To improve public procurement – use the Trust Test
Public procurement is too often solely made on price, and not enough on true value and to account for areas...
Remarks made at the launch of the Good Governance Index by Mark Goyder, founder and CEO of Tomorrow’s Company
16 June 2015
May I first thank the IOD for involving me in this process, and welcome the open and constructive way in which the Advisory Panel for the GGI has listened to its external advisors. I also welcome the partnership Tomorrow’s Company has enjoyed with the IOD in the work of our Good Governance Forum for the last 5 years, working with us to develop some of the practical tools of good governance including the very important idea of the board mandate, better boardroom conversation, governing values risk leadership and better board evaluation.
In his introduction our chairman, Ken Olisa, talks about the difficulty in telling the difference between the genuine article and the fake. Much harder, he says, than in art. Well that makes it very hard indeed!
I was hearing yesterday about the experiment conducted by Dulwich Picture gallery. They told all their visitors that one of the paintings on the wall was not actually the original, but a fake, and they challenged them to spot the fake. 12% of their visitors succeeded. Well, Ken if it’s that hard for art, and you say it is even harder for good governance.
I think that tells us something important about the attempt to develop an investible index.
In Tomorrow’s Company we believe that business exists to serve society. We want to inspire and enable companies to be a force for good. Society needs business that can succeed and prosper over the longer term. Shareholders need that. Employees need that. Taxpayers and citizens need that.
What makes companies successful in the long term?
I want to start by talking about long term success.
What makes companies successful in the longer term? We are clear about the answer to that question – a consistent focus on purpose, values and relationships, including an awareness around that licence to operate.
The evidence for this is overwhelming. I’ve summarised it elsewhere. Indeed I discovered looking back that 18 years ago I was in this room debating with the late Alastair Ross Goobey, CEO of Hermes Investment Management, and put forward 9 propositions which summarised the inclusive approach and which you can find on our website and in Appendix One below.
Let me just give you one example of the evidence which illustrates the point.
There are over 20,000 companies in Japan which are over 100 years old. There are 600 companies which have been successfully performing over 300 years. There are 30 companies which have thrived for over 500 years. There are five companies which have a successful legacy and history of over 1000 years. According to Professor Haruo Funabashi, who studied them, they have some common characteristics, which include leadership driven by clear values, vision and mission, a strong sense of legacy, a vision of the long term, an emphasis on the value of people, a commitment to society and “building the nation”, customer orientation, and innovation and continuous improvement.
We all know this to be true. In Tomorrow’s Company we called it an inclusive approach to sustainable success. And from the original business-led inquiry 20 years ago we argued that this should be the basis of how leaders, boards and investors think about and assess success.
What is the part played by good corporate governance?
But let’s not get carried away about the part played by good corporate governance. Good corporate governance helps to underpin long term success – a necessary but not sufficient condition. It helps to keep leaders honest, and holds them to account.
So, having first established what drives long term success, let’s acknowledge that a good governance index does not tell us everything that matters about the company…
As a citizen, as an employee or potential employee, as a major customer, and as an investor there are three key things I need to know.
Is the company well led and managed?
Is the company well governed?
Is the company well stewarded by its major shareholders?
Those are the three strands of work which Tomorrow’s Company pursues.
So a GGI doesn’t tell us everything that matters about the company and its future potential for success.
Now for the second problem. It is also unlikely to be able to tell us everything that matters about governance. Let’s start with definitions.
UK Corporate Governance Code:
“The purpose of corporate governance is to facilitate effective, entrepreneurial and prudent management that can deliver the long-term success of the company.”
Companies Act 2006, section 172:
“A director of a company must act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members (shareholders) as a whole, and in doing so have regard (amongst other matters) to: the likely consequences of any decision in the long term; the interests of the company’s employees; the need to foster the company’s business relationships with suppliers, customers and others; the impact of the company’s operations on the community and the environment; the desirability of the company maintaining a reputation for high standards of business conduct, and the need to act fairly as between members of the company.”
I am happy with the definition of good corporate governance that has been used in this project. I should be. It draws on the inclusive definition of directors duties in the Companies Act which in turn draws on the work which we did in the original Tomorrow’s Company inquiry 20 years ago.
