Share |

Bad governance led to economic crisis

If we had to boil down the current economic crisis into one root cause it would have to be the overwhelming failure of good corporate governance, says Mark T Green. In every case from AIG, GM, Citigroup and Chrysler it seems that the real problem was the failures that occurred in the boardroom. Over the last few months serving on boards and working with family business clients, a constant conversation has been centered around two questions:

1) How could the board allow this to happen?
2) What can we learn from this so we don't make the same mistakes with regard to our own family business?

Here are the three lessons that stand out and which will help your own family governance, whether it is an informal board made up family members, an advisory board or a full board comprised of outside directors.

Courage: Courage certainly was in short supply in the boardrooms over the last few years at these large troubled companies as board members simply failed to ask the tough questions to assure the long-term viability of the company and protect the interests of all shareholders. Board members must also demonstrate their courage by not tolerating mediocrity, poor decisions and flawed processes. If a board member won't do it then who will?

The most effective board members have the courage to say "no" to the CEO and hold them accountable. The lesson for family business governance is that board members must ask the difficult questions and/or hold the CEO accountable – especially when that person is a parent. However, it is essential that family governance is able to separate the issues from the personalities and be able to respectfully discuss an issue as business partners and concerned stakeholders, if not, shareholders.

Trust but verify:  Borrowing a phrase from President Reagan of "trust but verify", it's important that a board has solid trust in executives; however, that does not mean that the executive team should have carte blanche for all matters of the company. In examining the failures of the troubled companies it is evident that the board simply trusted the communication from the executive team in terms of the condition of the company. Building an environment of trust between board members, shareholders and executives is key to good governance. Blind trust is a recipe for disaster.

In family business governance a high level of trust is desired but it must be supported by robust systems and processes that ensure transparency, accountability and thorough communication to all levels. Board members should be encouraged to learn about the business and be able to visit the business, talk with employees, suppliers and customers to better understand the business so they can be effective and engaged board members. At the same time, board members must prepare for meetings by reviewing the financials and management reports to be able to ask intelligent questions and work effectively with the management team to deal with issues in a proactive manner. In short build trust, but always verify.

Being a board member is an honour and a responsibility:  Clearly, the board members of these troubled companies failed to understand the requirements and full responsibilities of their jobs. It is not just getting together a few times a year and collecting a cheque, but rather it is a serious job and the most critical component is to assure shareholder wealth and maintain a viable company. The proliferation of the board model over the past 30 within private companies, non-profits and government has raised awareness of the board of directors concept to an extent that it is now commonplace.

But while the concept is widely known and assumed, it is often poorly implemented. Returning to basics, being on a board is an honour and also a tremendous responsibility. Board members should bring experience, a broad network of contacts and a passion for the mission of the company. They should also be able to balance self-interest with the needs of the company and the laws of the land. Family businesses, regardless of the choice of governance tool, are all governed by something and the sooner we accept our roles and responsibilities the better off you will be. But first recognise that governance requires an even higher standard of responsibility and duty that must be diligently attended to each and every day not just during board meetings if at all.

Family businesses must educate their families and shareholders about governance from a family, management and ownership perspective. The current economic crisis serves family businesses by providing clear lessons on the importance of governance and the best teacher of all failure. Perhaps non-family businesses might consider learning a few lessons from family business by focusing on the long term, try conservative management instead of hype and start making decisions based on core values.

Click here to read more columnists

Click here >>