Practical Ethics 2

March 10, 2016

EthicsA couple of weeks ago I posted Practical Ethics discussing the undue reliance governments and others  place on other people’s ethics, Through naivety, undue optimism, or laziness, they set up situations based on blind trust in the ethical standards of others which have resulted in deaths, injury and the loss of $billions.

In this post I want to look inside an organisation and discuss reason why Determining the ethics of the organisation is at #2 in my Six Functions of Governance and Creating the culture of the organisation is at #3.  #1 in the list is Determining the objectives of the organisation.

The underlying approach I’ve taken, founded in stakeholder theory, is the presumption that the best way to achieve an organisation’s objectives is to work with the organisation’s full spectrum of stakeholders so they contribute to the success of the organisation and everyone benefits. This requires a strong ethical foundation and an outwardly focused culture. The role of the governing body is to set the objectives and create the organisation’s culture and ethics, the role of management is to work within this framework to achieve the objectives. Whilst many aspects of governance can be delegated to a degree, setting the ethical standards of the organisation in particular is non-transferable. It starts and stops at the top – with the governing body.

The ethical standards of an organisation are created in two ways:

  • The way the organisation’s leaders act;
  • The ethical standards the leaders are prepared to tolerate in their subordinates.

This post will look at both of these aspects, using the example of the current scandal surrounding Comminsure (the insurance arm of the CBA bank) to highlight their importance – see more on the scandal.

 

Leaders set the standard.

Generally speaking, the top managers in an organisation create a ceiling on ethical behaviours. Leaders at the next level down tend to be rated lower than their managers on every leadership dimension including their honesty and integrity, many may rate equally but it is very rare to find a subordinate acting more ethically than the organisation’s leaders (for more on this see Ethical Leadership).

The key here is the word ‘act’ – leaders set the ethical standards of the organisation by their actions, not their statements. It more than ‘walking-the-talk’, talking is almost irrelevant.

One glaring examples from the Comminsure scandal will serve to demonstrate the issue.  The CBA’s CEO said that he placed a high value on transparency and open communication; this included both encouraging and protecting ‘whistleblowers’ within the bank. A commendable and highly ethical position; and from a practical perspective essential for the minimisation of wrong doing in a workforce of 55,000.

However, actions speak louder than words! In November 2014 the chief medical officer of Comminsure, Dr Benjamin Koh, disclosed his concerns over “an improper state of affairs” concerning aspects of Comminsure’s business to key independent directors at Comminsure including the chairman Geoff Austin. Two months later Comminsure began to investigate Dr Koh and he was sacked by the managing director of Comminsure, Helen Troup, for ‘misconduct’, in August 2015. He is now suing Comminsure and the CBA for unfair dismissal.

The appearance is that the bank’s management won’t fire you for whistle blowing but they will find some other excuse. The bank virtually admits as much, in this statement which states: “Commonwealth Bank encourages all employees to speak up if they see activities or behaviours that are fraudulent, illegal or inconsistent with our values. We provide a number of different safeguards to ensure that there are no negative consequences for raising concerns. We have thanked Dr Koh for raising concerns that led to the CMLA Board conducting a review. Dr Koh’s employment was not terminated for raising concerns. It was terminated primarily for serious and repeated breaches of customers’ privacy and trust involving highly sensitive personal, medical and financial information over a lengthy period of time.”  What they fail to mention was one of major issues raised by Dr. Koh was the manipulation, alteration and loss of information from the records he is accused of mishandling.

The perception may be incorrect, but to anyone looking on from outside of the organisation it would seem the person running Comminsure preferred to sack a whistleblower rather than deal with the problems he raised.

The CEO and the Directors of CBA can talk until they are blue in the face about the ‘ethical standards’ they purport to uphold, their actions speak louder. The person running Comminsure and responsible for the issues raised by Dr. Koh is still in her role, the ‘whistleblower’ is out of a job. If the board really meant what is says, the whistleblower would have been protected and the manager attacking him disciplined. Everyone else in CBA will clearly understand the message.

It really does not matter what the final outcome of all of this is; the actions of CBA and Comminsure management have made it clear to every one of their 55,000 staff that if you raise concerns within the banks ‘whistleblower’ processes you will be fired!

Given this perception, is it any wonder that the leaders of the CBA seem to be continually in the dark about what’s really going on in their organisation……..  Unfortunately for those in governance role not knowing is not an excuse.

 

Tolerating unethical behaviour.

Ethics2The second plank underpinning an ethical organisation is the degree of unethical behaviour it is prepared to tolerate. If an organisation is prepared to tolerate a person increasing his or her bonus by not paying out an insurance claim to a dying person for 3 or 4 years, everyone else in the organisation will understand the acceptable level of behaviour.

Comminsure has been shown to have withheld legitimate payments to claimants for years to boost profits and bonuses (only rectified after the national broadcast was imminent).  As far as I can tell everyone responsible from the managing director down are still in their jobs.

Previously the CBA was shown, courtesy of a Senate enquiry, to have misrepresented information to clients and falsified documents.  Again, most of the people responsible still work for the CBA and the ethical benchmark has been determined by this fact.

