Random thoughts on the scope of corporate governance

I've been following tweets about the HBOS fraud from well-informed people and, not for the first time, I wonder how it is possible to distinguish between corporate governance failure, audit failure, poor business decisions and outright fraud. This distinction matters in placing blame - which may, of course, be shared - and in considering regulatory responses.

If corporate governance is about how companies are directed and controlled, any failure of direction or control could be deemed corporate governance failure. But businesses do fail, for all sorts of reasons, not all of which could be anticipated or managed.

Corporate governance failure implicates the board of directors. Audit failure implicates not only the auditor but also the wider profession. Poor business decisions may lie with the board and/or senior management: they could be the result of poor business strategy (the fault of the board?), poor operational implementation (the fault of management?) or lack of proper oversight by the board.

Experienced NEDs have told me anecdotes about feeling powerless in board situations where it was clear to them that decisions made would set the company on a downward path: the challenge for a NED is then whether to stay and continue to try to mitigate the negative outcome or to resign and possibly accentuate the difficulties, as the signal of company problems affects the share price. Would subsequent company failure in such circumstances be viewed as a corporate governance failure?

Fraud is surely a failure at an individual level. Does anyone ever explore the motivations of those convicted of fraud? The detection of fraud is not, as we know from the famous canine analogy (bloodhound not watchdog), necessarily down to the auditor.  But a recent shift in thinking seems to view the occurrence of fraud as a failure of company culture and thus a further area of board culpability.

And where do the regulators stand in all this? The FRC has been remarkably quiet on the HBOS scandal and a recent call for a new corporate governance regulator suggests that the present regime is inadequate.

Some radical thinking is needed. This paper by a US legal scholar deserves wider consideration.

It argues that "the board of directors in a large, public corporation is ineffective to perform the functions assigned to it and so should be eliminated in favor of a governance system that more accurately reflects corporate decision making."