Governance Vs Performance

‘Can a focus on governance improve performance?’ question in UK Financial Times.

CEOs find themselves increasingly in a muddle over their responsibility for the figures (‘bottom line’) and the wider implications of the need for business to address issues other than dividend and share value. On the one hand the media assess them mostly on profits – at least until something goes drastically wrong, at which time they will be accused of societal negligence. That is when the CEO feels that s/he cannot win. Truthfully, they may be right.

But that thinking is not the way to success. They are going to have to fight their way around the dilemma, nudging this way and that as the wind blows. It may not be quite the original Rothschild management system but it is today’s. Even so, it can’t be good to be seen fighting for your own salary if you are a top banker. You are dealing with personal financial sums others cannot even read. Ridiculously outsize pensions seem to the man on the omnibus to be incompatible with good governance, however modestly they compare with American counterparts.

And here’s the rub. If your business is seen as ‘making money’ you will probably, and not unreasonably, want a reasonable stack of it for yourself. After all, you worked pretty hard to buy your house, educate the children, help your parents and fund your pension. And that’s on top of satisfying rapacious shareholders who claim to be in it for governance but turn out, when the chips are down, to be in it for wealth. That’s why they have Wealth Managers.

Satisfying both opposing requirements seems too much of a conflict of interests. But it need not be, if you handle it properly. You cannot legislate the conflict away though people will doubtless try. That means business people must handle investment fund managers and the sustainability lobby at the same time. First rule is don’t bring them together. If you do your own interests will be totally ignored because each will be too busy trying to battle with the opposite side. Proselytising for a cause raises people’s blood pressure and makes them deaf.

Good governance is wider than profits. Internally it has to do with the treatment of staff before, during and after their employment. The Quaker employers of the 19th and 20th Centuries showed how care can transform a workplace from a slave pit to being purposeful and with opportunity.  Modern treatment of employees must be less embracing to be successful. The root of what matters is care. How you do it follows the cultures of where and when you do it.

Externally, governance is largely about the contribution your organisation makes to the world. The spur to this ought to be the shareholders. However, commercial progress and planet decline are moving rather faster than most punters. Leaders who have control of the necessary resources must make the running. This results in business managers making political decisions from positions where they are not elected to do so. In theory this may seem undesirable. In practice, we would rather have good governance whichever way it comes. That is why business will increasingly be taking a lead over many matters that have previously been purely political.

The ultimate judge of a company is not the shareholders, the employees or the politicians but the public. They are now expressing their views more openly and more successfully. The original Robin Hood image that climate change had is fast disappearing. Climate control is widely supported in spite of a denying presence in the White House. Then again, many shareholders – alas, not a majority – insist that the companies they invest in visibly support sustainability of the planet.

Measures of good governance are already being paid more attention to. Investors now consider social value as well as economic value.  Employees increasingly show that they prefer to work for companies that are eco-friendly. Consumers require packaging that is minimal, sustainable and more functional. The preservation of wild life partly as a balance to the ecosystem but also in its own right is seen, largely through the advocacy of David Attenborough, as a very real responsibility humans have. Survival of humanity and the planet are now accepted as top priorities.

Can a focus on governance improve performance?

It all depends on what you mean by performance. If simply increased profits, probably not. And you are not in business to make a loss, for sure. Increasingly, however, the investor, the consumer and the wider public understand that the definition of performance is changing. Both want return and quality but not at the price of annihilation.

That is why the scales will tip for good governance rather than outstanding financial performance.

Survival demands they should do so sooner rather than later.