If the behaviours were ethically unacceptable people would be fired or moved into roles where they cannot adversely affect customer’s lives. The fact most people are still in their roles and still have their bonus payments from previous years indicates to everyone the CBA believes these behaviours are ethically acceptable and will continue to reward people for placing profits ahead of customers (see The normalisation of deviant behaviours). Management’s actions speak far louder then PR announcements and so called ‘public apologies’ that only eventuate after adverse national publicity.

 

Culture

Culture is ‘the way we do thing around here’ – one of the key elements of culture is the ethical standards people see as ‘normal’; another is the learned experience of how to behave within the organisation. As outlined above these settings are very different from the rhetoric.

But, ethics and culture are always shades of grey; the CBA’s culture is clearly flawed if the bank claims to be concerned about its customers. However, if the CBA is really only concerned with short-term profits, the culture, ethics and PR spin may be appropriate. In the last 6 months, the CBA achieved a remarkable return on equity of above 17 per cent, and a $4.8 billion half-year profit. And, despite the scandal, its shares have increased in price today. The cost is the damaged lives of some of its customers; the unresolved question is what are the acceptable limits? Maybe a Royal Commission will let everyone know.

Legal implications aside, the challenge facing the CBA is that changing culture and ethical standards is a massively difficult task and the people who created and thrive in the current culture are unlikely to be willing participants in changing it.  There’s no easy answer to this dilemma.

 

Conclusion

The real measure of an organisation’s ethical standards are set by the way people behave when no one is looking on – there will always be mistakes and unethical actions by a few, others within the organisation will correct these deviations and being behaviours back inside the culturally acceptable norms of behaviour of the organisation. This has undoubtedly been occurring within CBA and Comminsure on a daily basis, unacceptable behaviours will have been corrected or sanctioned; desired behaviours rewarded. What’s acceptable and unacceptable is determined by the culture of the organisation and its ethical standards.

The ethical standards of an organisation are set by the actions of its leaders. What they do themselves sets the ceiling and what they tolerate in others the floor. The rest of the people in an organisation will generally find a position between these two limits and the culture of the organisation will adapt to see this level of ethical behaviour as acceptable. The problem the governors and leaders of the CBA face is the simple fact that changing the ethics and culture of an established organisation is extremely difficult.

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Practical Ethics

February 26, 2016

EthicsA string of disasters over the last couple of years suggest many business and government leaders simply do not understand ‘practical ethics’.  Through naivety, undue optimism, or laziness, they have set up situations based on blind trust in the ethical standards of others resulting in deaths, injury and the loss of $billions.

Just a few examples:

  • The ‘Home insulation program’ of 2008/9 resulted in 4 deaths, numerous house fires and many well established businesses being destroyed. The naive assumption by the Government seemed to be that with $millions of government funding easily accessed, businesses would still act ethically, train staff and comply with occupational health and welfare standards. The failure by businesses to meet this expectation has resulted in numerous prosecutions after the damage was done.
  • The outsourcing of technical and further education training (TAFE) to the private sector. Private providers under the VET Fee-Help scheme are paid for students signed up to courses, not for students qualified from courses – the naive assumption by the Government seemed to be that with $millions of government funding easily accessed, businesses would still act ethically and only sign up students that could benefit from the courses and would deliver good training outcomes. $hundreds of millions of public funds have been wasted – most of which can never be recovered.
  • Downer EDI’s Board of Directors appear to have blindly trusted their management to run the disastrous $3 billion Waratah train project. Normal governance feedback seemed to have been ignored to the point where the Directors were unable to get information on the project when needed, blowing a $20 million loss into a $200 million loss.

In each of these cases the government and business leaders seemed to have either assumed everyone would act ethically or relied on Adam Smith’s ‘Invisible hand’ (a flawed theory much loved by the rabid right, particularly in the USA). Unfortunately ethics is not that simple!  Writing a code of ethics[i] is a relatively simple process; encouraging people to live up to the code is far more difficult. There are several factors needed:

  • First, the organisations leaders need to lead by example. The ethical standards of the organisation and its supply chain are unlikely to exceed the standards set by the leadership (see: Ethical Leadership).
  • Second, the expected standards need to be clearly and unambiguously articulated. Saying you require one standard of behaviour and then paying people to perform differently will inevitably lead to the organisation getting what it has paid for (see: The normalisation of deviant behaviours).
  • Third, the governance and management systems need ‘real-time’ feedback to both encourage the desired standards of behaviour and to detect any ‘slips’ very early in the process so corrective actions can be implemented before there is a major issue (see: Self Correcting Processes).

Unfortunately governments in particular are reasonably good at enforcing standards years after the breach took place and seem to assume that the ‘deterrent effect’ will suffice to maintain ethical standards – this assumption patently does no work!  I doubt the £2.25m fine imposed on UK consultancy Sweett Group[ii] for bribing a prominent United Arab Emirates (UAE) businessman in return for work will have much effect on other unethical business people contemplating paying a bribe – for a start, no one expects to get caught. The ‘pink batt’ prosecutions occurred years after the scheme was closed, prosecutions under the VET Fee-Help scheme are still to eventuate (and rip-offs are still continuing). The simple fact is the fear of a potential prosecution in a few years time compared to the opportunity to make $millions now has very little effect on unethical people.

Conversely, over policing ‘ethics’ and watching every move can be as destructive as ‘blind trust’. If people feel they are not trusted, there is no incentive for them to act ethically.  Micro management is a major de-motivator and will inevitably lead to suboptimal performance with people doing ‘just enough’ and seeing how much they can get away with[iii]. This approach stifles innovation and creativity.

