Page 41 - IRMSA Risk Report 2021

DIRECTOR, RETLAW FOX ASSOCIATES
WALTER

EHRLICH

EXPERT OPINION

Governance can fail in any type of organisation, from a to the company as a legal entity, and not to any individual
homeowner’s association or school governing body to or group of shareholders. Courage is an immutable
a multinational listed company. Failure can occur in any attribute of a competent director. It takes courage to put
sector and no entity is too big to fail. The opinion below is the interest of the company first. If more directors, as
limited to looking at the role ineffective governing bodies those responsible for leading and directing organisations,
play in the failure of governance at entities directed by a spoke out, some of the governance failures of our time
board of directors. Governance has three core elements: could have been avoided.
identifying risk, setting strategy, and holding the CEO
to account for the execution of the strategic plan, the The CEO directs the governing body
mitigation of risk, and the overall performance of the Governance is the primary responsibility of the governing
organisation. Governance fails when the rules, practices, body. However, some governing bodies take their
and processes that are used to direct and control the direction from the CEO. So instead of the Chair and the
organisation successfully and sustainably are ineffective Committee Chairs deciding what the governing body
or fail. should focus on and setting the agenda to ensure that it
focuses its attention on strategy setting, risk governance,
To avoid governance failure, the governing body’s and CEO oversight, the governing body is directed by and
oversight responsibility must be crystal clear. All efforts rendered subservient to the CEO. Balancing power in a
of the governing body must be on risk, strategy, and boardroom can often be challenging. Like schoolyard
holding the executive to account. Governance failures bullies, aggressive CEOs can often get their way and the
do not happen overnight and there are several possible governing body is reduced to a rubber stamp.
causes that must be understood and acted on to avoid
such failure. Let’s consider four ways in which governing This can be mitigated by regularly conducting robust
bodies could contribute to governance failure. independent evaluations of the governing body and its
individual directors and using the outcome to guide the
True diversity is not achieved director rotation strategy. The interpersonal dynamics
Race, gender, and age diversity is important, but is between the organisation’s executive and non-executive
only one consideration in achieving true diversity in directors should be understood. For example, an assertive
the composition of the governing body. The overriding “Type A” charismatic CEO, without a counter-balancing
diversity concern must be whether the directors number of non-executive directors who are willing and
comprising the governing body have the knowledge, able to question, engage and, if necessary, challenge the
skill, experience, and independence of thought to fully CEO, will not bode well for effective governance in the
discharge their governance roles and responsibilities. organisation. Too many governance failures arise from
When faced with a challenge, true diversity helps to overly charming and charismatic leaders, surrounded by
counter “silo thinking” and allows the governing body to sycophant directors, both executive and non-executive,
consider an issue from many perspectives (e.g. financial, who have rendered board oversight ineffective.
economic, legal, generational, geographic, etc.). This
approach is far more effective in assessing risks than In conclusion: governing bodies fail when they fail to
using a one-dimensional approach. comprehend the value of good governance, and do not
intentionally and effectively put it in place or merely
The focus is misplaced treat it as a tick-box compliance issue. Achieving and
If governing bodies are too operational, it results in too demonstrating good governance is time-consuming and
little time being spent on the oversight role – which is complex, but its value in mitigating governance failure
essential to good governance. Governing bodies should should not be underestimated. The economic aftermath
evaluate the organisational strategy based on how well of Covid-19 will likely increase the risk of governance
risk is assessed and how well the organisation is achieving failure as organisations cut back on governance, which
its mission. The all-important link between risk, strategy, is often incorrectly seen as a dispensable nice-to-have.
and governance must be adequately considered. Governance and performance are not mutually exclusive;
both must be well executed. We should ponder the
Directors do not understand their role thought that to understand success we must understand
Directors have a fiduciary duty to act in the best interest failure – but we do not have to experience failure in our
of the company, even if this is not in the best interest of efforts to experience success.
the shareholder who appointed them. They owe this duty

Sources: Deloitte – “Duties of Directors”, Institute of Directors SA - King IV, USB Management Review – Business Perspectives on the Steinhoff Saga,
Special Report, June 2018.
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