Some caricatures on a chess board

Collective responsibility: boards and governance

Hot on the heels of the Carillion collapse comes the Oxfam crisis, both examples of poor governance but seemingly with little else in common. Carillion was a failure of a corporate finance and Oxfam a failure of NGO morality, each in different worlds  run by management boards with widely differing skills & experience.  The common factor was failure of collective responsibility. In one case a failure to scrutinize financial viability, the other a failure to scrutinize ethical viability. In both cases the board as a collective entity failed to identify a problem, and was caught out by events. Who can say whether a board is fit for purpose until the moment it is found not to be?

In Carillion’s case the board should have known it was insolvent from the profit warning of July 2017, and the half year accounts of September 2017. The board prioritised shareholder dividend over pension contributions in seeking to make the business appear solvent.  Evidently members were happy to trust the financial forecasts and goodwill valuation,  especially as these were  signed off by external auditors. Nevertheless, scrutiny by auditor or regulator does not remove the obligation from the board from its duty as first line of scrutiny. Trading while insolvent is a criminal offence and ignorance is not an acceptable excuse, whatever assurances may be given by in house experts.

In Oxfam’s case it seems in one disaster zone aid was bartered for sex, and although the perpetrators were quietly moved on, the charity conducted its own internal review seven years  ago. Now that both thoroughness and transparency of this has been questioned, the charity is suffering a trust problem.  Was the main board aware of the problem and was their response at the time appropriate? How much publicity should an organisation give to internal  discipline? Ask any school head how they get rid of a ‘bad teacher’ and the honest answer is they get quietly moved on, nobody benefits from  a truthful reference.  Hasn’t this also been a way the Church dealt with some  errant members of the clergy in the past also?

Both Carillion and Oxfam had board members with enormous experience, but one wonders how probing they were at the meeting when each respective crisis could have been averted.  Individuals who are thrown together for collective stewardship of an organisation can be reluctant to irritate fellow members. Much has been written on the dangers of cognitive bias or ‘groupthink’ that bedevils any collection of highly experienced individuals, meeting occasionally, tasked with  delivering consensus on agenda items. No member wants to be seen as an irritant to the process of reaching agreement but sometimes the right questions are not on the agenda!

Currently regulators in the UK lack the enforcement powers seen in the US where custodial sentences ensure that board behaviour in taken more seriously. Without a strong incentive to improve scrutiny, boards  in the UK will continue to adhere to a corporate code that sets standards but fails to penalise.  There are those who believe the FRC governance code and guidance on board effectiveness (together with related FRC guidance on risk management and audit committees) are not fit for purpose;  furthermore financial reporting and auditing standards are inadequate. Perhaps now is the time for dedicated training for boards on their collective responsibility for stewardship.