In the years leading up to the global pandemic, I found myself travelling around the world, working with boards in different jurisdictions, in a range of sectors and in vastly different circumstances.
Two things struck me. The first was that it didn’t make sense to talk about “best practice”. Every board is unique, and no solution that applies to one board is mappable exactly to another. It did, however, make sense to talk about “good practice”. And these examples of good practice can then be adopted by an organisation, and made “best” for their own specific business model.
The other was that, equally, poorly performing boards shared common features of governance weakness. It was, I reasoned, possible to identify the “red flags” which signalled likely organisational failure.
The resulting book—Building Better Boards—brings these two themes together. What does “good” look like in terms of individual director effectiveness, and collective board effectiveness? And how do we address issues of governance dysfunction?
Finding answers to these challenges is important. We need to ensure that the board governance model is working properly, for everyone’s benefit, particularly in a world where change in all its forms—technological, economic, environmental and societal—is exponential. And where, as stakeholders increasingly demand accountability, there is no place to hide anymore—the “slaughterhouse of social media” has put paid to that.
An age-old problem
So why do boards fail? The answer goes back partly to the evolution of the modern board, one which has taken place over a period of some 400 years. The board concept is, in reality, the only model that exists in the world of governance, containing the same dynamic features the world over. And it is in exploring these dynamic features that we can predict governance failure.
Some readers may not realise that the genesis of the modern board dates back to the signing of Magna Carta by King John of England at Runnymede, near Windsor, on 15 June 1215. The royal charter, an attempt to make peace between the unpopular king and a group of rebel barons, was one of the first steps taken towards establishing the system of parliamentary democracy in England. Its influence was strong, helping to shape the United States Bill of Rights (1791) and, more recently, the Universal Declaration of Human Rights (1948).
Magna Carta constituted, if not the first, then definitely the most distinctive, example of the holding of power to account. As importantly, it also represented more widely the beginning of a movement that eventually resulted in the creation of a system of representative and, ultimately, participative democracy.
Held to account
We can see the behaviour and performance of boards dating all the way back to these early years with the emphasis on collective governance, international trade based on maritime power, the onset of competition shaping a market model, and the inevitable successes and failures of the companies involved. Just as some companies succeeded, and made enormous riches for their owners, so some failed and began a long (and not so proud) history of corporate collapse, the inevitable consequence of greed, corruption, mismanagement and governance dysfunction.
It is difficult to describe in a short article what features can be attributed as common elements of failed organisations. The world is too complex and uncertain for generalisations, but important common features of all boards can be summed up in the important, and sometimes underappreciated, concepts of stewardship, oversight and agency—collectively representing the theme of accountability.
Stewardship, oversight and agency
Stewardship can be defined from a technical investor perspective, but here we are using the more generic definition as “preserving and enhancing the value of assets with which one has been entrusted on behalf of others, reflecting the fact that any investment intermediary looking after assets on behalf of a beneficiary or client has obligations of a fiduciary nature”. The board directly owns this accountability.
Oversight is a contranym—a word that can have an opposite meaning, depending on context. In this case, it can be the board that misses something, or the board that sees everything, or at least everything it needs to see. In this context, we are expecting the board to perform according to the latter definition. The board directly owns this accountability.
Agency, in broad terms, is any relationship between two parties in which one, the agent, represents the other, the principal, in day-to-day transactions. Agency theory attempts to explain disputes over the respective priorities between principals (those who own the assets) and their agents (those who operate the assets). Agency theory assumes that the interests of the principal and the agent are not always in alignment, and that the two areas where disputes are most likely to happen concern the organisation’s strategic objectives, and issues of risk appetite. The board indirectly owns this accountability, which falls as much into the direct area of responsibility of the management team.
For any board, whatever its structure and its constitution, it needs to reflect how its governance arrangements deliver effective stewardship, oversight and agency: features of the organisation which, collectively, provide for the accountability that stakeholders demand.
Worst-case scenario
Boards fail, the world over, because they fail to put into place the governance that delivers effective stewardship, oversight and agency. And, on the latter dynamic in particular, they fail to install the governance that ensures that the board remains in control of the organisation’s strategic vision and its risk appetite.
Building Better Boards sets out a number of case studies which prove indisputably that going back to basic first principles would have helped organisations to predict, pre-empt and prevent egregious cases of value destruction.
While the book doesn’t cover the Theranos case study, because the failed company is still the subject of enforcement action and court proceedings, the tale of woe which is Elizabeth Holmes and her brainchild blood-testing start-up would, at any time, substantiate the points made in this article.
The privately-held corporation that was touted as a breakthrough health technology company—founded in 2003 by 19-year-old Holmes—raised more than $700m from venture capitalists and private investors, resulting in a $10bn valuation at its peak in 2013 and 2014. The company’s technology was subsequently proven to be bogus, and the company collapsed.
On 3 January this year, Holmes was found guilty on four counts of defrauding investors, three counts of wire fraud, and one of conspiracy to commit wire fraud. She is awaiting sentencing while remaining “at liberty” on $500,000 bail. She faces a maximum sentence of 20 years in prison, and a fine of $250,000, plus restitution, for each count of wire fraud and for each conspiracy count. The sentences will likely be served concurrently, thus meaning she will serve an effective maximum of 20 years in total.
That is a long time to spend in jail. Sentencing is proposed for September 2022, after which point Holmes will have plenty of time to reflect on how some very old concepts, enshrined in a sound system of governance, could have led to a different future for her and her company.
Building Better Boards is a reflection on working with boards, and directors, from jurisdictions all over the world—some the very best, others struggling—and how it is possible to move from the latter to the former. The book references progressive thinking from regulatory guidance, Code principles, thought leadership and case studies to argue that commercially-focused governance is a business enabler, underpins organisational success, and is the source of lasting value creation.
Seamus Gillen is the author of Building Better Boards: How to lead and succeed in a changing world is published on 7 July (Bloomsbury Business. Hardback: £30)