Guernsey: Corporate Governance: The Art Of War Or The Science Of Compliance?

Last Updated: 3 December 2013
Article by Joe Truelove

Purpose of the article

This article has been written to consider the nature of corporate governance and the impact that has on board selection and behaviour. Fundamentally, is corporate governance an art or a science?

Declaration of author's interests

The author holds a Master of Arts degree but is also a Fellow of the Institute of Chartered Accountants in England and Wales. He serves as a Director on the boards of ten companies both regulated and unregulated and has been made the Chair of the audit committee of one of them.

Why does it matter?

Building the right team is the key to success in many competitive activities, from a cricket team to an infantry platoon. The management team of a company and the board of Directors in particular are vital to the success of any business. If the role of the board is to govern the company then without any sense of whether the act of corporate governance itself is an art or a science, how can a board be successfully composed? Should the board be composed of artists or scientists? What happens if inappropriate members are selected?

The scientific approach

It is possible to gain either a Master of Science or a Master of Arts degree in Corporate Governance, so academia seems to be divided on how to categorise corporate governance. When examining the typical syllabus it would appear that the content is predominantly company law and accounting, with some economics, risk management and ethics. No mention of biology, physics or chemistry there at all!

Perhaps even more importantly regulators are attempting to observe and understand the behaviours of boards. They normally do this after a negative event has occurred in a particular company and by reference only to the minutes of the meetings. This is why Directors pay detailed attention to the contents of minutes and compliance with all laws and regulations.

Various codes of corporate governance have been created as responses to various crises and some are required to be adopted by legislation. The UK has a Code of Corporate Governance; the Association of Investment Companies (AIC) has the AIC Code (designed for listed investment companies); the Quoted Companies Alliance has a code especially for small and medium listed companies. Even Guernsey has its very own Code of Corporate Governance, which is a requirement for regulated companies which have not adopted one of the other aforementioned codes. On becoming the member of a board you may feel that you will simply be able to read the applicable code and then be fully able to function as a board member.

Those who believe that the primary function of corporate governance is about understanding the relevant laws and regulations and establishing processes to ensure compliance with them would have us believe that being a company Director is a profession that can be learned and examined like accountancy and law. However this theory doesn't take into account the intangible nature of the qualities required for the role of Director. Few have the mixture of experience, professional education and wisdom to become a Director. Many of the best Directors have not taken exams in Corporate Governance so it appears that there is something more to corporate governance that cannot be easily quantified and measured in a scientific fashion.

The dark art?

Much of what happens in board rooms takes place behind closed doors and will never become public, so there is an element of mystery associated with the decision making process. Is corporate governance therefore a dark art? There is an unquantifiable element missing from the codes of corporate governance that is subjective rather than objective and which therefore cannot be converted into a tick box procedure, in fact the codes themselves leave plenty of scope for judgement and discretion to be applied, and these cannot be performed in a purely scientific fashion.

If we consider that the study of a language (an arts subject) is divided into reading, writing, speaking and listening then it is fair to note that the role of a Director includes performing all of these acts. The content of most board meetings revolves around the spoken interaction of the members of the board who need to listen to one another. One hopes that they will have all read a series of board papers in advance of the meeting and the summary of what was discussed and conclusions reached at the meeting will be written down during the meeting and a formal record agreed. A large part of corporate governance appears to include understanding company law and that is definitely an arts subject too along with most other essay writing subjects.

Isn't chemistry an important element of corporate governance? Very few reactive substances are utilised in the practice of corporate governance. The days of boards consuming large quantities of fine wine over lunch under the supervision of a sober company secretary are long gone. The chemistry between the board members however is of key interest. It is possible for a board which to split into two cliques, maybe one backing the fund manager and the other siding with some activist investors. There are situations where the Chairman has lost the confidence of other board members. An overbearing chairman can occasionally dominate a board. Sometimes conflicted individuals will protect their own interests rather than act in the interests of the company. All of these are scenarios evolving from human interaction which cannot be avoided by implementing procedures. A key to understanding board composition is to understand the motivations, potential for conflicts and underlying integrity levels of board members.

Is there an element of social anthropology required to understand the world of corporate governance? Well, observing the behaviours of a board of Directors and attempting to understand them could be compared to David Attenborough observing a group of gorillas and the dominant behaviour of the silverback (or on a fund board the silver haired Chairman keeping the meeting on track). But in this analogy it is David Attenborough who is the scientist. Neither gorillas nor Directors need to be anthropologists to perform their roles. And of course the behaviours of Directors bear almost no resemblance to those of gorillas.

Integrity, honesty and openness in dealings cannot readily be tested in a scientific manner nor can moral courage. We cannot legislate for those forming boards to select those Directors who at first glance appear the most like themselves or the most likely to be compliant and easily led.

Or the social science?

Of course there are a number of subjects which some Universities consider to be arts subjects and others consider a science. Subjects like psychology, economics and geography are often referred to as social sciences. Perhaps therefore corporate governance is a social science.

Psychology and sociology may help to understand why it was long considered desirable to have a peer of the realm as the Chairman of every board and why there so few female board members. Economists may add value at board level to explain the market conditions, but remuneration committee members need not be economists.

Although Corporate Governance is not an exact science, a questioning mind and an ability to apply logic are great attributes for a Director to have. An understanding of company law and financial reporting are very valuable too and they can easily be verified by reference to professional qualifications. Experience of audit is considered desirable for the Chair of the audit committee but does she need to be a retired audit partner? Learning by rote one of the various codes and being able to recall parrot fashion the reference numbers may be helpful, but copies of the rules can be referred to in the meetings.

Corporate Governance is concerned with the human interaction between the board members with management, with shareholders, with advisors and with each other. Yes, there are sociocultural norms to be observed and an element of ritual and ceremony have developed over many years (a bit like Japanese tea drinking!) An ability to get on with other people is taken for granted but mustn't be overlooked. Emotional intelligence is as important as intelligence quotient and qualifications.

It is much easier to focus on the detail of compliance than to consider the tough subjects which need to be broached. Should the company be wound up? Why doesn't the Chairman retire? Which one of us will make way for younger blood and new ideas? The ability to navigate these difficult conversations is like the work of a diplomat involved in The Great Game in the 19th century. An art form if ever there was one.

Resolution

Sun Tzu wrote his famous treatise on the Art of War when few people believed that war was an art form. To govern a company is to be human, to interact as part of a team, there will be a leader appointed and you are competing with other similar groups of people. Like war it's a fight for life and death or, in the world of investment funds a constant battle to generate superior returns and attract more investors.

To win that battle boards need to be able to think outside the box not tick a series of boxes. Whilst scientific application of processes may help to satisfy the regulator and social sciences may assist with an understanding of how boards function; corporate governance is above all an art form, like war and diplomacy, requiring the application of judgement, wisdom and experience to the strategic decision making process of a company. Understanding this is the first step to being able to consider what sorts of individuals and skills are required to create a formidable team.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Joe Truelove
 
In association with
Mondaq Advice Centre (MACs)
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.