How do we improve corporate performance and avoid more corporate failures? The government is clear: We need more regulation. ‘Restoring trust in audit and corporate governance’ is the promise of the current white paper, whose consultation period ends on 8 July. It’s an extensive list of some 90 new regulations; ranging from mandating joint audits, new company disclosures, increased director accountability to stretching regulation to many more companies, including private ones.
Existing governance regulation has failed to stem company failures, so why does the government think that more regulation is the answer? Or perhaps more regulation is just a punishment to business for past failures?
The present regime of blaming individual directors and ever-increasing regulation makes sense only if you believe that business failures come predominantly from greed and corruption. If most company failures come from changing markets, or perhaps boards making poor decisions, or directors not reading the warning signs till too late, then the answer is better educated directors, not more regulation.
What is really noticeable about company failures is how so many involve intelligent, experienced businesspeople making errors of judgement or mistakes, and getting caught up in very difficult situations. The detailed reasons why companies – like other organisations – fail are often complex and subtle.
This means we need a completely different approach: One based on identifying reasons why companies fail and working with boards to inform them so that they are better prepared to avoid these risks in the future. We need an independent body that investigates why company failures happen; analyses what went wrong and what could have been done to stop it; looks at systemic problems and develops avoidance strategies – asking why, not who. There is a prime example of this approach already in the UK – the Air Accident Investigation Branch. Its no-blame culture and focus on understanding process failures is one of the key reasons why aviation is such a safe form of travel. It avoids personal criticism of individuals, because all humans make mistakes. It is the key role of processes and controls to reduce the risks from inevitable human error.
Company boards are teams of individuals with different skills and experiences. Like all teams, they would benefit from more information, education and coaching. What director hasn’t looked at another failure, shuddered and thought that could have been them? What director wouldn’t welcome detailed explanations of others’ failures as cautionary tales, with good advice and recommendations to avoid a repeat? And if such analysis subsequently suggests evidence-based changes to governance regulation, that is all to the good.
There is of course a role for individual responsibility and culpability. The problem is that single-minded pursuit of blame and punishment gets in the way of learning from mistakes and crises. The first stop should be to understand what went wrong and then alert others as to how to avoid that happening again.
It’s a simple fact that governance won’t be improved by even longer annual reports. Diverting even more board time to governance compliance won’t add efficiency or entrepreneurship. We won’t recruit new and diverse board directors who can accelerate economic growth if they have to devote themselves to compliance, rather than getting the resources and education to learn how to be better.
We need more understanding of the art and science of board management, more education and more encouragement, not more auditors, more boiler plate reports and finger-pointing. We need higher performing boards; education, not more regulation.
There is more on the failure of regulation and the need to develop and educate board directors, as well as over 150 tips for directors and plenty of anecdotes in my new book ‘Behind Closed Doors. The boardroom’ available from all leading bookstores, including Waterstones and Amazon.