Building uncompromising governance
Is it common to discover that organisational performance, culture, or health of specific projects is worse than reported? The opinion expressed below proposes a solution for how individual leaders and boards can deal with both intentional and unintentional distortion of reality.
Problem Statement
As a confirmation of the proverb that "the truth always comes out," it is common for corporations to issue “restatements” (examples are failed projects, or belated realisation of a strategy failing to achieve goals). This form of low corporate governance quality originates at Individual and Group levels of governance activities. Approximately 98% of restatements are linked to unintentional misreporting (Patrick Velte, 2021).
What makes good governance is normally discussed through the lens of board independence, diversity, ownership structure, CEO characteristics, remuneration, and oversight. Given that misreporting and resulting restatements are a domain of poor oversight, let's focus on this perspective.
The trick with restatements is that they “are mainly perceived and applied as a proxy for low corporate governance quality because restatements are often linked with
initial undetected misreporting rather than to a subsequent successful detection of misreporting”. Such linkage indicates ineffective audit. Research seems to indicate that audit and oversight alone cannot guarantee prevention of integrity issues. Governance breaches are often reported to be rooted in “overconfidence” of individuals, and sometimes even the Board (Deloitte, 2016, Good Governance driving Corporate Performance?)
In the opinion of the writer, governance breaches can be crystallised within two root-causes:
- Individual managerial overconfidence driven by politically motivated self-preservation and toxic positivity. Because organisations are social constructs, they are susceptible to the same fallibility as individuals;
- Group think and confirmation bias that result in filtered, blocked or mutated information flow.
These root causes negate effectiveness of monitoring via audit. Yet, “corporate governance can be classified as a monitoring tool in line with shareholders’ interests of ethical management behaviour “ (Patrick Velte, 2021). Whilst this definition of the function is true, today’s implementation of audit is a very conflicting approach because the management stack is expected to report on itself via “sponsored” (employed or paid) audit. None of the known
C-suite positions are able to resolve this conflict.
It is common for managers to express a view that “we paid for multiple audits over the years, and all reports relayed that our governance was good”. Which begs the question - if multiple audits were reported (or communicated to stakeholders) as “green”, then why the sudden significant restatement. There must have been issues with either scope and / or independence of the audit. Inability to take responsibility for identification, reporting, and steering of core issues early is the ultimate proof of ineffective governance. Bias and toxic positivity prevent some leaders from acting early.
Whilst there is no silver bullet, it is important to be aware of grey areas that can create misguided, over-confidence based gambles:
One of issues deeply embedded into low quality governance is that managerial attitude of “I know better” is prioritised well above systematic and authentic employee engagement. Richard P. Feynman’s warning still has not truly landed - “The first principle is that you must not fool yourself and you are the easiest person to fool”.
Solution
The solution for preventing governance breaches is the concept of “systemic honesty” where all sources of information are always processed through reflective patterns. “If we want to be leaders of impact, we must learn to reflect” (Carly Fiorina, 2022, Advice for Independent Thinking).
Shying away from stress-tested reflection on reality only delays the inevitable. How can leaders verify if things are truly as reported?
Here are 9 specific recommendations for building uncompromising governance:
Conclusion
Low quality governance is inexcusable and improvements are achievable today.
“The ‘good’ governance … requires collaboration, objective oversight and
empowering alternate views” - (Deloitte).
The solution is to:
- treat middle managers and team leads as a horizontal leadership group
- give employees an avenue to “push” measurable and context-aware feedback
- introduce a virtual role of the “Chief Reality Reflection” Officer to the Board
The Corporate Executive Board (CEB) estimates that 50% to 70% of executives fail within 18 months of taking on a role. One of the key reasons is: "They don’t prioritise listening and learning — and fail at managing change". It is possible that the mirror image of this statistic is that only 48% of employees see their company leadership as high quality (GLF).
9 specific recommendations from above are designed to provide a systemically resilient solution for effective transparency:
- Transparency is a new transient competitive advantage and should be inward looking as much as it is being considered in terms of societal impact - impact on shareholders and employees is at least as important
- Improve ESG disclosures in order to stay ahead of the curve
Sustainable future begins with the capability to prevent restatements and failure.
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