Practical ethics requires pragmatic trust. You need to trust the people you are working with, governing or managing, but have agreed processes that provide feedback and monitoring, that demonstrates your trust is being honoured.

  • In my ‘Six functions of governance’ management control functions are expected to provide feedback to the governing body that allows it to hold its management accountable and ensure conformance by the organisation being governed. Had these functions been implemented effectively EDI-Downer would be in a much better position today.
  • Demand feedback – even if you do not want to hear bad news! The recent announcement by CSIRO that its climate division will be virtually eliminated may be a pragmatic response to government initiatives and cost cutting but serves no one in the long term. Governments and business rely on climate science to make billion-dollar decisions. Without it, they will be relying on guesswork. Shooting the messenger simply means everyone is ‘flying blind’.
  • Build feedback into management systems. In the various government debacles mentioned above (and others) simple changes in process could have reward desirable outcomes rather than rewarding unethical behaviour. The purpose of any TAFE course is to educate a person and demonstrate learning by success in an exam.  Why not pay most of the money on completion of the course? Then make sure audit processes are in place to validate the exam performance is genuine – these exist and are easily applied.

Pragmatic trust is a graduated process – as people demonstrate their trustworthiness and ethical standards less oversight is needed (but less does not mean no oversight); the challenge is to design systems that reward desirable behaviours and outcomes creating a win-win, people who demonstrate high ethical standards are rewarded.

This approach is the antithesis of the current government approach which seems to rely on blind trust, assumes everyone is ethical, and as a consequence directly benefits unethical behaviours (at least in the short term). Not only have the $millions paid out in VET Fees to unethical providers resulted in minimal return to the government; they have actively encouraged unethical standards and have damaged businesses and organisations that do offer quality courses. A lose-lose outcome in which the only winners are the unethical businesses that have ripped off the system – the Pink Batts Royal Commission found a similar effect on the insulation businesses.

Slippery-slopeEthics are by definition based on the standards of behaviour considered acceptable by a group[iv].  When a significant proportion of the groups members start to let standards slip, they will tend to drag the rest of the group with them down the slippery slope – it is very hard to stand out against the normally accepted behaviours of your group. And as with any slippery mountain slope, it is far easier to slide towards the bottom than to keep your footing and climb towards the top.

The role of ethical leaders is first to set the ethical standards, then live up to the standards themselves, and finally require their followers to conform to the standards using pragmatic trust and encouragement rather than after the event punishment.

 


 

 

 

[i] The PMI Code of Ethics and Professional Conduct is a good example: http://www.mosaicprojects.com.au/PDF/PMICodeofEthics.pdf

[ii] See: http://www.globalconstructionreview.com/news/sweett-group-must-pay-32m-bri7bery-a7bu-dh7abi/

[iii] For more on motivation see: http://www.mosaicprojects.com.au/WhitePapers/WP1048_Motivation.pdf

[iv] For more on ethics and leadership see: http://www.mosaicprojects.com.au/WhitePapers/WP1001_Ethics.pdf

 


Is your steering committee costing $5000 per hour?

December 13, 2015

The loaded cost of running a committee of senior managers can easily exceed $5000 per hour once the opportunity costs are included.  Productive committees offset this by creating value, hopefully significantly greater than their running costs.  Project and program steering committees should be no different!

Steering_Committee

However, if the steering committee is simply focused on ‘governance’ it is highly unlikely to be generating any significant value.  At the management level where most steering committees operate there is very little governance decision making needed and conformance and assurance usually needs specialists.

The first four functions of governance defined in The Functions of Governance are:

  • Determining the objectives of the organisation: this is done by the organisation’s governing body and implemented through the strategic plan. The project should have been selected because it contributes to achieving the strategic plan, a function of portfolio management, but once the project has started it is rather too late.
  • Determining the ethics of the organisation: this is done by the organisation’s governing body; it is a duty of every manager to support the organisation’s ethical standards and ensure the people they are managing conform. But you do not need a committee to ensure this occurs, just the project manager’s line manager (usually the Sponsor).
  • Creating the culture of the organisation: again this is done by the organisation’s governing body; it is a duty of every manager to support the organisation’s cultural standards and ensure the people they are managing conform. But you do not need a committee to ensure this occurs, just the project manager’s line manager (usually the Sponsor).
  • Designing and implementing the governance framework for the organisation: this should be done before the project is started and include delegations of authority for expenditure and decision making and escalation paths. If it has not been done, one half hour meeting of the sponsor and a few key managers can set the delegations.

In summary, the aspects of governance that determine the way the organisation operates and how the project or program will fit into the overall governance framework does not need a monthly meeting of any type.  There are management responsibilities but these are vested in the responsible line manager, typically the Sponsor (see more on the role of a Sponsor).

The final two functions of governance are ensuring accountability by management and conformance by the organisation.  A steering committee can certainly focus on these aspects of governance but if they do, they are largely wasting their time and most of the $5000 per hour.  There are two fundamental reasons for this:

  1. It is extremely poor governance for a managing entity to seek to provide assurance that the people it is managing are conforming. Assurance oversight should be provided by an independent body.
  2. Most aspects of project surveillance and assurance require high levels of technical skill. It is highly unlikely any of the managers on a steering committee posses these skills (see more on project surveillance).

