Technically beautiful governance can be functionally inadequate

Imagine a small board with three non-executive directors. They may technically tick every governance best practice box – have every committee in place with charters, regular meetings and the right agenda. Technically it looks beautiful, but those three directors are on every single committee so really it’s just compliance for compliance’s sake. It’s not achieving the right outcome. It’s technically beautiful but functionally inadequate.

Governance is a critical aspect of a board’s agenda, but most small boards probably devote too much time to it. An enormous amount of time can be spent going through all the procedures and considering the key attributes of each decision under your governance structures. But boards shouldn’t constantly be immersed in the detail of risk matrices and analysis, they should be enabled to sit above it.

While governance is important, some directors view it as their only role. A tick box approach only makes this perspective more dangerous, particularly for newly listed or small listed companies. That’s because it leads them to focus on what they perceive is good for the market, or their profile, or to reduce their personal risk exposure, rather than what’s actually good for the business.  While they may be seen to be complying with ‘best practice’, that compliance burden and mindset can be incredibly restrictive.

In my experience I’ve seen this tick box approach to be more prevalent in highly regulated sectors. If a business is a licensed entity in the financial services sector they tend to feel like they’ve met their obligations if all their compliance checklists are in place. But these organisations forget that simply ticking the box doesn’t protect them from making really bad decisions.

Communication is key to good governance

Boards do need to tick boxes, after all that’s what reporting is, but this doesn’t mean they have to tick every box. If they’re not adopting “best practice”, it’s often just a case of stating the business reasons why not. There are many publicly listed companies that are not complying with all ASX governance principles for good commercial reasons. They may have a small board and it’s not possible to have every committee required under governance structures. While the business still has an obligation to consider the same issues in the right manner, setting up a committee structure just doesn’t make sense.

That’s why I encourage boards to be more transparent in the language they use so that people can understand why they’re different, and why that is appropriate in their circumstance.

Open and honest communication, with shareholders and the market, is always best practice. As long as there is a clearly articulated and sound reason for the action or non-compliance, and it is communicated, shareholders will usually be able to accept it even if they don’t agree with it. What shareholders won’t forgive is bad outcomes because the board was focused on ticking a box. All good directors know that good governance is important, but by itself doesn’t translate into good business decisions.