Leading over the cliff: when governance goes wrong

A spate of failures in the corporate world and at sporting clubs has highlighted the need for leaders to foster cultures of integrity at their organisations. AICD’s Theodora Antonopoulos explains.

For a country which so readily cuts down the tall poppy, it is ironic how much Australian businesses spend on leadership training and development. The estimates exceed $1 billion annually. But leadership on its own does not ensure business success. Indeed, some of the greatest crises in Australian corporate history have occurred under the watch of captains of industry who were adulated for their leadership capacity. Think: Babcock and Brown, Centro and OneTel.

There is no doubt leadership is critical to the success of our organisations. But if we think that improved leadership leads to superior business outcomes, why are all of these crises still happening? What essential ingredient is missing from the leadership equation?

As we find ourselves in hallowed month of September – football finals season – we need only reflect on the governance failures at clubs which are household names. The board of the Parramatta Eels had become so dysfunctional, and had presided over such gross breaches of one of the fundamental tenets of the NRL – the salary cap – that the NSW Government removed the entire board and appointed an administrator. Essendon is still suffering the fallout from its failure to ensure its players complied with the World Anti-Doping Agency code.

Some of the country’s largest companies have been the subject of public and political criticism, rightly, for their provision of poor financial advice and inappropriate financial products to their customers. Dick Smith, in an attempt to make a quick return, is now in the throes of insolvency. Another household name gone.

These are not instances of a few bad apples spoiling the cart. For these crises to unfold, they required the cooperation, or at least the acquiescence of a significant number of leaders. They demonstrate to those responsible for governance – our directors and senior executives – that failures in governance can have catastrophic and possibly terminal consequences for business.

Good governance leads to good performance. And our leaders, while important and accountable, are only as good as the governance frameworks in which they lead.

A positive, performance driven culture is a crucial responsibility for directors and the cornerstone of an effective and sustainable business. The phrase ‘setting the tone from the top’ says it all. Boards must engage with management to ensure that that the organisation’s purpose and culture is clear, that it inspires and infiltrates every element of the business.

Good governance is a direct benefit of diversity. The problem with an obsessive focus on individual leadership is that a leader’s biases, blind spots and preferences are given undue weight.

Groupthink is a particular vice which diversity combats. Directors are duty-bound to ask the difficult questions in the boardroom even if they go against the majority view. Shareholders can make and unmake directors. Their confidence in the governance of a company is essential to its success. It supports the share price for listed companies, and ultimately those who have the privilege of serving on its board. If directors wish to maintain that confidence – and ultimately their jobs – they should begin with developing good governance practices and communicating this with shareholders – the rest will follow.

Recent corporate failures are a vivid demonstration of what happens when an organisation’s leaders neglect to spread a culture of integrity, accountability and diversity. The success of our companies and organisations relies on directors and senior management working together to ensure a focus on governance best practice. Only then is outstanding performance possible.

Related viewing: Lysarne Pelling, AICD Senior Policy Advisor discusses the importance of corporate culture and why boards are responsible for driving and managing a healthy organisational culture.