Governance reform in the NHS

In all the commentary this week around the Government's plans to radically devolve power in the NHS, there has been little about the governance challenge this represents (honourable mention to the exceptions: the Chartered Management Institute here and Michael Tremblay here).

Are GPs ready to take control of 80% of the NHS's £100bn annual budget? While some run thriving SMEs, the management challenge to take on commissioning their services is a step change from a small rural practice.

In particular, do GPs have the right governance culture for their new role? By this I mean no disrespect to GPs but simply question whether their existing culture - necessarily elitist, authoritative, closed, collegiate - is the right culture to fit the new NHS strategy.

Working with a plethora of private sector providers requires acute attention to contractual detail, considerable strategic vision of the kind of services mix required, entrepreneurialism, innovation, and (dare I say it) some marketing nous as the reforms bed down and GP consortia start competing for business.

According to my insider sources, these are not the cultural values taught in medical schools nor fostered by the Royal Colleges. It seems like the NHS reforms represent a considerable research and practice opportunity for Governance Beyond the Boardroom network. Please drop me a line if you wish to pursue it.

Goldman Sachs governance report

As an example of what leading financial service firms are doing in terms of their governance culture, this week's report from Goldman Sachs sets three interesting precedents for the sector.

1. The extent of the reputational damage when a firm's actions stray so obviously from its espoused business standards. 

Goldman's first business principle is: 'Our clients' interests always come first'. This ideal looks a little hollow as the details of Goldman's investment in Facebook have leaked out. Their last business principle is: 'Integrity and honesty are at the heart of our business'. Again, hard to square with the news that Goldman lost an additional $5bn in proprietary trading in 2008 but have only just announced the loss.

2. Getting your culture right is key to overcoming reputational woes. As the report notes (p. 6):

'The firm's culture has been the cornerstone of our performance for decades. We believe the recommendations of the Committee will strengthen the firm's culture in an increasingly complex environment. We must renew our ... constant focus on the reputational consequences of every action we take. In particular, our approach must be: not just "can we" undertake a given business activity, but "should we".'

3. Firms are right to be concerned about the intuitive link between culture, governance, and reputation. As the report says (p. 8):

'[Goldman's reputation] can be affected by any number of decisions and activities across the firm. Every employee has an equal obligation to raise issues or concerns, no matter how small, to protect the firm's reputation. We must ensure that our focus on our reputation is as grounded, consistent and pervasive as our focus on commercial success.'

Despite the poor reception the report has generally received on Wall Street, Goldman might again be ahead of the pack in one major aspect. Instead of addressing governance failures in a simple rearrangement of committee armchairs and more internal procedures, they have taken a more root and branch approach. Under the rubric of improving governance, they aim to address: improving client relationship management, making adherence to the Business Principles reportable, better oversight of new products, taking transparency seriously, and incorporating culture and values into KPIs.

At least Goldman is coming up with a public response to the seriously flawed culture of banking that led to the financial crisis. I hope, but don't expect, more international banks will follow Goldman's new approach to governance reform.

Governance Beyond the Boardroom in Oil Industry

Deepwater Horizon Oil Spill

Yesterday's scathing report by the presidential commission into the April 2010 Deepwater Horizon oil spill paints a picture of a disfunctional corporate culture at BP and across the oil industry. The report is very useful in explaining what exactly went wrong in the build up to the explosion. But the most interesting aspects for this blog's readers lie in the 'Overarching Management Failures by Industry' section [p. 122]:

"The most significant failure at Macondo—and the clear root cause of the blowout—was a failure of industry management. Most, if not all, of the failures at Macondo can be traced back to underlying failures of management and communication. Better management of decisionmaking processes within BP and other companies, better communication within and between BP and its contractors, and effective training of key engineering and rig personnel would have prevented the Macondo incident. BP and other operators must have effective systems in place for integrating the various corporate cultures, internal procedures, and decisionmaking protocols of the many different contractors involved in drilling a deepwater well." 

As this case demonstrates clearly, some of the greatest risks in the oil industry are faced along way from the boardroom. Without a robust governance culture that proactively addresses the integration of various corporate cultures, internal procedures, and decisionmaking protocols" of the various contractors", the report concludes that:

"the root causes are systemic and, absent significant reform in both industry practices and government policies, might well recur."

This isn't the current governance culture of the industry. Rather, it is summed up by BP engineer Brett Cocales in an email a few days before the explosion [quoted p. 116]:

“But, who cares, it’s done, end of story, [we] will probably be fine and we’ll get a good cement job.”

Open Source Toolkit Framework goes live

The project team is very pleased to announce that the 'Governance Beyond Boardroom' toolkit framework has gone live on the website today. It is open source and freely available here.

Please all have a play and test it to destruction! I'm sure there are things we may have missed so let us know where we can improve. It's an ongoing research and practitioner project so all ideas for improvements most welcome!