An index is a snapshot.
But as the Greek Philosopher Heraclitus tells us ‘Everything is fluid’. An index is a snapshot, however good the camera, taken at a point in time. The weather at the time may be good or bad. The company and its shareholders may be smiling or scowling at that moment.
Today’s peacock is tomorrow’s feather duster. Equally tomorrow’s feather duster may be today’s peacock!
To take a current example. Tesco. According to the draft index produced here, Tesco comes very low on the list.
Looking backwards, as an academic might do, that might make sense.
But looking forwards, as an investor might want to do, it makes less sense.
I would imagine that right now there are few boards more vigilant, less complacent than Tesco’s!
What matters in corporate governance?
Decision-making – including dealing with dilemmas, and tough choices. When there is a fierce argument between two points of view honestly held.
Corporate governance is about stewardship, leadership and accountability. It is about keeping the leaders honest, and holding them to account. In the first instance, there is that formal accountability to shareholders. The board are elected by the shareholders to be good stewards of the assets under management. Through that nomination and election process the shareholders or their representatives put the directors in place.
For example: you want loyalty by the chair to the CEO. But you also want sufficient detachment because there may come a time when the CEO may need to go for the sake of the organisation. The chairman has to balance these things.
HBOS won all the governance awards going. But it turned out not to be well led. Its board tuned out to be too uncritical of its leadership.
How do you measure such nuances?
Openness (call it transparency if you must but the word is over used.)
Good delegation – from shareholders to board, from board to management. Clarity of mandate.
Effectiveness in dealing with dilemmas.
The GGI is an emergent answer. It is stimulating this vital debate. But let’s be cautious before we imbue it with spurious authority!
As Ken says, let’s recognise that the company is a living organism.
So to summarise:
I welcome the quest to find measures that enable us to rank companies on the quality of their corporate governance. But you cannot judge a company in isolation by judging its governance. You need also to judge its stewardship and its leadership.
Secondly, no index can fully capture the quality of governance because things are fluid. I am sceptical that one could ever develop an investible index. An index will inevitably be looking backwards. Investors are interested in looking forwards.
15 years ago, I wrote a piece called ‘Lessons from Enron’. I could have republished it as lessons from Parmalat, HBOS, Tesco, Mid-Staffs, Satyam and many other corporate governance disasters. In it I offered, like Ken Olisa in his introduction, an organic image of good corporate governance.
“The company is a living system. Employees are its life-blood. Management is the heart which keeps the blood pumping. Strategy is the brain and measurement and communication the central nervous system. Culture is the DNA. Leadership and continued entrepreneurial energy are its soul and spirit. Governance and accountability are its rhythms and disciplines, like exercise, a means of keeping this living organism fit and lean. Unless we understand governance in this wide context, we will continually fail to manage risk, sustain performance and earn trust.“
End of speech.
From speech to IOD in 1997
1) Business is subordinate to society (Licence to operate)
2) Every business is different (Uniqueness)
3) Businesses are started by individuals (Entrepreneurs)
4) Motives vary but profit or dividend for entrepreneur /shareholder is rarely dominant (The fallacy of Homo economicus)
5) Sustainable shareholder value creation depends more than ever on inspiring loyalty, creativity and trust in and learning and feedback from all key relationships (Business is about leadership through relationships)
6) Companies cannot inspire these responses without generating a clear, pervasive, and enduring sense of the purpose and values of the whole organisation (Purpose and values are the basis of leadership)
CONCLUSIONS – the case for the inclusive approach
7) Each business will make its own choices, but a business which fails to include all key relationships in its definition and measurement of success (its success model):
– misses opportunities
– incurs undue risk and thereby
– puts itself at a competitive disadvantage
8) Alongside business skills and strategy, purpose and values are central to the creation of shareholder value
9) This holds for individual companies and for the business community as a whole whose freedom of action depends on the level of public confidence (Licence to operate)
 Living Tomorrow’s Company – Rediscovering the Human Purposes of Business, Mark Goyder, Knowledge Partners 2013.
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