Reputation in the balance: rethinking corporate governance

In light of bad practice at some large organisations, corporate governance needs to be seen as less of a box-ticking exercise and more an integral, people-focused part of business

If you enjoy watching business leaders being grilled by select committees or shareholders, then it’s been a pretty good few months for you. From Sports Direct’s Mike Ashley explaining to a group of MPs that he can’t possibly be expected to know everything going on in his organisation (and its supply chain), to former BHS owner Sir Philip Green getting his excuses in for the retailer’s collapse and subsequent pensions debacle; from VW investors filing a multi-billion-pound lawsuit against the corporation, to BP shareholders rejecting CEO Bob Dudley’s £14 million pay deal, there has been a lot to keep you amused – or depressed.

In fact, ever since the financial crisis, tales of businesses behaving badly have been hitting the headlines with alarming regularity. “Fundamentally, nothing has been learned since the last financial crisis,” says Andrew Kakabadse, professor of governance and leadership at Henley Business School.

So, what’s to be done? These stories thrust the concept of governance into the spotlight – but Kakabadse believes we need a wholesale reframing of what governance actually means. “We have learned nothing because we have had only one assumption about governance for the last 95 years: that governance is process and procedures,” he says. “We need a debate on the nature of governance. At the moment, we have monitoring without mentoring. But mentoring with monitoring is the way forward.”

And he’s not alone in his thinking. “We should regard governance as an enabler, not a compliance checklist,” says Martin Tiplady, former HR director at the Metropolitan Police and CEO of Chameleon People Solutions. “It can feel like a piece of health and safety, but it’s a positive thing about making sure our company performs more effectively.” Paula Jordan, HR director at FTSE 250-listed housebuilder McCarthy & Stone, agrees. “Good corporate governance isn’t just a box-ticking exercise; it makes good business sense,” she says.

The problem with box-ticking is that it tends to leave out the people element. And, when viewed as merely a compliance issue, ticking all the boxes doesn’t automatically mean good governance, points out Karl George, managing director of the Governance Forum. “Bad board behaviour is the thing that scuppers good governance every time,” he says.

According to Kakabadse, despite the UK’s more principles-based governance code, there is an “overwhelming HR need that we continue to neglect… A move to mentoring with monitoring means you absolutely need HR. The people element of governance is so essential. It’s the number-one reason companies fail.”

“The purpose of corporate governance is to facilitate effective, entrepreneurial and prudent management that can deliver the long-term success of the company,” adds Helen Pitcher, chair of Advanced Boardroom Excellence, quoting from the Financial Reporting Council’s Corporate Governance Code. “That reads like a manifesto for HR.”

Indeed, the examples at the start of this article are all down to the behaviour of individuals, encouraged to act in an unpalatable way by the culture in which they operate, set by the tone from the top. “With Deepwater Horizon [the 2010 BP oil spill], there was a reason people made the decisions they did. It was about partner relationships,” points out Tim Pointer, founder of Starboard Thinking and former HR director at Pentland Brands.Humanising governance

What we need then is a reframing and humanising of governance, one in which HR has the opportunity to play a vital role. But where to begin? For Pointer, “governance is everything to do with culture… You want to do the right compliance training, but you need a much bigger conversation about your organisational culture,” he says. “Otherwise you are legislating from what has happened, not what is going to happen. People are always going to be going into new situations, and with culture you can create a flexible framework.”

“You can have organisations with ‘good governance’, but issues of organisational effectiveness are not being surfaced,” says experienced HRD and NED Wendy Cartwright. “That’s because it’s difficult to get under the skin of some of these organisational culture issues.”

Indeed, many of the big banks, standard-bearers for poor governance in light of the financial crisis, are now focusing on culture beyond compliance.
“A lot of what we have done has been focused on getting the right compliance culture, but we haven’t looked at the culture in a completely holistic way,” says Nick Ulycz, head of HR at HSBC UK. “We had to look at compliance, but now we need to move into something a lot broader and look beyond compliance.”

What both Ashley and Green’s questioning by select committees have thrown up is the issue of how much senior leaders should be aware of everything that is happening in their organisations, from shop – or factory – floor to top floor, both inside the company and on the edges, which are growing ever more permeable, with recruitment agencies and others in the supply chain, for instance.

Tone from the top

“Boards are responsible for understanding the culture of the organisations they oversee, but they don’t tend to do it very well,” says CIPD CEO Peter Cheese. “The ‘Mike Ashley defence’ of
‘the business is too big and too complex, so how can I be expected to know’ isn’t a defence, as the tone starts from the top. HR is not the owner of culture, but it should provide insight and know the levers to influence and track it.”