In the next few months we hope to be using the toolkit framework with some pilot sites. We have some volunteers already but are happy to work with more first movers. If your organisation would like to be involved in this innovative approach to governance, please let us know by replying to the project team at andrew.tucker@pol-soc.bbk.ac.uk.

How badly run are banks?

Interesting insight into the extent to which the British public thinks banks' governance has deteriorated over the last 22 years. According to the British Social Attitudes Survey, the percentage of the public saying banks are well run has crashed from 91% in 1987, to 19% in 2009.

This longterm trend provides some explanation why politicians and regulators seem happy to proceed with further intervention in banks' governance regimes despite a lack of concensus around the root causes of the credit crunch. While researchers and bankers have done a good job of examining limited aspects of the credit crunch, the wider narrative has congealed around banks being poorly run.

And, to give this deterioration some context, over the same time period, the percentage of the public saying the NHS is well run has improved from 35% to 54%; trade unions has improved from 27% to 35%, and even the press has remained static at 39%. Surely time for the banks to take a more proactive role in explaining how their governance woes are being addressed?

Reputation and the Board: Bridging the Gap

Thank you to all those who attended the annual Henley Reputation Conference last week. The theme was 'Bridging the Gap' between the organisation and the board. An excellent day run by the John Madejski Centre for Reputation saw some excellent presentations and strong debate amongst the mainly private sector delegates.

On behalf of the Governance Beyond Boardroom network, I gave a presentation and panel session on the results of the project. For a version of the presentation, see here.

The panel session afterwards brought together Simon Culhane (Chief Executive, Chartered Institute for Securities and Investment) and Peter Montagnon (Senior Investment Adviser, Financial Reporting Council). The panel tackled two particularly pertinent questions from the practitioner audience:

1. How do you apply the analysis of governance culture?
The audience seemed keen to see the fuller toolkit approach to be posted soon on the project's website. However, a delegate from a big four bank said that their induction focuses on the corporate culture but this learning fizzles after a few months when it is not backed up by the behaviour of senior managers. She concluded that there is a disconnect in large banks between what the HR function tries to promote in terms of a strong governance culture and what operational functions actually practice. A number of other delegates from FTSE100 companies agreed with this sentiment.

2. Does the person who draws up the corporate culture own the governance function?
This question focuses on an essential causal direction and is particularly pertinent in light of the Mansion House conference last month (see previous post). While the event was held under Chatham House rules (so I cannot attribute comments), there was a split in the debate between those who argued that culture is a supporting part of the GRC function and those who believed that governance rules and procedures should be tailored towards producing a culture that supports board strategy. Of course, there is considerable crossover here and the potential for some productive future research.

Both questions are key for organisations seeking to realign their governance culture with corporate strategy. Please let me know if these themes chime with your organisation's requirements so we can take forward the project's work together.

Regulator in the Boardroom?

Hector Sants, "Culture Inspector"?

You may have heard a rumour circulating that the FSA wants to put a 'culture inspector' on the board of banks and other financial institutions. As Anthony Hilton writes in the Evening Standard recently, this is a canard but it is not necessarily a bad idea.

...trust won't be restored until people have confidence in the City's ethics and in many cases these are inseparable from the firm's culture. So, vague though the term is, culture is going to be a continuing concern for regulators, politicians and the public.

This continuing concern can be traced more accurately to a speech last month by Hector Sants, Chief Executive of the Financial Standards Authority when he said:

It is crucial that we improve behaviour and judgements. To do this we must address the role that culture and ethics play in shaping these.

Sants went on to suggest how this might work:

For regulators, the starting point should be that we want the firm to have a culture which encourages individuals to make the appropriate judgements and deliver the outcomes we are seeking... The regulator's focus should therefore be on what an acceptable culture looks like and what outcomes that drives... It is neither feasible nor desirable for the regulator to specify the type of culture a firm has, nor the measures and metrics by which this should be assessed. What should matter to the regulator are the outcomes that the culture delivers and that the firm can demonstrate it has a framework for assessing and maintaining it.

This is the crux of the issue - can firms demonstrate that their culture governance framework (assuming they have one!) is robust, accurate and produces a culture tied closely to its corporate strategy. Of course, this is much harder and complex than at first glance. Just think how such a framework might work in your team/department before considering how such a framework can be rolled out across a major institution, and still retain its usefulness.

Developing such a culture governance framework is further complicated by Sants' further correct observation that:

... a box-ticking approach to regulating culture will not work. The regulator must focus on the actions a firm takes and whether the board has a compelling story to tell about how it ensures it has the right culture that rings true and is consistent with what the firm does.

So where does that leave Boardrooms in the City? Simply, they need to act rapidly to develop a culture governance framework that can stand up to regulatory scrutiny. While the FSA won't proscribe a framework tool, boards need to develop one based on leading academic research and best practice. In this, board members should look to the Governance Beyond Boardroom network for where to start.