent facilitation and review to help boards - and the governance professionals that support them - ensure their governance systems are effective.
The Governance Framework combines international best practice with the successful diagnostic process and methodology that the governance forum has established through reviews of hundreds of private and public sector companies and voluntary sector organisations.
Developing a Framework for predicting, or preventing, governance and ultimately organisational failure would surely be the utopian dream for any auditor? Whilst I cannot claim to have built such an infallible tool, The Governance Framework can help to identify areas of strength and weakness and therefore the potential for improvement in an effective and structured way on a platform of research and evidence-based practice.
I am grateful for the support of The Chartered Governance Institute in developing the assessments carried out for The Governance Framework and look forward to feedback from members.