Monday, March 20, 2006

Jens Mueller and Sandy Maier: Searching for good governance

We hear a lot about good governance but usually only take notice of governance in companies with demonstrably poor governance and dramatic problems - think Enron.

Working backwards from examples where governance has failed and stakeholders incur horrendous losses, we presume that there is a better way to operate a firm. If governance is the glue that holds a company together and ensures all staff do the right things at the right times, it should be measurable.

Governance is the special air in a company, flowing around everyone and everything it does, and making an organisation the unique entity it is.

On that basis, a large group of leading corporate organisations in New Zealand have come together to support the "Directions Understanding Good Governance" survey.

In one of the largest reviews of corporate governance ever undertaken in this country, an MBA team at Waikato Management School is looking at governance standards worldwide and has created an online survey for company executives, corporate directors and investors.

Building on the most meaningful questions from more than 100 governance research papers worldwide, this New Zealand survey will add highly relevant and academically valid information. We plan to make this information available to directors, company executives and shareholders to give them tools to assess their own governance structures.

With this work, we hope to better understand how directors (hopefully the strategic leaders of organisations) are selected and how well they operate in firms to create and then maintain good governance standards.

These Waikato Management School students, all experienced managers from six different countries, are in the final months of their MBA studies.

As part of the action learning environment at the school, they will create a list of key recommendations to New Zealand shareholders, executives and directors. We hope that this work will contribute to the ongoing discussion of what good directors do to help create great organisations.

With about 2000 responses expected, we are especially interested in the governance activities at small and mid-sized firms.

It is pretty obvious that the large public corporations in New Zealand are well (possibly too well?) regulated, although we will be keen to see how directors of these firms report on the effectiveness and competence of their board leadership. Is the heavy focus on compliance interfering with the long-term strategic goal-setting at these large businesses?

In small and mid-sized firms, formal governance structures have historically been of secondary importance, taking a back seat to the day-to-day operation of the firm.

There is likely nothing wrong with competent people, possibly family members, leading their own firms. But what needs to happen at those firms that wish to create a more sustainable governance structure?

How would a $10 million Gisborne-based exporter of onions to Switzerland find directors suitable to help develop this business?

Similar to a rugby team, where the governance needs to extend beyond the playing field and into the management ranks, many of our smaller firms need help that goes further than the operational part of the business. Good governance reaches into the critical reflection of why we do things and is not limited by what we do. Good governance provides a dense fabric of values, unique to the firm and acceptable to the community in which we work.

As a wise friend of ours at KPMG Trustees once remarked: Once you lose your credibility, you've lost it all.

Our interest is not only to protect firms from future problems, but to help create standards by which we can measure the early onset of governance problems.

This topic is of great interest in New Zealand, where we focus extensively on exports and thus are likely to have successful firms measured by global governance values.

Firms such as KPMG, Simpson Grierson, Sheffield, Porter Novelli, Business New Zealand, Brook Asset Management, and Management Magazine work with globally active firms every day, explaining why their leaders came together to help executives better understand how to develop good governance strategies.

We plan to replicate this work in several other countries, starting in Australia, Singapore, Germany, the US and China, to be able to tell our exporters what governance standards are expected and practised elsewhere.

With a large number of survey replies already in hand from executives and directors in firms with sales under $5 million, we are seeing some important trends emerge.

It appears that the majority of referrals for new board memberships come from existing directors. In a relatively small country with a finite pool of qualified directors, this raises the question of whether new directors were appointed for their skill or for reasons of being compatible.

There is nothing wrong with having people you know and trust on boards and we would assume that the business networks of successful people are quite diverse and rich in competence, but we wonder if such a new director recruitment process offers the shareholders the most appropriate mix of talent from which to select.

In a large number of firms, the CEO is also a lead director. That may be a good mechanism to further information flow among directors and management, but it burdens the CEO with the near-schizophrenic task to completely separate his/her own employment interests from the process of making board decisions.

There must be a better way to have a CEO fully involved in board discussions but separated from the duty to vote on corporate matters. How many people do you know who could look calmly into a mirror and fire themselves for cause?

Most directors report that little formal training is provided to them, while the main source of advice and training is informal and from within the firm.

That may well be suitable to communicate the firm's culture and the way we do things around here, but it leaves open the issue whether individuals - even competent executives - could reasonably be expected to quickly become effective directors.

These and many other issues will likely emerge from our work, and we sense that the way directors are brought together with organisations might change in the future, that a more transparent forum will emerge, and that the Trade Me for Directors may be just around the corner.

Company directors, investors and corporate executives are invited to complete the survey, at no cost, and they will receive a copy of the national results.

* The survey can be accessed using the link below.

* Jens Mueller is Associate Professor of Entrepreneurship and Strategy at Waikato Management School and a longtime CEO/chair of global firms. Sandy Maier has been a professional director in New Zealand for many years and is a member of the Institute of Directors.

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