Society faces a crisis of governance. In the UK and around the world, we depend on institutions to deliver us the goods and services we need in order to be healthy and happy. How well those institutions carry out their mission and meet the needs of the people depends in large part on how well they are governed. But far too often, those who are responsible for governance are failing in their responsibilities and duties.
This is equally true whether we are discussing corporations, government institutions and public sector bodies like the National Health Service (NHS), or third sector institutions such as charities. Governance is equally important in all, and yet in every sector the signs of crisis can be seen. The impact on society, as we shall demonstrate, is colossal. At best, many of our institutions are underperforming and failing to deliver, meaning other people suffer the consequences: loss of jobs and income, poor quality education or shortages of urgently needed medicines or medical care, to name just a few examples. At worst, the consequences are corruption and scandal, mismanagement, value destruction, the failure of entire institutions, and sometimesâtoo oftenâinjury or death.
This book is about the crisis of governance, and what can be done about it. We argue that much of the problem is due to widespread ignorance about what governance actually is, and specifically about the role played by boards of directors. The general public, the media, governments, even boards of directors themselves do not fully understand the concept of governance or what is involved. This ignorance means that all too often people donât realise what good governance looks like or, much more dangerously, do they recognise bad governance when they see it.
We will focus particularly on the role of the independent directors who serve on boards, explaining their responsibilities and defining the tasks they face. Independent directors are the lynchpin of governance. If they do their job well, then we can be reasonably certain that the institution is well governed and able to carry out its mission. If they fail, then the institution is, at the very least, at risk. It is vitally important that we have independent directors who fully understand their task and are prepared to engage with the institutions they serve.
In writing this book, we want to help independent directorsâand prospective independent directorsâlearn more about their role and purpose and better equip themselves for the challenges we face. But the core messages of this book will be important to anyone who cares about good governance: executives, regulators, political leaders or anyone who is affected by governance issues and wants to see positive change. In short, practically everyone.
Governance and Management
There is a sharp distinction between governance and management, and the role of the former is not always fully appreciated. The day-to-day running of these institutions is the task of the executive team and the managers who report to them. They prepare budgets, execute strategy, deliver products and services to clients and customers, and do all the myriad things any organisation must do in order to carry out its mission.
Governance, on the other hand, is about oversight. Managers and executives come and go, but governance structures are permanent. It is the independent directorsâsometimes also known as non-executive directors, governors or trustees, depending on the type of institutionâwho are the real custodians of the organisation. Their task is to ensure that the organisation stays focused on its mission, balances the interests of its stakeholders and works to the benefit of all. Theirs is the ultimate responsibility. If the organisation has a failure or breaks down in some wayâa human or financial scandal, perhaps, or a case of corruption, or a breach of regulations or procedures that puts peopleâs lives in dangerâit is up to the independent directors to put things right. It is also part of their role to ensure that these failures do not happen in the first place.
Businesses, large and small, provide employment and generate wealth. Government regulates society and provides vital services such as infrastructure, policing and defence. The National Health Service tends to the ill and the hurt and tries to keep the rest of us healthy. Schools and universities provide the education we need if we are to thrive. Sporting bodies provide us with entertainment and recreation that helps keep us fit. Charities are active everywhere providing vitally needed services ranging from medical research and health care to libraries and the arts. And so on, and on.
Each of these sectors has their own particular and unique challenges. In particular, some distinctions must be drawn between governance in business, on the one hand, and in the private and third sectors on the other. The onus to provide good governance in business is on the owners of the business (or at least, the owners of the share capital of the business). In current business theory, ownership and control of business should be kept separate, with owners staying out of the day-to-day running of the business, but this does not mean they are excused from all responsibility; shareholders have a duty of stewardship and should continue to exercise oversight over the companyâs management. How well they do so varies wildly from case to case; some shareholders take their responsibilities seriously, others appear to have little concern for the companies they apparently own. But, in theory at least, owners are able to exercise governance over private sector companies. In practice there can be a clear benefit to listed companiesâ governance from shareholder involvement. The recent action by Blackrock in regard to the requirement for companies to pay more attention to sustainability issues is a good example. Notwithstanding the above points some of the largest and most successful companies today (e.g. Amazon, Facebook, Google, Microsoft) are companies where those managing and controlling the business are also major shareholders, often founders. These companies pose particular challenges for governance and independent directors.
Charities and public sector bodies are different in that they usually have no owners (though within the third sector some organisations are organised along mutual lines, meaning that independent directors are also nominally the owners, even though the organisation has no actual share capital). Unlike in business, where independent directors have a responsibility to shareholders, in these organisations the independent directors are the last line of responsibility; the buck stops with them. This creates different expectations of governance, and different challenges for directors.
But what all these organisations have in common is that they are under pressure like never before. Economic and political uncertainties and the challenges of the digital age mean the future is becoming harder and harder to predict. What will the market look like? What strategies will be needed for survival and growth? Even these basic questions are fraught with uncertainty. At the same time, austerity and budget cuts, the vagaries of government policy, the increasing costs of skilled labour, medicines and technologyâto name but a few of the many issues we faceâmean that all of our institutions are under mounting pressure to do more with less, to deliver more value to society while coping with diminishing resources. And all this was before the coronavirus epidemic of 2020 caused the worst health emergency and economic crisis in living memory. The pressure before the epidemic was nothing compared to what we face now.
The challenge facing independent directors and boards is, how to overcome these formidable obstacles and have real positive impact on society? That is the endgame; that is the purpose for which independent directors exist. Their function is to provide governance, support and oversight, ensuring that the executives meet the goals that have been set for them and that the needs of stakeholders are served. With good governance, organisations can expect to overcome most of their challenges, if not all, and go on to fulfil their purpose and mission. Without it, they have little hope of doing so.
We must be careful not to overstate the problem. Many boards are dealing with these challenges; some are overcoming them and forging ahead. There are many high-performing boards, many excellent independent directors and many hard-working and dedicated chairs who give tirelessly of themselves and work hard in the service of society. But sadly, there is also a long tale of underperformance; and sometimes that underperformance leads to disaster.
Fatal Consequences
Good governance is often lacking, and when it is, the consequences for society can be severe. When failures happen, responsibility can nearly always be traced back to the board. In the words of one recent report by Alvarez & Marsal and Henley Business School, âmany boards are arguably not currently equipped to deal with major or extraordinary disruptions and discontinuities and are often found to be unaligned with their management team and not effective in addressing the most pressing issues.â1
Kevin Carey, chairman of the charity Royal National Institute for the Blind (RNIB), was much more blunt. âMost charities donât fail because the...