The global financial crisis represents the biggest and most damaging failure of corporate leadership of modern times.
In March 2009, the president of the International Federation of Accountants (IFAC), Robert Bunting, argued: “Regardless of who is to blame, the crisis was unquestionably exacerbated by corporate governance failures.” He specifically criticised the lack of proper risk management processes and governance systems, which “do not seem to provide adequately for challenging management’s risky strategies.”
Only a month earlier, the Organisation for Economic Cooperation and Development (OECD) had highlighted in its own review of the financial crisis the importance of qualified board oversight and robust risk management.
The review by Sir David Walker, who headed a government enquiry into governance in the UK banking industry, similarly emphasises the board of directors’ role in overseeing corporate strategy and risk. Published in November 2009, the Walker report concludes that, when a board discusses major strategic and risk issues, there must be a disciplined process of challenge from directors.
The review demands that “board level engagement in the high level risk process should be materially increased,” with particular focus on the organisation’s risk appetite and tolerance. It also argues for corporate stress testing, where directors should ensure that they “understand the circumstances under which the entity would fail and be satisfied with the level of risk mitigation that is built in.”
CIMA’s thinking
The CIMA report, Enterprise Governance: Restoring Boardroom Leadership,explores some of the corporate governance issues in an effort to help boards understand what they must do to be more effective. It considers the processes and practices that enable directors to challenge management more constructively. It goes on to examine how executives and Neds (non-executive directors) can build an effective relationship that is challenging and questioning, yet positive and productive.
The publication also stresses the importance of succession planning and long-term talent management as important aspects of the strategic role of boards – a factor that can make or break their organisations.
Underpinning CIMA’s thinking is the philosophy of enterprise governance, based on the goal of running a company so that long-term sustainable performance is paramount. The fundamental question it asks is: what practices can organisations adopt throughout the business cycle to deliver sustainable performance?
We argue that a key practice is to ensure that the board exercises its responsibilities effectively so that the right things are done – and done well.
CIMA’s report includes examples from the banking industry, especially in the UK, but its insights can be applied in other sectors worldwide. Corporate leadership failed spectacularly in some leading UK companies. It is therefore inevitable that some of the most dramatic and relevant lessons can be learnt from British experiences. By painful necessity, the UK is now among those leading the way in corporate governance reform.
It is also evident that the public sector is in no way immune – for example, governance lapses at the Mid Staffordshire NHS Foundation Trust in March revealed that systematic failures can exist even where the profit motive is absent. The non executive role is coming increasingly under pressure where budgets are being squeezed and, in the view of some, public services potentially compromised. NHS (National Health Service) trust boards are facing public pressure expressed through the media and vocal public representatives where services are said to be suffering in order to meet stringent efficiency targets.
Among the questions to ask are: what happens when a non executive board member is of the view that the plans for financial breakeven may compromise patient safety? Also, are non-executive board members getting the right level of information to give them assurance that risks are being appropriately managed?
2012, May 23 
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