The organisational entity best suited for the work of surveillance and assurance is a PMO with appropriate support from management. If there is an effective PMO structure in place with the ability to identify shortcomings, backed up by responsible line management there is no need for another committee to second guess the process a few weeks later (see more on PMOs).

Dilbert-committee

Some of the completely unproductive ‘governance’ functions undertaken by ‘steering committees’ include:

  • Validating correct procedures have been followed (properly resourced PMOs are a better and cheaper option).
  • Discussing negative variances and allocating blame (management action is needed not committee discussions).
  • Second guessing management decisions after the event and interfering in the day-to-day running of the project (project professionals are not helped by interference from amateurs – even if they are senior managers).
  • Listening to lengthy reports on what has happened during the last month (effective reporting is all that is needed).

Being involved in this type of activity may make the steering committee members feel important but contributes little or nothing of value in a well governed and structured organisation; if the organisation is not well governed and structured the committee members would be far better off focusing on fixing the real problems.

 

Steering Committees can be highly valuable!

The constitution of most steering committees creates a real opportunity to add value to the overall management of a project or program, but only if the committee focuses on helping craft success. Steering committees typically include members from a range of areas within the organisational affected by the project and its deliverables. Therefore as a group its members are uniquely placed to assist the project manager and sponsor deliver a successful project by helping them steer a path through the organisational politics and stakeholder issues that confront any project or program.

This objective can be achieved by making the members of the steering committee personally responsible for the realisation of value from the organisation’s investment in project, and in particular for dealing with the organisational change and stakeholder issues that are outside of the project manager’s responsibilities. Some of the key responsibilities allocated to the steering committee may include:

  • Responsibility for preparing the organisation for the changes needed to make use of the project’s deliverables and the realisation of value.
  • Managing the interface between the project and the organisational change management work
  • Being available to assist in the management of stakeholder issues escalated from the project and/or identified in areas outside of the direct influence of the project.
  • Ensuring effective benefits management is in place for the life of the initiative (ie, it continues after the project is closed).
  • Dealing with any other aspect of organisational politics that may affect the work of the project or the on-going change initiative.
  • Making value based decisions on complex change proposals, including contributing positively to the resolution of intractable problems, to optimise the value outcome for the organisation.

Obviously the steering committee also needs to take an interest in the project its steering to success. The problem is these are all management activities, not governance activities (for more on this see Does organisational governance exist?).

Effective steering committees work with the project manager and sponsor to identify the external influences causing problems and help the project successfully navigate the organisational stakeholder environment. They also resist the urge to interfere in the actual running of the project or program. There is a world of difference between a collaborative and supportive approach focused on success and the negative approach adopted by so many steering committees that seems to translate ‘governance’ into giving the project manager a ‘hard time’ to ensure compliance with ‘due process’ even if this adds to the existing problems.

Are your organisation’s steering committees worth their hourly running costs?


Does organisational governance exist?

November 8, 2015

Governance99Governance and governing have historically was associated with the role of the Sovereign governing his (or occasionally her) ‘sovereign state’. Over the last five or six centuries the exclusive power of the Sovereign has largely been devolved to governments of one form or another but the functions of making laws, authorising the collection of taxes and providing direction to the citizens of the state remain fundamentally unchanged.

The concept of corporate (or organisational) governance grew out of this overarching concept; to imply there was a similar role within an organisation for a ‘governing body’ to take responsibility for the governance of the organisation. This concept of a governing body setting the ‘rules’ by which an organisation operates and providing guidance on the organization’s objectives has many parallels with the functions of a government.  A government may choose to declare war on another country and provide resources and directions to its military but, at least for the last 2 or 3 centuries, governments have learned not to interfere in the actual conduct of the military campaigns – fighting the war is the responsibility of the professional military. Similarly the governing body of an organisation can set the objectives for the organisation and define the rules by which members of the organisation should operate but is wise to refrain from becoming actively involved in managing the actual work.

The paramount reason for separating governance and management is the simple fact it is almost impossible to take an objective view of work you are actively involved in! With these thoughts in mind, I started to consider the functions and purpose of governance to contrast with the functions and purpose of management.

The functions of management were quite easy to define, the work was done 100 years ago by Henri Fayol in his 1916 book Administration Industrielle et Generale, while there has been some academic argument about the syntax of Fayol’s five functions of management, they have basically stood the test of time. These are outlined in The Functions of Management.

Defining the functions of governance was much more difficult. Almost all of the standard texts describing governance either define:

  • The objectives of ‘good governance’; for example Cadbury’s ‘holding the balance between economic and social goals and between individual and communal goals’;
  • The principles of ‘good governance’; for example the OECD Principles of Corporate Governance (2004 and the 2015 update); or
  • Elements of defined or required practice such as the ASX listing rules and the AICD Governance framework.

None of these sources actually describe what the governing body does or the extent of the governance processes within an organisation.  These are the questions I’ve been focusing on for the last couple of years.

The functions of governance have been described in The Functions of Governance, so far there has been no significant disagreement, that I’m aware of, that would indicate the need for change.  The functions of governance are also mapped to the functions of management and suggest a clear difference in purpose between governance and management that can be summarised as ‘governance sets the objectives and rules for the organisation, management works within the rules to achieve the objectives’.  A closely coupled, symbiotic relationship.

