EXCLUSIVE
There should be an end to quarterly reporting, and a cultural and behavioural transformation in business governance, Bob Garratt told an audience of business leaders at the Human Capital Forum Leadership Seminar on 5 March.
‘We must ban quarterly reporting. The notion that you report every quarter and that every quarter has to be better than the last defies reality, and destroys the notion of an organisation learning through its mistakes. It just becomes this immense [reporting] machine,’ he said. The pressure to give a short-term impression of success encourages false accounting or chasing unsustainable business, he added.
The obsessive short-termism had contributed to the credit crisis and consequent recession, said Professor Garratt, who was one of the few business advisers to warn of systemic risk in banking and other industries prior to the crash.
In his 2003 publication Thin on Top: Why Corporate Governance Matters and How to Measure and Improve Board Performance, he had warned: ‘The crisis in corporate governance in western democracies has occurred because the roles, tasks and accountabilities of the board of directors are not understood by politicians, business executives themselves, or the general public.’
At the Human Capital Forum Leadership Seminar, he demolished some of the corporate myths that had led to the crisis:
• The first duty of the Board is not to the shareholders, it is to the stewardship of the company,
• There is no distinction between ‘non-executive’ and ‘executive’ director in law or in Board responsibilities.
Despite their huge responsibilities, few directors are fully trained and inducted for the role, and the pool of potential candidates is insufficiently diverse.
Professor Garratt had been heavily involved in developing Board directors at Lloyds TSB, which was one of the few banks to avoid excessive risk in the boom years – though it has subsequently been exposed through its merger with HBOS.
He also questioned the fashionable practice of ‘agency theory’ which forms the bedrock of approaches to governance. In this, the owner, or shareholder, employs an ‘agent’ – the board – to promote their interest. But in an age where there is 90% turnover of shareholders in a listed company over the course of a year – who is the owner? In such cases, directors and executives tend to become dominant.
Organisations now have to move from agency theory to stewardship theory – ironically restoring the original concept of the Board’s role developed in the 17th Century.
Philip Whiteley, chair of the Forum, said that a conceptual error throughout business and management was to forget that people management lies at the heart of everything. ‘Governance is a people management matter. It’s about recruitment, development and performance. The economy doesn’t consist of money, it consists of people – making economic decisions. The company doesn’t consist of resources, it consists of people – who make and use resources.’
To contact Bob Garratt, write to garratts@btconnect.com