Dr Alessandro Merendino
Over 200 Boots stores in the UK are closing down (BBC, May 2019). This adds to a long list of companies that have recently experienced a corporate governance failure in the UK, such as HMV, British Home Stores, Carillon, Poundworld, Carpetright, Jamie Oliver and Patisserie Valerie; just to cite the most resonant names in the High Street.
The common denominator in these companies is a congenic corporate governance issue.
Corporate governance is the system by which companies are directed and controlled (ICAEW) where the board of directors sets the strategic goals, provides leadership, and supervises and mentors the management. The newest Code of Corporate Governance (FRC, 2018) stresses the importance of good corporate governance as the main component for the long-term sustainable success of a company.
If it is true, therefore, corporate governance is dead.
Like the recent Boots news confirms, companies seem to fail to adopt long-lasting, healthy and fruitful corporate governance. Despite the policy maker recommends avoiding the ‘tick-box approach’, research finds that directors still conceive corporate governance as a burden and a mere bureaucratic encumbrance. As a result, ‘corporations fail to put in place optimal governance systems because directors and executives are substantially focused on the short-term view without capturing in time the environmental signs’ (Merendino and Goergen, 2018).
Corporate Governance failure does not happen overnight, there are a number of signs or practices that repeatedly ring the alarm bell. Some of these signs, that weaken corporate governance, are related to when:
- A CEO fulfils multiple roles in different committees
- Non-executive directors are not engaged in discussion or are over-pessimistic
- The Chairperson does not promote a culture of openness and debate
- Non-executives and the chairs are increasingly busy in other companies
- The board and the management undermine each other’s roles.
Poor corporate governance leads to poor performance (Merendino and Melville, 2019) and eventually to an organisation’s collapse. Although this is counterintuitive, many companies are on the verge of failure. In fact, it is deemed that non-executive directors and chairs could have saved those companies that have recently collapsed (Financial Director); but they did not. The role of non-executive directors and chairs is vital to ensure a long-lasting corporate governance culture. Non-executive directors and chairs not only have to have the necessary skills to direct, drive and steer an organisation, but they have also to challenge executives, setting the companies’ values, and ensuring that all the obligations are fulfilled. However, it appears that non-executives or chairs insufficiently handle corporate governance.
We cannot let corporate governance die. Why? Because it is the brain and the heart of each organisation, it is like the engine of a car, it is like a pilot in a cockpit or it is like the columns of the Acropolis: a vital component of any organisation. As a result, corporate governance over time needs some medical or surgical intervention to make it work properly. Medical interventions mean that the board of directors needs to be re-trained and to re-think their business model. Surgical intervention refers to the radical change in the composition of the board of directors or executives.
In order to avoid further corporate governance collapses (and possibly surgical interventions), directors must embrace the corporate governance culture as per the Code and continuously monitor corporate governance health. On the other hand, the regulator could provide the boards of directors with some extra support to revamp corporate governance before it is too late.