The responsibility for governance seems to be clearly defined by law makers and regulatory authorities.  The governing body is held accountable for the actions of the organisation it governs; this is the Board of Directors in most commercial organisations, in others the person, group or entity accountable for the performance and conformance of the organisation.

Having established the functions of management and governance, the fundamental question posed in this post is does organisational governance exists as a separate entity or is it simply an extension of ‘good management’.  To a degree this is a ‘chicken and egg’ problem.  Does the functioning of an effective governing body lead to ‘good management’ or does ‘good management’ embody the elements of good governance as an integral element in the overall functions of management (ie, Fayol’s five functions need expanding to include governance).

The consequence of the first option is the presences of a governing body which has as its primary function the oversight of the organisation’s management.  The consequence of the second is so-called ‘governing bodies’ such as a Board of Directors, are in effect simply the first, and most senior level of management.

There are a lot of writings that suggest the second option is at least considered viable by many commentators.  This month’s magazine published by the Australian Institute of Company Directors  contained a number of articles on ‘cloud technology’ and ‘big data’ suggesting Directors should be making management decisions on a daily basis based on current sales information, etc.  Similarly there are numerous publications describing various mid-to-low level management committees such as project steering committees as ‘governing bodies’ responsible for the ‘governance of’ a project. However, a project steering committee is in essence no different to any other management committee responsible for overseeing the work of a management entity; therefore under this scenario, every management committee responsible for the oversight of a management function is a ‘governing body’. The consequence of this line of argument is the proposition that governance and management are integral and there is no significant difference in the entities that undertake the work. Every level of management from the Board down is responsible for delivering good management which incorporates governance.

The alternate view based largely in corporate regulations and laws suggests the functions and responsibilities the governing body and its management team are discrete and different. The governing body (singular) represents the owners of the organisation and is responsible for governing the organisation to achieve sustained superior performance. The governing body accomplishes this by:

  • Defining the objectives of the organisation;
  • Determining the desired ethical, cultural and other standards they expect the organisation to work within (‘the rules’);
  • Appointing management to accomplish the objectives, working within ‘the rules’; and then
  • Ensuring the conformance and performance of their management and the organisation as a whole.

The primary advantage of this approach to governance is the functions of management are separated from the functions of governance. It is virtually impossible to have an impartial view of the work you are engaged in and one of the key responsibilities of the governing body is to oversight the performance of its management; the law says so!

Therefore, I suggest good governance requires a clear separation of the management and governance functions for no other reason than the need for the governing body to be able to objectively oversight the performance of it management. But this raises practical issues.

It is virtually impossible for the governing body to meaningfully oversight the work of 100s of managers and 1000s of staff, contractors and suppliers. Some aspects of governance have to be delegated to the management body.  This requires the following:

  • A carefully designed governance framework. Roles, responsibilities, decision limits and escalation paths need to be defined.
  • Clear rules for managers to follow in the performance of their management responsibilities. Managers should be personally responsible for following ‘the rules’ and for ensuring the people they manage follow ‘the rules’. Complying with, and conforming to, the objectives, ethics and culture of the organisation should be a condition of employment and a clearly defined management responsibility.
  • Ensuring any governance function is separated from the management function being governed. Assurance and conformance cannot be in the same place as management responsibility for performance. For example, a project steering committee should be responsible for providing direction and support to the project management team to ensure the performance of the project and the achievement of the project’s objectives (a management function) – ensuring conformance with ‘the rules’ is also part of this management responsibility. Assurance that these objectives have been achieved is a governance function that has to sit in a separate reporting line. In many organisations the PMO may be the entity tasked with this responsibility.

However, while the governing body by necessity has to devolve aspects of its responsibilities to people and entities within the overall management structure, the governing body remains responsible for the design of the governance framework and accountable to the organisation’s owners and other external stakeholder for the performance and conformance of the organisation and the validity of any assurances provided by the organisation to regulatory authorities.

 

So where does this leave questions such as the use of ‘big data and ‘the cloud’? I would suggest the responsibility of the governing body is to understand the technologies sufficiently to be able to set sensible objectives and ethical parameters for the organisation’s management to work within and then to ensure their management are working to achieve these objectives. It is no more the responsibility of the governing body to ‘manage big data and use it to make decisions on a daily basis’ than it is the responsibility of a steering committee to ‘govern’ a project. The responsibility of the governing body is to govern; the responsibility of a management committee is to manage.

This concept of separate functions and focus is not intended to imply an antagonistic relationship. In the same way every high performance soccer team blends people with different skills and responsibilities into a tight unit, a goal keeper needs very different capabilities to a striker; a high performance organisation needs a blend of capabilities: effective governance, effective management and committed staff. Certainly members of a performing team support each other and will help to correct deficiencies and errors by others within the team (high performance organisations are no different); but if the team start to mix up the skills and responsibilities the overall team performance will suffer (the consequences of steering committees pretending to be governance bodies is discussed in a 2012 post Management -v- Governance).

 

In conclusion, the answer to the opening question is YES, I believe governance and management are different and their functions are different:

A high performance organisation that is capable of achieving sustained superior performance combines both governance and management in a clearly delineated governance framework, supported by a clearly delineated management structure.


