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The Governance Mule

THE GOVERNANCE MULE1

A frank and practical look at the keys to successful governance for non-SEC registered entities

Materials are plentiful concerning the mechanical keys to successful corporate (and related entity) governance. Typically, the materials provide a laundry list of items which, if adopted, and then monitored, provide a valuable checklist. Among the regularly-referenced items are:

  • Accountability
  • Transparency
  • Responsiveness
  • Effectiveness
  • Strategic Vision
  • Efficiency
  • Equity
  • Legality
  • Consensus orientation
  • Fairness

The lists have their place, but provide little practical guidance on how to get to the end game of day-to-day governance or how to respond in the event of crisis. With that in mind, following are a few keys to successful governance.

1. Avoid Cookie Cutter Approach. While the above principles remain constant, their application does not. Each entity must be flexible enough to address issues on a case-by-case basis. The bottom line is the Board and Management have to act in the best interests of the organization regardless of the personal consequences. Rigid attention to a checklist sometimes results in the avoidance of getting the whole picture - a box is checked, you move on and the underlying issues are never pursued.

2. Importance of Independent Board Members. Utilization of independent Board members and reliance on their wisdom and experience is crucial. In family-owned businesses, filling a Board with "yes" people who are afraid (or don't deem it their place) to question the family leadership is a mistake. It is not in the best interests of the entity, and surprisingly to most family leaders, it is not in their best interests either. Checks and balances must be in place. The value of independent members is never more appreciated than when there is a family feud.2

3. Fulfill the Duties. Members of Boards generally have two duties – a duty of loyalty and a duty of care. To act in the best interests of the entity, they must be informed, exercise appropriate due diligence and generally oversee the Company. To fulfill those responsibilities, among other things, substantive evaluations must be regularly conducted of the CEO and other key Management personnel to ensure they are being accountable to the organization.

4. Oversight of Culture. In a recent article in the New York Times, Joann Lublin noted:

Oversight of corporate culture should be among the top governance imperatives for every board... A strong culture offers a powerful source of competitive advantage, while companies with weak cultures see far higher levels of misconduct...

"Great culture" is a goal of everyone. Everybody tends to claim they have a great culture, whether or not they really do (see Uber). Unlike financials and other tangible information, it is practically impossible to measure culture (many have tried – most attempts ultimately tend to be non-substantive, feel good processes that are form over substance). So how does a Board monitor culture? Lublin, among other things, suggests directors pay close attention to incentive pay plans which if misapplied or over-used weaken culture. In addition, genuine deference must be given to risk managers and human resource managers.

5. Communication I - Speak up. As noted by Warren Buffett in his 10 commandments for running a successful business, directors who perceive a governance problem should alert their fellow directors. There must be open and frank conversations among the Board, independent of their conversations with Management.

6. Communication II – The Whole Pie. – In order to ensure governance is vibrant, it is important that all key players have an accurate picture of the entire business. If Board members are only provided a portion of a given story, they cannot make an informed decision and thus proper governance cannot be achieved. There must be regular engagement between Management and their Boards, and a regular flow of unfiltered information.

7. Where do the children play?3 Many of us fall into a rut when it comes to when and where Boards meet. Logistics make a difference. Assuming the same chair of the same place at the same time results in consistent and repetitive behavior. Innovation, which should make the hallowed list of governance principles, surfaces more readily when environments change. At least annually displacing Management from their safe house and having Board meetings elsewhere is a good thing.

Richard E. Putnam

 

FOOTNOTES

1. Similarity to Warren Haynes' band Gov't Mule is fully intended. The band and its music, a fitting successor to the incredible Allman Brothers Band, really has nothing to do with the topic of this paper.

2. Richard "Dickie" Dawson was the patriarch of the 70's game show "Family Feud." Like good governance, the show has evolved over four (4) decades with Ray Combs, Louis Anderson, Richard Karn, John O'Hurley and today, Steve Harvey filling Dickie's shoes.

3. "Where do the Children Play" is a Cat Stephens (Yusuf Islam) classic from the 1970 album Tea for the Tillerman.

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