Some rules not made to be broken

BOB SEMPLEreviews Rules Are Not Enough: The Art of Governance in the Real World, by Rupert Merson; Profile Books; £15 (€17)

THE SENTIMENT of Rupert Merson’s book is aptly captured in a quotation at the start of the book: “I do not care if it was within the rules – it is wrong” (David Cameron on MPs’ expenses). Sounds familiar?

Merson aims his book at business owners, managers and leaders who, inter alia, are wondering if "this governance thing" will help maximise the chances of making their businesses a success. He makes a good argument that governance has lots to offer many organisations, not just the large public companies.

He defines corporate governance in high-level terms addressing accountability, conflicts of interest, the needs of wider stakeholders and the importance of introducing the independent expertise into decision-making (oh, for more of that in Corporate Ireland in recent times!). Throughout, however, he stresses how difficult it is to confine governance to simple definitions.

The book is structured around 10 “key elements and subject areas”: objectives, finance, people, stakeholders, rules, performance measurement and management, values and culture in the organisation, transparency, growth and complexity, structures and power. At 264 pages – on a topic many would find dry – he sets a demanding goal to maintain the reader’s interest.

Merson starts, as many writers on governance do, by commenting on the separation of owners of a business from those managing it (agency theory) and the accepted imperative to “maximise value for shareholders”.

He contrasts this with looking after the needs of a wider range of interested parties – depositors, employees, pensioners and so on (“stakeholder theory”). This is all pretty standard fare, so far.

He contrasts governance in social enterprises (often reliant, for example, on volunteers) and partnerships (which focus on distributing income rather than accumulating value). This opens the perspective on governance and gets the reader thinking about the relative merits of different approaches.

Perhaps the most important points Merson makes are the angst of the entrepreneur ceding control to “other people’s money” and the need for greater focus on personal behaviour and responsibility.

In a lengthy chapter on people, he acknowledges that for many people, directors “are villains that corporate governance was invented to sort out” and rather obviously asserts, “the role of the non-executive (director), in businesses both big or small, is nothing if not increasingly risky”.

He provides useful pointers for non-executive directors, especially those dealing with small and medium-sized enterprises (SMEs) and rounds out the chapter with perspectives on entrepreneurs, partners and volunteers.

His assertion that “guidelines are rules for grown-ups” is tempered with an acknowledgment that there is also a need for enforcement, but he is largely silent on reforms needed to make a principles-based approach more effective.

Sections on social enterprises, family business governance (of special interest to many Irish SMEs) and partnerships all raise interesting issues but he leaves it to the reader to conclude how to apply these insights to their own situations.

Merson doesn’t mince his words on performance measurement and reward. “Bright people will do stupid things if they are encouraged to do them by clumsy management and measurement systems.” The chapter is well referenced and provides good coverage of the issues, including useful pointers on evaluation of board performance.

Values and culture are fundamental to success but they have to be deeply embedded rather than faked and they have to be the right ones! Sounds easy?

Merson is critical of those who complete checklists mindlessly, “do as I say, not as I do” merchants. He also warns of accepting grand statements at face value from apparent paragons of perfection, who then crash spectacularly. The most important part of this chapter deals with “valuing contradiction”, a quality too often lacking.

On transparency, Merson recommends clear communication but reminds us that generally accepted accounting practice takes no fewer than 1,440 pages to describe and that financial statements are “tissues of judgments and subjective assessments”.

He goes on to warn, rather bluntly, that there are always two stories to tease out: the ones that directors are trying to tell and the ones they are trying to hide.

Merson’s final chapter draws together his key observations.

“Governance has to become something people want rather than something they just complain about, comply with or put up with.” He says increasing complexity and the interdependence of business is making governance far more difficult to implement.

He challenges the reader that “with personal responsibility goes a due sense of modesty” and encourages us to throw away the cult of the business leader as hero.

Merson protests early in the book that he has written this book “for real managers who are trying to deal with real issues”. He goes some way towards providing the practical guidance he promises but he stops short of driving home the advice so badly needed.

Specifically, although he mentions personal accountability, he misses the opportunity to challenge each reader to confront how this needs to be applied in practice. Some would say it’s all down to common sense. The problem, as they say, is that it’s not that common.

Bob Semple is a partner at PricewaterhouseCoopers