Governance and ethics

October 10, 2015

Lost valueBack in June I posted on Governance and Stakeholders focusing on the damage institutions were doing to their stakeholders through on-going governance failures.  Two of the organisations discussed (not for the first time) were the CBA Bank’s ongoing financial advice crisis and FIFA’s corruption, both on-going scandals.

Press articles over the last few days show neither of these problems is being well managed from either the institutions’ perspective or their customers’/stakeholders’ perspectives. The on-going sagas suggest the root cause of the problems is very much a governance failure, but in areas not previously discussed.

The Six Functions of Governance are:

  1. Determining the objectives of the organisation;
  2. Determining the ethics of the organisation;
  3. Creating the culture of the organisation;
  4. Designing and implementing the governance framework for the organisation;
  5. Ensuring accountability by management;
  6. Ensuring compliance by the organisation.

This post will demonstrate the importance of functions 2 and 3.

Starting with FIFA: the stated objective of FIFA is to further the development of soccer (football) world-wide. A noble objective!  However, to a large extent the culture and ethics within FIFA have become focused on individuals obtaining and retaining personal power for the benefit of the ‘powerful person’ – they may believe they are the best possible person for the job, but the evidence suggests otherwise! The use of FIFA’s resources by people in power to achieve this end has already been well documented and whilst of themselves these actions are not necessarily wrong, they have certainly led to a number of high profile prosecutions for corruption. I would suggest the ethical breakdown was driven by the toxic culture focused on achieving and retaining power.

This type of problem is well understood in many similar organisations that I’m familiar with, where there has been a focused effort by the governing body to create a culture of service to the membership / stakeholders.  This has been achieved by placing strict limits on the amount of time any one person can occupy a position of power. Generally there’s a ‘leadership chain’ of one or two ‘vice presidents’ and then the president.  People on this chain have one year terms in each position and move up the ladder progressively (elections are for the lowest ‘rung’ on the ladder).  Similarly, members of the governing body can serve a maximum of two terms of two years and a minimum of 25% of the ‘board’ positions are up for election each year.

This type of governance framework provides both continuity and renewal, and discourages people seeking power for themselves.  Anyone interested in seizing ‘power’ for 10 to 20 years will go elsewhere and find another organisation to participate in. This continual renewal process ensures there are always new ideas and new sets of eyes to ‘see’ any problems that are emerging, balanced by experience to maintain the longer term objective of the organisation. Ethical standards, competency and other matters remain important within a governance framework focused on facilitating the organisation’s objectives.

It will be interesting to see if the inevitable changes in FIFA will move in this direction and then if they use their funding power to drive similar changes through the regional and national organisations. If there’s no structural change, there will be no lasting change in the governance culture and consequently in the culture of the whole organisation.

CBAThe second focus is the CBA bank. Culture is also an issue in the way the CBA bank is treating the people damaged by the toxic culture it encourages in its wealth management division.  The basic rule for dealing with a failure (particularly of this magnitude) is ‘own-up then fix-up’. You need to acknowledge the error and take appropriate actions to rectify the mistake.

The causes of the problems were structural, and are discussed in The normalisation of deviant behaviours, but it took a Senate enquiry to drag a reluctant acknowledgement of the error.  To avoid sanctions, the CBA also agreed to set up a ‘high profile’ unit to compensate the victims of its wealth management advice.  After many months virtually no-one has been compensated and the bank’s approach would appear to be parsimonious at best.

The ‘fix-up’ part of dealing with a problem requires quick and generous restitution as far as is possible. This is relatively easy where then primary loss is financial but runs counter to the bank’s demonstrated culture of not really admitting error accompanied by short-term monetarism.

A quick and generous solution would be to frame a simple calculation and make an offer. The CBA knows how much money was ‘brought to the table’ by their victims, they can easily calculate what that would be worth now if the bank had advised the people to invest in bank term deposits and  they know the value of the money actually returned to the people. A couple of weeks with a decent spreadsheet and everyone could have received a reasonable offer.  There may be a need to add in some costs incurred in fighting for the victims rights and for other losses and damage but the whole problem could be largely resolved by now.

The cost of this type of option will be insignificant compared to the less obvious but real costs associated with the wages and costs associated with the bureaucratic monster the bank has created, the massive on-going damage to the bank’s reputation and ‘brand capital’ and the contingent liabilities for further legal actions and/or government action driven by the bank’s approach to this problem.

I’m not sure how the logic of the bank’s assessment processes are structured but a report in the press this week that some people had only been offered a fee refund highlights an approach focused on minimising payouts rather then solving the problem.  If advice was so bad a refund of the fees paid for the advice is warranted, the advice was bad and liability for the damage it caused would appear to sit with the bank??

How you change the culture in an institution as big as the CBA from a parsimonious focus on paying out money to maximise short-term profits is a challenge of the CBA Board, but if they fail, sooner or later the CBA will fail because its stakeholder community will decide to do business elsewhere.  Just because you are big does not mean you are invulnerable.

Conclusion.

The first three elements in the six functions of governance are there for a reason.  Obviously the objectives of the organisation are its reason for existing and have to come first. Then the governing body has to do the hard work of developing the right set of ethics and the right culture within the organisation’s (making sure its governance framework supports the desired culture) before anything else can really occur. As FIFA in particular demonstrates, failure in these critical aspects of an organisation tarnish everything else is touches.

