How Does the Board Ensure Its Policies Are Followed?

August 25, 2011 by  Filed under: Management 

It is one thing for boards to publish values and mission statements but what about implementing procedures to ensure staff actually subscribe to them and follow them or, even better, buy-in to them?

An example of the problem was provided by the revelation in the press that the public relations company, Burson Marstellar had been planting negative stories about Google in the press. Later a company spokesman claimed that the team responsible for this had acted without authorisation and contrary to ethical guidance. Let us accept that explanation at face value. How then should the board frame its ethical values and communicate its ethical guidance so that everyone knows about them and knows how to behave? How can the board check the guidance is being observed and how should it respond to infractions? There seem to have been no consequences in the B-M case.

When I posed this question on a discussion forum a typical response was

“By establishing committees and creating a reporting & escalation framework to those committees and senior management to ensure compliance with policies, guidelines, standards and procedures.”

Unfortunately this demonstrates the problem rather than a solution – because governance professionals assume that people can be corralled into correct behaviours; but often they can’t: they cheat the system, they find ways to bypass procedures, they collude, they redefine terms to mean what they want them to mean in order to justify their actions.

Perhaps another example will help. GlaxoSmithKline, one of the world’s biggest drug companies, had a plant in Costa Rica that supplied the US drug market. Unfortunately the Federal Drug Administration reported several compliance breaches, so GSK sent in an investigator. She was so concerned by what she found that she recommended temporary closure while the problems were fixed but instead of acting on this, GSK removed her and, when she would not shut up, sacked her. Even then she tried to contact executive management at head office to get them to do something and only when they would not take her calls did she go the FDA. The resulting court case was settled with GSK paying $750m. Now GSK had a compliance department, internal and external auditors, whistleblowing procedures and published pages and pages of risk analysis and governance procedures in its annual report. The ‘ultimate feedback mechanism’ should not be a $750m payment. Taking account of the legal costs and plant closure (yes it was closed, permanently) that’s nearly $1bn. That’s a lot of money.

There was one response on the forum that did move this discussion forward. The writer suggested

“Make a board director personally responsible for a number of polices and their effective implementation, and tie measures of that implementation to the executive remuneration schemes – that way not only do they have to provide objective evidence of the policy being implemented from a governance point of view, they also have to do it to get paid!”

Now that, I think, is at least part of the solution to this problem.

The issue boils down to the fact that systems and procedures are necessary but not enough – we need to influence behaviours. To do this companies need all their people and their business partners to have shared vision, shared values and shared understanding. A value guides behaviour because it is simply a belief to which you ascribe a worth or a value; this means that when it conflicts with another belief of this kind you can weigh them up and decide which takes precedence. The vision tells everyone where you are going and enables them to judge for themselves whether, if they take a particular decision, they will be moving the business in the right direction or not. And if the business strategies are clearly communicated then everyone understands the detail of how you intend to achieve the goals and that too enables them to ensure that tactical decisions fall within the strategic envelope. Clearly communicating all this means that boundaries are set and individuals have a lot of delegated authority to know how to act within them. Aren’t you still left with the problem of measuring compliance? Yes, but all this should make many of the systems and procedures self correcting because individuals will say, “That does not fit in with our corporate values – we should not be doing it…” Also, while it may be easy to wriggle around prescriptive rules it is far harder to justify crossing those boundaries that have been clearly set. It will be clear to everyone that a wrong course of action conflicts with the values, vision or strategies that have been clearly communicated. And, of course, the remuneration system will reinforce the right behaviours because someone who achieves good results but by inappropriate means will not be rewarded.

As a final illustration, there is a piece of wisdom written by Jack Welch, the iconic former head of GE, in his annual report in 2000;

There are four types of managers…

Type 1: shares our values; makes the numbers – sky’s the limit!

Type 2: shares the values; misses the numbers – typically, another chance, or two.

Type 3: doesn’t share the values; doesn’t make the numbers – gone.

Type 4 the toughest call: doesn’t share the values, but delivers the numbers. The toughest to part with because organizations want to deliver and to let someone go who gets the job done is unnatural. But we have to remove them because they have the power to destroy the open, informal, trust-based culture we need to win today and tomorrow.

Brian Finch is a business consultant, company director and author, specialising in business planning, effective financial management and corporate governance. This article draws on the recent book “The Value of Talent” by Janice Caplan. For more information, or to contact Brian Finch, visit his corporate governance blog at http://finchesblog.blogspot.com His latest book is Financial Times Briefing: Corporate Governance

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