German car moguls cheated their customers over the level of toxic fuels emitted from the cars that they sold to them. Directors at Britain’s biggest publicly listed supermarket chain fiddled its accounts to inflate profits, while a retail tycoon stripped his privately owned company of so much money that workers may lose their pensions.
In Sweden, seven board directors at the country’s largest listed forestry group were felled after it was discovered they let family and friends—and pets—use corporate jets to fly to the Olympics and on holiday. One jet was sent to fetch a wallet left behind by one of them from the frozen north.
Further south in Italy, the boss of Telecom Italia was recently fighting to defend his €40m pay package, even though the former state-owned company was heavily indebted and investors were furious.
Oh, and America has a president who boasts about not paying corporation tax, and refuses to reveal his tax returns. Donald Trump is not the only one to use losses and other tricks to avoid tax; companies such as Apple and Pfizer have more than $2trn stashed away in secret hiding places so as to not pay tax in their domestic jurisdiction.
Greed and incompetence
What makes the scandals at Volkswagen, Tesco, BHS and SCA, among others, so shocking is that they have taken place since the 2008 financial crisis: a watershed moment in global corporate governance, which revealed levels of greed and incompetence on an unimaginable scale.
You would have thought the ignominy suffered by so many bank bosses, the outpouring of public anger towards them, and the introduction of tighter regulations to improve corporate behaviour, would have taught businessmen and women a lesson or two about toeing the line.
Clearly not. In fact, these latest examples of corporate misfeasance suggests there is an existential crisis in global boardroom culture, in spite of and despite concerted efforts to improve corporate governance.
Looking back at the VW affair, for example, why on earth would the directors at the firm, one of the world’s greatest car makers with an enviable reputation, behave with such stupidity, if not total irresponsibility? As Germany’s newspaper Der Spiegel asked incredulously, why was VW committing suicide?
Why indeed. Professor Bob Garratt, author and one of the world’s most provocative thinkers on corporate governance and leadership, blames arrogance on the part of the VW board. But their arrogance, he suggests, was made possible by the two-tier supervisory structure in Germany, which permits management to be cut off from proper board scrutiny.
He says: “The problem with supervisory boards across Europe is that half the members are financiers and the other half trade union representatives. It’s a lethal combination. Neither group is motivated to care: the financiers are only concerned that money is flowing in while the unions are only interested in jobs. No one cares about the customer.”
Yet Garratt, author of the best-selling book, The Fish Rots from the Head, does not believe that today’s corporate bosses are greedier than those in the past; it’s just that we discover their misdeeds because of 24/7 rolling media. However, he does believe that most corporate governance is a sham.
So what can be done to make sure the fish head stays fresh? He tells Board Agenda that it’s time for a fundamental reform of board structures, and a rethink of 300 years of limited liability company law.
“We need to ask what a company is for,” he says. “Limited liability means that neither the management of a company nor the owners of shares have direct ownership, therefore [no] sense of true responsibility. This form of ownership needs to be looked at again.”
Indeed, Garratt has some sympathy for board directors: “Most try to do their best. But the problem is that many directors are of low quality. So I would advocate [that] they need to be better informed, be taught their duties, have greater expertise and be evaluated.”
To spearhead change, Garratt wants a new “public oversight” body created to oversee reform for listed as well as private companies. This new independent body would work with the four main players to come up with new ways of enforcing better governance: the boards, the owners (investors in publicly owned companies as well as private), the regulators and the legislators.
Ironically, Garratt says the government does have the teeth to punish bad corporate behaviour but they are hardly ever bared, let alone used to bite. He points out that Section 172 of the Companies Act states that a director has a duty to promote the success of a company and, critically, act with regard to the “interests of the company’s employees”—and that means relations with suppliers, customers and others.
Part of the problem, says Garratt, is that the rules are rarely enforced because there is confusion over which prosecuting body it should be: is it the Financial Reporting Council (FRC), for example, or the business department?
Instead, he proposes that corporate governance should be stripped away from the FRC and given to a new national organisation, which would sit alongside the new oversight body. He also recommends better board recruitment, and more professional training for directors who should be drawn from as wide a pool as possible, including workers and consumer groups.
As “professor extraordinaire” at Stellenbosch University, South Africa, Garratt has been advising the South African government on its national economic programme, which is working on bringing people from more diverse backgrounds into corporate life. “This initiative has been incredibly successful. For example, many young black women have been brought onto SA companies and they are proving to be most effective. Everybody is surprised and pleased with the results.”
Cultural hand grenades
Norway’s board expert, Turid Solvang, founder of the firm ‘Future Boards’ says hand grenades are already exploding in boardrooms across Europe. “There is a revolution underway. Board culture is changing fast and it’s partly to do with the latest corporate governance problems, but also because industry is changing so fast.”