It is impossible to achieve a ‘customer centric’, stakeholder aware organisation if the culture is focused on power or short-term profits!


Making Ethics Effective

September 14, 2015

EthicsAn organisation can espouse the highest ethical standards but if these are not supported and enforced they are simply nice statements that look appealing. The challenge is to have the right levels of support and just enough enforcement.

Headline news in Australia over the last couple of weeks (with months to run) is the appalling treatment of franchisees and their staff by the 7-Eleven chain.  To survive (and in some cases profit) many 7-Eleven franchisees resorted to underpaying staff by a standard 50%.  The TV expose and press reports indicate multiple breaches of employment legislation, occupational health and safety legislation, corporations law and taxation legislation.  Most of the focus at the moment is on the students who allowed themselves to be trapped into the wages scam.  This post will suggest these people are not the ‘biggest losers’.

The whole 7-Eleven chain was benefitting from the scam.  Head office made more profit, the franchisees reduced their wage bill by up to 50% (their primary cost under the franchise arrangements) and the students received their reduced pay.  Whilst in some cases there may have been elements of coercion used to keep the students employed, everyone got into the deal voluntarily.

The major losers in this scam were people who rely on the workings of the law and run their businesses honestly.  Two major groups are the corner shop-keepers who paid the lawful minimum wage and saw their businesses destroyed because the 7-Eleven ‘model’ undercut costs illegally and the unemployed people who did not get jobs because they had the audacity to expect to be paid their legal entitlements.

People in these groups faced a major ethical dilemma, go out of business (or remain unemployed) or ‘bend the law’ to survive in completion with a chain that was prepared to allow widespread malpractice.  Not an easy decision!

I would suggest the major failing was not the ethics of the 7-Eleven chain: the erosion of ethical standards is usually slow and insidious. The real problem appears to be the government agencies tasked with enforcing the law.  Over several decades government departments have been steadily stripped of resources and these days can only adequately respond to ‘major issues’ –  they are forced to assume ethical behaviour by most people most of the time and even when advised of blatant breaches will generally ignore the issue if it is considered minor.

One example we confront regularly is breaches of the Australian Competition and Consumer Act 2010 – one of the Act’s primary requirements is honesty in advertising, the advertised price of any goods of services should be the minimum price the consumer has to pay.  We routinely see Google advertisements targeted at our training market in Melbourne offering ultra cheap prices.  Click through to the related web page listing the training courses in Melbourne and the price increases, spend 15 minutes filling in registration forms and you eventually see the price you are required to pay (with all of the taxes and changes now added)!   This is a deliberate strategy by unethical organisations – the low price gets people onto their web site, and inertia keeps them there (particularly after spending effort on filling in the forms) so they end up paying far more than is necessary for an equivalent course.  The practice is so widespread, particularly with overseas based training providers, we regularly find people asking us if our prices are ‘real’ and ‘how much will they actually pay’ – the answer is simple, we conform to the law and charge the advertised price.

However, this was not an easy decision to make! We have had to reduce prices and increase advertising to attempt to off-set the illegal practices of others. Complaints to authorities go unheeded because they simply do not have the resources to deal with a relatively minor issue and business suffers.

When ethical standards start to slip several things tend to happen, ethical people move away to somewhere where their standards are not being challenged, less-ethical people move in and further degrade standards and many other people simply learn to ignore the problem (see The normalisation of deviant behaviours). And once unethical or corrupt behaviour becomes normalised, reversing the situation is extremely difficult. Press reports suggest that some 7-Eleven franchisees who have been forced to pay proper wages are now using extortion to demand 50% of the money back from the employee (outside of the premises so the extortion is not recorded), or the worker loses his/her job.

At a national level one hopes the 7-Eleven furore when added to the construction of a refuelling wharf in the Tiwi Islands without environmental approval (the government agency did not have the resources to investigate in a timely way), the blatant abuse of the vocational training scheme by some commercial organisations and numerous other failures will cause a re-think of the way business and government approach regulation.

Certainly the removal of unnecessary bureaucracy, regulations and other forms of red tape is to be encouraged. However, if the government decides a regulation is desirable, proper and comprehensive enforcement should be automatically provided. The failure to enforce regulations penalises the honest, ethical organisations who feel obliged to comply; and advantages the dishonest who chose to breach the regulation and balance the low cost of getting ‘caught’ against the additional profits garnered from ignoring the provision. Prosecuting a few ‘rule breakers’ 5 or 6 years after the event is not an appropriate way to govern – the damage is already done.

What does this mean within organisations and projects?  Effective governance sets the ‘rules and objectives’ for the organisation (see: The Functions of Governance). Management and staff operate within those rules to achieve the objectives. A key element in a well designed governance framework is the feedback loop providing assurance of management accountability and compliance.  This loop needs three elements:

  • A clear articulation of acceptable and unacceptable behaviours at all levels of the organisation, with senior leaders ‘walking the talk’.
  • Proactive surveillance to identify issues and opportunities as early as possible backed up by effective improvement processes (see: Proactive Project Surveillance).
  • Rigorous, but fair, enforcement processes to deal with breaches.

The last point is the most difficult to get right.  The system needs to be open and accountable, apply both natural justice and the ‘presumption of innocence’, deal with the root cause of the breach, avoid scapegoating, and be trusted.  One element is ensuring effective reporting and ‘whistle blowing’ processes are available so that people (both internal and external to the organisation) who believe there is an issue can raise the matter safely – its impossible to enforce rules if people in authority don’t know (or don’t want to know) about the breach.

