Running a Company without Corporate Governance. What Happens?

Without corporate governance in place, most companies will eventually go bust. In the interim, shareholder value will slowly (sometimes quickly) erode through waste and a series of suboptimal decisions.

The single hardest obstacle for me as a consultant is getting the management team to buy in to the importance of good corporate governance. I wish I could hang a mirror in from of them that shows what might have been had they done things differently.

My belief is that good corporate governance improves company performance and results in better shareholder returns. Shareholder returns come from cash flows, comprised of inflows and outflows. A lack of corporate governance usually leads to higher than necessary cash outflows through poor capital allocation and general waste.

In my mind, there are a number of things that happen when a company is poorly governed.

– Decisions are made by the CEO with minimal information and discussion.
– The business strategy changes frequently.
– The company does not provide the Board with periodic updates through a monthly management report.
– The Board offers little input during meetings, often acting as a rubber stamp.
– Financial statements, press releases and forecast results are often issued at the last minute with minimal time to review and discuss.
– Staff is not clear on what they have the ability to approve.
– Actual operating results are not close to budget. Capital projects are almost always overspent significantly.
– Management is not held accountable for poor results.

When I talk with the management of an organization, I ask for an overview of the company’s history. I obtain an understanding of how the company came to be, the original vision and the significant capital expenditures to date. I am waiting to hear something like, “That one was a disaster”, or “I’m not sure why we ended up doing that”. From there, I try to learn more about the decision making process without being judgmental.

I can then use that information to suggest how implementing certain corporate governance measures might lower the risk of a similar mistake in the future. I highlight the typical corporate governance check points and walk the CEO, COO and CFO through how they might come to a decision on a similar scenario in the future. Those check points include proper project economics and a formalized approval process that involves both management and the Board of Directors.

My next post will build on this idea by identifying the three most important corporate governance concepts. Even if you find corporate governance to be a bunch of big company nonsense, your company will benefit from implementing these three suggestions. Look for that post on October 21st.