If the tone starts from the top, HR may well have to deal with the issue of, as the Governance Forum’s George describes it, boards very often being “an incompetent group of competent people”. This isn’t about whether HR is on the board or not (a discussion we know most of you are thoroughly bored with), but whether or not the HRD has a voice, the ability to influence and, critically according to Kakabadse and Cartwright, a dotted-line relationship with the chairman.

“To be effective with the board, the HRD has to have a separate line to the chair, and the chair of the RemCo and the NomCo,” Cartwright says. “That’s the line you have to walk, without undermining the CEO.” Kakabadse adds that “the moment we draw a different debate on the role and contribution of the board”, bringing stewardship to the fore, is “the moment HR comes into the spotlight” – “get stewardship right
and HR becomes the bedfellow to the chairman.”

While changing board composition means fewer HRD directors sit on it in executive roles, they should still be involved in board-level discussions, says Celia Baxter, former group HRD at outsourcing company Bunzl and NED at manufacturing and engineering holding group Senior and wire-coating supplier Bekaert. “It doesn’t matter whether the HR director is on the board,” she says. “RemCo and NomCo will inevitably include the HRD. If I wasn’t involved [in succession planning discussions, for example], I would be asking to be involved because of the value I could bring. It’s a bit like saying the audit committee shouldn’t have the FD attending.” HRDs can also play a powerful role in governance by becoming NEDs (see box on p27).

Get involved

George spends much of his time assessing board effectiveness, and says he would like to see HR directors get more involved with this area, rather than seeing it as outside of their job. “It’s almost like HR feels they stop with the executive directors,” he says. “But the skills of HR would benefit board appraisals, and areas like board-level induction. HR should be thinking: we can make a valuable contribution to board behaviour and attitudes. We [external board experts] can do board observations and identify the behaviours, but what do you do about it [once we’ve left]?
HR is really important in supporting boards.”

Some HRDs are already playing a central role in this area. Baxter says when Bunzl started doing board performance reviews, she was in control of the process, undertaking internal questionnaires and collating the responses. “The board performance review is in many ways similar to an engagement survey process,” she says, although she points out that more recent regulations mean that independent external bodies must now carry out such reviews.

At drug and alcohol treatment charity Addaction, executive HR director Guy Pink is going even further as the organisation reviews its governance structures and processes in the wake of its merger with fellow substance abuse charity KCA. “Within charities, we’ve seen that not having an effective board can have major ramifications,” Pink says, citing Kids Company as a sad example. “Helping [board members] to be effective trustees is familiar HR work. It’s critical to make sure we have that affinity with processes across the organisation.” So, HR is working on board recruitment and inductions, buddying up new trustees with existing board members to help them settle in.

Unusually, Addaction company secretary Howard Newman reports to Pink, something Newman says works because “there’s a synergy across the roles”. “Previous structures had company secretariat within finance,” Pink elaborates. “We could have done the same here, but because HR has that degree of independence, the capacity to ask those awkward questions and be the moral compass, sitting it within HR really resonates.”

The moral compass?

Pink’s words on the independent, and sometimes awkward, role HR plays, or should play, in corporate governance are echoed by many others. “HR is sometimes the conscience of the organisation,” says Nicola Pattimore, HRD of technology services company Equiniti. “You have to make sure the organisation is maintaining integrity, holding it to account. HR holds quite a unique space. You’re in the organisation, but often outside it, supporting it. Create space and time for yourself to listen, watch and have that clarity.”

“If you are in the HRD role, you have to have total integrity,” agrees Baxter. “If you think your CEO is asking something unreasonable, you need to talk, depending on the issue, to your chairman, your RemCo chair, and the CEO. If you don’t, then you shouldn’t be in the job. You might not be popular, but that’s your job. You have to take the bull by the horns.” This integrity is something CEOs are looking for (although it might not always feel like it), according to research from Henley Business School’s Centre for HR Excellence, which found lack of integrity was a top-three reason CEOs had sacked
their HRDs.

Pointer says the HR director should know their own values so well they are prepared to walk away from a job. He quotes the advice a former boss once gave him: “There’s a possibility in your career that you are going to be asked to do something you don’t believe in and find counter to your moral compass, and you need to have enough money in the bank to be able to walk away.”

However, several experts also point out HR shouldn’t be shouldering this burden alone, and that there is often a fine line to walk. “HR has no more duty to be the ‘conscience of the organisation’ than any other function,” believes Pitcher. “However, it is the centrality and all-encompassing outreach of HR which gives rise to this claim, with HR more than any other function having the potential to influence and have oversight right across the organisation.” She also warns against HR falling back into a policing role.

