The book “Thin on Top” written by Bob Garratt is highly recommendable book on Corporate Governance and How to measure and improve Board performance. The book explains the fundamental differences between “managing” and “directing” an organization. The author attributes the present global corporate governance crisis to a complex mixture of directional ignorance, strategic incompetence, and greed. The author spells that the vast majority of directors are not fully competent and most have not been able to distinguish between managing a business and directing one.
Excerpt from the book:Corporate Governance – the appropriate board structures, processes and values to cope with the rapidly changing demands of both shareholders and stakeholders in and around their enterprises.
Good governance has been built on three fundamentals corporate values.
•Accountability
•Probity (Honesty)
•Transparency (Openness to the owners)
Three myths of Corporate Governance1.The myth of the all-powerful chief executive
2.The myth that a directors primary duty is to the shareholders.
3.The myth of executive and nonexecutive/independent directors.
Auditors:• Audit committees are often ciphers of the chief executive and are comprised of selected, passive “non executives” directors. In addition, auditors often seem more interested in generating consultancy fees than in their proper role of being employed by the shareholders to give an accurate, disinterested account of the finances of the business.
• Investors are generally kept in the dark about business strategies, risk assessments, and current performance.
• The regulatory authorities are often weak, slow, and politically plaint in their responses to compliance infringements, and the business media often have conflicting interests that block any deep investigation of financial wrongdoing.
Importance of Corporate GovernanceThe book highlights the increasing importance of corporate governance, the two very controversial reports and their controversial legislative proposal which has been resisted by the corporate has been discussed:
1.Turnbull Report – Guidance for Directors on the combined code.
•The boards of listed companies must report to their shareholders annually ontheir risk assessment and decision making process, or explain why not.
2. Myner Report – Insurance Industry
•It insisted that institutional investors must intervene in their underperforming investments.
The ten duties of a Professional Director1. The duty of legitimacy.
2. The duty of upholding the three values of corporate governance.
3. The duty of trust.
4. The duty of upholding the primary loyalty of a director.
5. The duty of care.
6. The duty of critical review and independent thought.
7. The duty of delivering the primary roles and tasks of the board.
8. The duty of protecting minority owners’ interests.
9. The duty of corporate social responsibility.
10.The duty of learning developing, and communicating.
Eight sources of errors in Board Strategic Decision taking• The illusion of invulnerability
• Collective efforts to rationalise
• Unquestioning belief in the boards inherent morality
• Stereotyped views of rivals and enemies.
• Direct pressure on deviations from apparent group consensus
• A shared illusion of unanimity.
• The emergence of self-appointed “mind-guards”
The book highlights that much of the negativity can be countered through developing effective neutral chairing, rigorous board evaluation processes, decent directorial training and appraisal processes, in addition, the board must ensure rigrous and open internal and external audit processes.
Source: Thin on Top by Bob Garratt.
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