Monday, March 30, 2015

A Board Beyond Compliance

"Compliance" is just a subset of "governance" and not the other way around.

Corporate governance is the system by which business corporations are directed and controlled. Compliance is the management discipline of designing and implementing effective steps to ensure that the company actually complies with the laws and regulations relating to its operations. There is a strong compliance element to corporate governance but corporate governance is about practice as well as policies. As one of the most important governance bodies, how can Corporate Board go beyond compliance?  

There is a strong ethos element to corporate governance which cannot be measured by check-box compliance methodologies: For example, board effectiveness depends on good governance, board members need to be well prepared for meetings, they need to read, understand and ingest their board packs and reflect meaningfully on these so as to ask intelligent questions and contribute meaningfully to board meeting discussions. The emergence of a compliance mentality among U.S. corporations has been one of the strongest deterrents to genuinely constructive corporate governance known. Complying with regulations and guidelines is not only just the beginning, such a perspective upon the "legality" of past practice can be inimical to the development of forward-looking, risk control-oriented mechanisms of management and control. A forward-looking, risk-management approach to governance can improve the functioning of the corporation and make its long-term survival and profitability more likely.

The real BoD’s dilemma is that driving the business forward is extremely difficult: This means looking into an unknown future and attempting to define the landscape with its risks and opportunities. It also means taking control of the softer issues, such as CEO succession, setting policy, strategic thinking, setting risk appetite, etc. In mathematical terms, compliance is necessary but not nearly sufficient. In practice, it is not that difficult (although costly) to outsource a large part of compliance, as it is relatively easy to measure through processes, systems, audits, etc. Of course, it remains the accountability of the Board, therefore, they should spend enough time on it, and start questioning: What compliance element measures a chairman's effectiveness or the skill level of board members? What compliance measure tests the level of integrity of directors to ensure that they will make full disclosure when conflicts of interest arise? What of the uncomfortable situation when a director feels the board is not making an optimal decision but is afraid s/he is the only one to feel that way and doesn't speak out not wanting to rock the boat? All these matters are real corporate governance issues.

Board time management: It is an almost universal finding that the Board spends too much time on compliance or operational issues at the expense of the future. Some suggestion Board should spend 20% of their time in the past (compliance), 20% on the present (operational and tactical) and 60% in the future. Boards find it very difficult to implement, simply because it deals with a lot of uncertainty and unknowns, but that is exactly what a senior executive team does. For example, while the Board needs to focus on landscapes, technologies, and uncertainties, the C-suites can translate that into competitiveness, products, and risks. Corporate Governance has to be about all of the above.

“Do you see corporate governance as a compliance matter?" The question itself reflects the need for a paradigm shift. "Compliance" is just a subset of "governance" and not the other way around. To perhaps go one step further, not only is compliance part of governance, in fact, depending on the industry and company situation, a well-governed organization might go "beyond" that compliance which is necessary and appropriate, to a state of compliance that creates competitive advantage. This is also the real board's dilemma, that of driving the business forward with adequate control and balance them just right.


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