McCarthy & Stone’s Jordan adds that rather than just banging on about being the moral compass, HR must demonstrate that “doing the right thing makes good business sense… Think about the brand damage that happens to companies that haven’t done the right thing. It impacts their share price. [Good governance] works on every level: it’s corporate box-ticking, it helps employee engagement, it improves your share price, so you get happy shareholders.”

To judge whether what the business is doing or planning to do is ‘the right thing’, Jordan advises asking leaders to think: “Are you comfortable that if whatever we are choosing to do was written up on the front page of The Sunday Times, you would be able to hold your head up and explain why it’s appropriate?”

She adds that HR needs to take “shareholder activism into account”, particularly around remuneration policies, which “need to look right and strike the right balance”.

Norman Murray, former chairman of Petrofac, says he would like to see more HR directors attending shareholder meetings to explain remuneration policies, as institutional investors are growing wary of executive reward consultants. “As a chair, I want [a pay deal] investors will vote for,” he says. “If I could take the HRD to talk about what we’re planning, that would be better.”

The culture club

Beyond remuneration, culture is also rising up the agenda for investors, with 2015 research by culture consultancy Walking the Talk and investment consultancy Stamford Associates finding that 94% of investors say culture plays an “important” part in their decisions. “The area that’s grown between HR and governance is more interest from the board in understanding and defining the culture of the organisation,” says Baxter. “It’s a bit of a difficult one as it’s not always easy to articulate what culture is.”

Cheese believes we need to make the measures on culture “more tangible than just sniffing the air”, and certainly this is something investors would welcome. Ulycz says HSBC struggles with the people metrics that can act as lead rather than lag indicators: “Our group-wide people metrics are always in the here and now and backwards-looking. It’s a real challenge to do the predictive piece and find things that can tell us what the future looks like.”

But Baxter urges caution on any attempts to qualify culture. “The desire to measure culture fills me with dread,” she says. “Culture is intangible and qualitative, but that doesn’t tend to make board members feel comfortable. If we’re not careful we may try to over-quantify the identification and description of organisational culture, which misses the point.”

In addition to culture and reward, other traditional HR issues such as diversity and inclusion and succession planning are garnering more interest from investors. But while that is important, Stuart Woollard, managing partner of OMS LLP, which has recently released what may well be the world’s first universal standard in human governance and human capital reporting, believes business needs to aim higher. “Boards are framing their understanding of people within an HR context, around talent attraction, for example,” he says. “That’s important, but it’s only one piece of a much bigger puzzle. If your frame of reference is HR in that context, you are never going to understand people risk.”

The risk factor

And people risk is an element of governance that needs to be cracked to end the constant merry-go-round of business scandals. Mala Shah-Coulon, an executive director in EY’s corporate governance team, says when she analysed the risk section in annual reports, 63% mentioned some aspect of people risk. “If 63% see it as a risk, it needs governance around it,” she says. “People risk is not just an HR issue, it’s a board-level issue. I’m not sure boards are waking up to this yet.” She uses the example of cyber security, which boards are taking increasingly seriously thanks to financial penalties and which “often comes down to people and how they are managed… I’m not saying there needs to be regulation, but sometimes that helps people focus.”

Pointer says that although “you can feel like a naysayer”, HR needs to flag up potential people and culture risks. “HR is about speaking truth to power,” he adds. “Part of the job is looking for the risks and making sure you never fall into a culture of complacency. When an organisation is performing well, it is most important to ask questions about what could derail success.”

Making sure people risk is on the agenda must not fall into the box-ticking compliance trap, however. “You can find organisations that congratulate themselves that risk is managed because it’s all on the risk register spreadsheet,” says Cartwright. “In those organisations that manage people risk well, they are having proper, deep conversations away from the risk register about getting the right balance and the right culture.”

Woollard even advocates a new board role, a director with “accountability for human governance… It needs to be someone who can take a broader look at an organisation as a whole system. We need someone who can understand the whole systems nature of an organisation, someone who is excited about the human dimension and how people behave in a whole systems context. Risk is often done by audit committees or specific risk committees, people who are not qualified to answer the [human] question. How many failures have we got to see before we start connecting the dots?”

It’s a powerful question. Placing people issues at the heart of the organisational value creation system, as well as considering the risks related to what Woollard terms “human governance”, potentially places the HR director at the cusp of a great opportunity – if they are up to the job.

“We need to build a level of capability within HR to deal with these sensitive and complex issues,” says Kakabadse. “At the moment, there’s not much of a people component to the governance process, and it will be difficult to break that in a short-term market.” But he urges HRDs to look more closely at the role they can play in governance and stewardship. “If we could only talk about governance in a different way, HR would be more central to governance than finance ever could be. This is a call to action.” Over to you.