What is Governance? Government in so called democracies is about doing things for the people, of the people and by the people who are governed. At that level the accountabilities are with the Parliament, Senate, House of Representatives or whatever local variation exists. This is largely based on ancient Greek and Roman models with the major innovations being in the areas of how people get elected (see Democracy). Governance of Public Administration is also relatively easy to understand. If Public/Civil Servants are to serve the people they must server the Government and still do the right thing, personally and for the greater good. Failed States fail mainly for poor administrative Governance. That is what allows them to continue to do what has previously failed to succeed until failure is irretrievable. What about Corporate Governance? I mean this in the sense of Companies and large Non-Government Organisations such as major charities. This is where the waters become muddy … Berings Bank, Enron, the NAB foreign currency trading scandal, the Japanese Banking collapse and now Bear-Sterns, the Mac-Mae twins, Merrill-Lynch, AIG and Lehman Brothers. Why can this happen? The pages of economic history are littered with stories of major collapses and outrages committed by people in trusted positions. Yet, we have so many things in place to supposedly protect us from fraud and bad behaviour. Henry VIII’s Chancellor introduced accounting practices to track pilfering form the King’s tax. Companies and Securities legislation has been around for hundreds of years. There are severe penalties for Insider Trading and requirements for annual Audits of company Accounts. On top of that, you would think that the shareholders might want to be sure that their employees are looking after the investment that they have made in the company. It is tempting to see parallels with the way we deal with environmental crises too – see: [cref 196]
How did they get away with it?
A good question really. The answer is best summed up as: “in different ways in different places and times”. Sometimes it is explained as sheer criminality. Enron, Worldcom, Berings are examples. But criminality is not enough to explain why the people who should have been overseeing the criminals did not do what they should have done and stopped it. Incompetence is a good excuse. You can usually get away with blaming some convenient scapegoat for being incompetent and most people will believe you. Incompetence may well have played a part in the poor investment decisions of Merrill Lynch and the sub-prime mortgage lenders. There is one big question remaining. Who was responsible for ensuring that these people did their job properly? Other times is is explained as a Cultural failure. The whole organisation became so corrupt that anything was allowed to happen without anyone caring. The foreign currency trading at NAB is an example among many. Structural problems are a frequently cited cause as well. Too many executives in managerial positions owning significant shareholdings and manipulating the corporate books for their own gain. People in Authority not listening is the other main cause given. A whistle blower, Auditor or observer might see a problem and let a company know but it gets ignored or swept under the carpet. In all cases, it is better described as a failure of Governance.
What can be done about it?
Small scale fraud in reasonable sized businesses is not very common. Small organisations are more at risk from owners or office holders than from other employees but substantial businesses are not often defrauded by employees. There is a huge industry in place to prevent employee fraud. Video surveillance, cash tills, double checking of financial transactions and much more. Where is the same scrutiny of senior executives and owners? Often non-existent. Why is this so? Mostly because it is the senior executives and owners who put the fraud protection in place. They either do not suspect themselves or prefer to not think about it. The evidence is there to detect fraud and contrary behaviours. You just have to want to collect it and act upon the evidence when it is there. You do not need high tech approaches to achieve this. IT is easy and just good practice is enough to gather the information needed.
Why don’t companies do it?
The answer to this question is the key to a lot of things that seem to make no sense. It was once summed up by Plato in his question to Socrates: “Who will guard the guards?”. The Guardian class in Greece were charged with looking after the interests of the population but then the question is who will ensure that they do their job and that they are honest in doing so. “Democratic” Government solves this problem by separating powers. Giving judicial review to Government actions and limiting the ability for Governments to manipulate the judicial system. Civil wars were fought to gain and maintain this privilege in England. In companies the solution is supposed to be that the Board of Directors oversee the company and the Managers manage. This separation is remarkably rare now and that is probably the root of most of the problems. Executives with near absolute power and limited accountability because they are accountable to themselves adn not disinterested parties.