
Letter to the Financial Times Governance matters more than ever!
By arguing that governance doesn’t matter (“We are all hypocrites on corporate governance”, January 27), Stuart Kirk throws down the gauntlet to those of us who believe that high standards of corporate governance are crucial for sustainable business success.
Kirk is right to challenge aspects of the conventional wisdom around governance, especially the heavily redacted version that underpins the burgeoning ESG ratings industry.
One of the challenges faced by investors and other stakeholders is the difficulty of assessing the quality of governance from outside of the organisation. Is the board asking the right questions? Do directors have access to the right information? Are they robustly probing senior management in board meetings?
Lacking access to this crucial information, many investors and their service providers resort to quantifying governance in terms of whether companies are ticking certain boxes. For example, is there a split between the roles of Chair and CEO? Does the board consist of a majority of independent directors? And so on.
Although such mechanisms can play a valid role in governance, none of them are direct proxies for the most important driver of corporate governance: the effectiveness of the board of directors. It is hence unsurprising that many studies struggle to establish any statistically significant correlation between company performance and governance defined in those terms.
However, Kirk goes too far in asserting that good governance or sound management is irrelevant to corporate success. Organisations lacking meaningful checks and balances against flawed or reckless decision-making are acutely vulnerable to human fallibility, regardless of how successful they have been in the past. Missteps or bad behaviour are less likely to be challenged, corrected, or even discussed. Such organisations should rightly be viewed as accidents waiting to happen. The recent experience of the Post Office is a salutary example.
Kirk is to be praised for questioning the way in which governance is being packaged and sold to investors. But let’s not fool ourselves into believing that governance is anything other than critical.
You can read “We are all hypocrites on corporate governance” here.
