Governance – my gut instinct

It started on a high altitude skiing expedition. Scientist and doctor Tim Spector found that he was rapidly losing his sight. The cause turned to be a small stroke. This prompted him to focus his research on the causes of strokes. In particular he began to analyse his own diet. To help him he had the twins’ database that he and his research team had accumulated at the Department of Twin Research at Kings College London.

The result of the research was the discovery of the importance of the microbiome, the community of microbes that live in our gut, skin and body.

He sums up his conclusions in these words,

‘I believe that diversity, both in the food that we eat and  the microbes we feed is the key. The trillions of microbes in our gut play an important part in digesting food and producing a number of chemicals vital for a strong immune system. We know that the greater the number of different types of microbe the healthier we can be.  

Spector warns people against the ‘diet industry’ – books and articles which promote neat formulae for a healthy diet. The (false) assumption is  that we are all the same, and that it is possible or safe to generalise about diet. Spector has found from the twin research is that even identical twins different in their response to food. The only generalisation he offers is that we need to expose ourselves to the widest possible sources of plant-based nutrition. Beyond that, it is a question of getting into individual analysis of the make-up of each individual.

I couldn’t help applying his challenge to the world of corporate governance. We have an array of guidance, codes and experts who confidently tell us about the governance practices that will guarantee robustness in companies.

Some allowance is made in terms of company size. Otherwise the underlying assumption is that we have now identified the key constituents of good governance.

All companies will be better governed, we are told, if they separate the role of CEO and chair, follow the guidance on minimum numbers of independent NEDs on boards and board subcommittees, and judge the independence of directors in large part by the number of years they have served.

In response the annual reports of listed companies contain many bland statements like this one.

Together the balance of skills, experience and personal characteristics of the non-executive Directors result in a diversity of views and opinions to support the executive Directors and provide excellent advice and judgement on the formation and implementation of the Group’s strategy. The Chairman encourages open and honest debate in the spirit of constructive challenge, which results in high quality decision making in all areas of strategy, performance, responsibility and accountability

I could have chosen such a statement from many companies. In fact it comes from the construction company Persimmon in 2012, the year its board accepted the recommendation of its Remuneration Committee to introduce  an uncapped Long Term Incentive Plan which resulted in a contractual obligation to pay around £75m to its chief executive. By all the standards of the day, the Persimmon Remuneration Committee was properly constituted. It was chaired by a NED – and there were two other NEDs on the committee.

These standards have not changed very much since. They are as dated and unsatisfactory as the books about diet that Professor Spector has been criticising.  Surely by now companies should be expecting questions like these;

  • Does the remuneration committee consider the remuneration of directors and employees in the round?
  • Does the remuneration committee consider and regularly revisit the relationship between how people are incentivised and how they behave?
  • Does the board look beyond the company’s share price to the value the company is adding for society?
  • Does the board consider that the real test of success is the current share price or does it balance this with indicators that demonstrate progress in creating and serving customers, engaging employees, innovation etc?

These are all things which are relatively easy to compare across companies but are not yet interrogated by the FRC. Now let us assume that, as in the case of human beings, the DNA of companies varies significantly. This would suggest that there are many criteria of good governance which can only be judged in the context of a single company.

  • How far is this company practising what it preaches in its values?
  • Or, important in the context housebuilding company, what importance do the directors attribute to quality rather than quantity – for example their impact on building communities (as opposed to housing units) or the aesthetic achievements of the company

None of these criteria figure among the way the Financial Reporting Council treats these indicators as measures of its success in promoting good governance.

Without consulting Tim Spector, I suspect that, were he studying corporate governance, and we had the benefit of his insights, he might would say

‘I believe that diversity, both in the kinds of people we employ and the voices we listen to – is the key. The many individual people and relationships that together make up our company’s culture and behaviours  – let’s call it the company’s gut –  play an important part in affecting the company’s ability to function effectively; to earn trust and receive, understand and respond to external information and anticipate external risks and opportunities..

There are few generalisations we can make about what constitutes a well-governed company. All we can say is that a well-governed company is one that exposes itself to the widest possible sources of information and experience. Beyond that, it is a question of getting into individual analysis of the make-up of each individual company and the values that underlie its decison making.

2 Replies to “Governance – my gut instinct”

  1. Hi Mark, a thoughtful article and one that, I believe, makes the case for Principles (rather than rules based) Governance and ‘Comply or explain’ (sometimes called Apply or explain) accountability by the directors. This requires directors to use their ‘nouse’ and not to believe the job is done when the rules and met and boxed ticked – for example what is the stated Purpose of the organisation and how is that being held to (as a guiding star) through all decisions and actions? Of course the success of Comply or Explain also depends on transparency (assurance and reporting. etc) and stakeholders with sufficient clout (investors, regulators, employees etc) to hold the directors and their judgments to account in meetings and eventually in court. I’m looking forward to the planned McGill debate on Director Accountability and Liability in this context. Bryan

  2. Thanks Bryan. I have always follwed Mervyn King in arguing that it should be apply and explain, not comply or explain. Define and articulate the principles; then show how you have follwed them. And yet…this stilol largely deals with that part of coproate governance concerning areas of comparability. We need more thought on how to ‘govern uniqueness’. This is what i am thinking about at the moment.

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