The good news is that if these types of system are in place, the organisation will develop a self-reinforcing ethical culture.  Unethical people will leave to find somewhere easier for them making way for people who want to work in an ethical environment.  Fairly soon, everyone holds both themselves and other accountable.

However, this situation cannot be taken for granted! The presence of the surveillance and enforcement processes underpin these highly desirable behaviours.  If the organisation makes the same mistake the Australian governments have repeatedly made over the last 10 years of deregulation and simply ‘hope’ everyone will do the right thing it won’t take long for the slide into unethical behaviour to start.  Hope is not a strategy, good governance requires assurance that the organisation’s objectives are being achieved, and effective assurance needs both surveillance and enforcement capabilities.


Governance and stakeholders

June 7, 2015

CrisisBoth stakeholder theory and the modern concept of organisational governance place importance on the organisation fulfilling the needs of all of its stakeholders. The older, generally discredited ‘stockholder’ theory suggested the primary purpose of an organisation was to maximise value for its owners – generally interpreted by those in power as looking after the short-term interests of ‘those in power’ or the few with a direct investment in the organisation.

Three on-going sagas demonstrate the fallacy of taking a short term ‘stockholder’ approach to creating value.

1. The FIFA Crisis: Ignoring the alleged criminality of many of the key actors, my view is the biggest ‘governance failure’ in FIFA for the last decade or more has been the perceived method of allocating development funds to national soccer authorities.  The perception is that most of these funds were distributed at the behest of Sepp Blatter, and therefore if the associations wanted to keep on receiving their development funding they needed to vote for Blatter.

There is nothing wrong with funding the development of the game – it is one of FIFA’s primary objectives.  The governance breakdown was in the lack of a robust and transparent process for allocating the money to soccer associations that could make the most beneficial use of the funds and requiring accountability for the expenditure. The $billions in largely unaccounted largess distributed on a less than transparent basis is I suspect the root cause of much of the evil besetting FIFA at the present time.

Its too early to determine the damage to both FIFA and the game of soccer (football) from the breakdown in governance but one thing is already very clear, the big loser over the last decade has been the game, its players and its supporters – ultimately the stakeholders who really matter.

2. The on-going Banking Crisis: The focus of banks on employing and rewarding greedy people focused on maximising their bonuses at the expense of the Banks customers and shareholders lead to the financial crisis and a series of other failures, reviews and prosecutions in the USA, UK and Australia at least.

In Australia, the governance failure was senior managers and the Board’s Directors putting short-term profits ahead of the long term development of the bank. Front line sales people were paid to sell inappropriate products to clients – they do not get bonuses for not selling product even if it is in the best interest of the client.  Middle managers were paid to ignore potential problems – their KPIs and bonuses were driven by the sales volumes of their staff, etc.

The banks and their stockholders did very well for a while, now many of the problems created by this governance and cultural failure are starting to emerge, the short term stock speculators are taking their profits and dumping bank stocks.  Trust in the banking system is at an all time low (financial advisers are deemed less trustworthy then politicians). Very few of the stakeholders in the baking industry, including employees, long term investors,  clients or governments are on the ‘winning side’.  I’m waiting to see what game changing ‘disruptive innovation’ emerges – anyone offering a viable alternative to the banks has a once-in-a-lifetime window of opportunity to start up in a market looking for a viable alternative to ‘big banks’.

3. The on-going Child Abuse Crisis: The Australian Government’s Royal Commission into child abuse continues to uncover major breakdowns in governance in a vast range of organisations. The thing I find most upsetting is the abject failure of the leadership in most of these organisations to uphold the values of the organisation.  Abuse was ignored, covered up, secret payments made to ‘settle complaints’, etc.  The focus of the various churches, school and other institutional leaders was always a short term attempt to protect the institution from ‘bad publicity’. Hide the perpetrators of the evil and diminish the claims of the abused children (causing even more distress and harm).

The long term damage this short-sighted policy of ‘cover-up’ and ‘look-the-other-way’ will cause to the churches in particular has yet to emerge but I suspect there will be massive consequences that damage both the institution and the people the institutions serve, their congregations.

Summary

In each of these cases, the governance failure started at the very top of the organisation, the Executive Committee, Directors, and Bishops failed to develop a culture focused on achieving good outcomes for all of the respective organisation’s stakeholders and allowed corrupt cultures to develop focused on advantaging a very select group of ‘stockholders’.  The resulting crises will be causing damage to the organisations and their stakeholders for decades to come. Unfortunately in the vast majority of cases the people responsible for the breakdown of governance in their organisation are still hanging on to their jobs and pretending the failures are the fault of people lower down the organisational hierarchy.

Avoiding this type of problem is not easy but it starts with the governing bodies recognising that they, and they alone, can set the cultural and ethical tone for an organisation. The functions of governance outlined in our White Paper may seem soft and fuzzy concepts but if they are not implemented effectively and rigorously the next crisis will only be a matter of time. Long term success can only be assured by governing for all stakeholders, which in turn requires an ethical framework and a culture that demands transparency and accountability (as well as technical excellence) from everyone working in the organisations hierarchy.