intellectual-framework

Governance Beyond the Boardroom

Principal Investigator: Dr Andrew Tucker Greg Spiro Elizabeth Nicholson

Presentation of Intellectual Framework

A Failure of Corporate Governance Narrow Definition doesn’t work: Internal controls to make sure shareholders get a reasonable return on investment. ‘Failures in corporate governance arrangements caused the financial crisis” - OECD, 2009 "The banks should be using their profits to rebuild their balance sheets, not to hand out huge bonuses while the rest of the economy picks up the pieces for the follies of finance. But the change of culture needs to go far deeper than bonuses." – George Osborne, 2009

A Gap in our Understanding

Corporate Governance literature

Financial Sector literature Corporate Culture literature

Governance Beyond the Boardroom Corporate governance traditionally addressed at BoFI board level. Are boards fit for purpose?  lack of understanding of complex products, arrogance, recklessness  innovation, technical sophistication, de-layered structures  cheap money, bubble behaviour, hubris

‘Democratising’ boosts performance/motivation but broadens scale of the ‘theatre’ in which risk has to be managed. Awareness beyond the Boardroom of implications of actions and behaviours on commercial performance and long-term resilience of the firm.

H1. Governance issues can be examined for their impacts outside as well as inside the boardroom.

Improving the Model

Improving the Model

Role of the SubAgent • Information asymmetry between principal & agent, agent & sub agents • Complexity of products = effective SA independence • The larger banks are so complex, global, and multi-disciplinary that they are forced to adopt a subsidiarity model • Control aspects of governance break down in innovative, entrepreneurial environments.

Building the P-A-SA model Need to look beyond the endogenous factors: • ‘groupthink’ in the markets • environment of “turbo capitalism” • loosening regulatory oversight

Boom times provide numerous conditions for misconduct by SAs: • • • •

bonus linked to trade size rather than profitability SA not understanding implications for A’s long-term success lack of risk knowledge and experience by A’s agents surging profitability led A and P to adopt SA’s short-term focus

H2. The Board is not the sole guardian of corporate governance issues.

Governance as Risk Management

A Flawed Model • Securitisation model of originate-and-distribute banking loans designed to circumvent accountability for the loan by offloading it to a third party • Compliance, audit function circumvented • Light touch codes of conduct unenforced by trade associations, regulators

A Flawed Approach • Longlist of fines for poor governance • Practitioners fall back on “the market knows best” • Governance falls within dominant risk management paradigm H3. Using a risk management analytical approach to governance fails to understand the interdependent dynamics of governance issues.

Governance as Culture

A New Cultural Approach • Who are banks’ core stakeholders? • prevalence of “chequebook diplomacy” • how to identify “alpha”? • difficulties in measuring performance • investment vs. retail banking traditions • absence of a widely-recognised professional standard • extreme discrepancies between effort and reward

Culture as a bar of soap

“the way we do things around here” “the bonus culture…the culture of greed” “teamwork and long hours” “how you behave when you think nobody’s looking!”

Culture: A textured definition Culture is a pattern of shared tacit assumptions that was learned by a group as it solved its problems of external adaptation and internal integration, that has worked well enough to be considered valid and, therefore, to be taught to new members as the correct way to perceive, think, and feel in relation to those problems. - Edgar Schein: Organisational Culture and Leadership

Artefacts

Espoused Values

Basic Assumptions

The Dark Side of the Moon • • • •

Discussables & Undiscussables Dos & Taboos Sound of Silos Broader Definition: the rules, processes and behaviours that ensure (i) reasonable return on investment for shareholders, (ii) sustainable business, and (iii) constructive relationships with stakeholders.

H4. Governance is better understood and managed as a cultural phenomenon.

Governance Beyond the Boardroom

http://www.business.bbk.ac.uk/news-andevents/governance-beyond-the-boardroom