Solvang should know. She is the former president of ecoDa (the European Confederation of Directors’ Associations), Europe’s trade organisation which represents more than 60,000 professional directors across the continent, whose stated goal is to create a more transparent and sustainable business environment. Like Garratt, Solvang does not believe that corporate behaviour has got worse. More pertinently, she says that we are hearing about more scandals because there is so much more and faster information emerging from the media.
“Now that regulators, investors and consumers know instantly when something is wrong, they are the ones who are putting pressure on companies to sort themselves out quicker than ever,” she says.
“The composition of boards is changing dramatically to meet huge challenges from new technologies like robotics, artificial intelligence and other industrial shifts now taking place, like the move to driverless cars. Is anyone in the industry thinking about the impact on motoring schools? That sort of change.”
Boards must be more open-minded if they are to survive: “The old boy’s network is dead,” continues Solvang. “Boards need younger directors, and more females, with different experiences, competences and the know-how to work in teams.”
Solvang says that the latest King IV report into improving corporate governance is fascinating, as it recommends moving from the “comply OR explain” concept towards “apply AND explain”. “The mood is moving more towards outcomes, to a goal of more ethical and effective leadership. That’s a big change.”
This may be a potent change but it’s still a subtle one. Headhunter Mark Freebairn, a partner at Odgers Berndtson, believes more radical solutions are required to improve board culture as well as corporate culture. He says the disconnect between society and business is now so great that companies must take the lead to demonstrate that they are good citizens.
“The social contract between the public and business is broken and it’s not surprising that business is vilified. The welder from Wigan earning £16,000 a year does not understand why businessmen like Philip Green and bankers involved in the financial crash have not been punished. Brexit, Trump, Le Pen and other populist movements around the world are symptoms of this breakdown.”
To reboot trust, Freebairn suggests that companies should be the ones to take the initiative, and do so by launching positive symbols of engagement. “There are many visible ways business can do this—it could be by sponsoring individual Olympic champions. Let’s say Vodafone adopts and sponsors Mo Farah. Or businesses could choose a local charity and give a percentage of profits.”
Such a demonstration of support would be far more effective than fiddling around with codes, he says. “Only a few people understand what the FRC or other codes are trying to achieve. That’s not enough. Companies must show that they engage with the public; that they understand. Some CEOs are getting this. Only that will change public opinion.”
Freebairn has a point. Over the past few decades there have been as many new corporate governance codes as there have been new scandals; but the number of bosses punished for their crimes have been few and far between.
No wonder the public mistrusts big business. Here in the UK, the FRC recently launched yet another report, Corporate Culture and the Role of Boards, which recommends that the strategy to achieve a company’s purpose should reflect the values and culture of the company and “should not be developed in isolation. Boards should oversee both.”
Words and action
It’s only by bringing together the right culture, strategy and performance that boards will be successful, says David Herbinet, partner at Mazars, one of the world’s biggest accountancy firms.
He adds: “Getting the balance right of this triptych is the greatest challenge facing boards today. Sadly, the evidence suggests that most of them do not. Investors play an important part too as they put too much pressure on boards to maximise short-term share performance.
“There are great companies like Unilever where the CEO, Paul Polman, is trying so hard to create a sustainable culture. But investors are making it difficult—they want immediate results. It’s going to take years for this balance to be achieved.”
Herbinet is right: improving board culture as well as corporate culture is going to take decades to achieve, and there will be many experiments and false starts along the way. Garratt’s new oversight body is an interesting idea, while work being done by South Africa’s King report to improve global governance is heading in the right direction.
At the same time, the onus should not only be on the regulators or the legislators to persuade or force business leaders into good behaviour. They themselves should pick up the baton to help heal the divisions with wider society and restore public trust.
They should start by looking to the military for inspiration. Simon Sinek, leadership guru and bestselling author of Start With Why and Leaders Eat Last, points out that the military gives soldiers medals because they are willing to sacrifice themselves, so that others may gain. Yet in business, Sinek argues that that process is backwards because “bonuses are given to those who are willing to sacrifice others, so that they can gain”. Brilliantly put.
Officers in the British Army practice what they call the “Condor moment”; this is when officers take the time to pause and reflect before they go into action. Its proper description is “courageous restraint”, and is built into a code of conduct enshrined in the British Army’s Values and Standards handbook, by which every soldier, from private to general, must follow.
General Sir Richard Dannatt writes in the foreword that these are principles that “cannot be delegated, and I hold you all accountable. The values are about character and spirit; the standards define our actions and behaviour. I expect everyone in the army to abide by these values and standards.”
It’s now time for boardrooms to practice their Condor moment.
Maggie Pagano is Associate Editor of Board Agenda who writes for The Times, the Daily Mail and Financial News.