Newsletter | Volume 1

Values and culture may be the cornerstone of governance because they drive behaviors of people throughout the organization and the ultimate effectiveness of its governance arrangements.

Let's admit it. Had the Board of Directors, Management and Risk and Audit Committee's done their jobs the right way, we would not be in the current mess that we are.

The key to changing the way people behave is to change the way they think. Accordingly, the paramount aim of this report is to promote among board members, management leaders, supervisors, and shareholders a practical and productive way of thinking about effective governance. Only by changing the way people think about governance can we successfully induce the specific, tailored changes that will enhance governance in each institution

Correct behaviors and effective governance.

Suitable structures and processes are a necessary but not a sufficient condition for good governance, which critically depends also on patterns of behavior. Behavioral patterns depend in turn on the extent to which values such as integrity, independence of thought, and respect for the views of others are embedded in the institutional culture.

Positive values and culture are visible from the board to the executive suite to the front line. Values and culture drive people to do the right thing even when no one is looking. Values and culture are a critical aspect of the governance system, which makes them acceptable and critical dimensions of inquiry for supervisors.

Clear understanding of value drivers

Values and culture are also key areas for inspection and examination by boards. While these sensitive features defy quantitative measurement, they cannot be ignored. Anyone spending time in a company quickly develops a clear understanding of what drives it: most new employees understand the values and culture of the institution within a year, and many figure it out within just a few months.

They instinctively observe how values and culture influence routine business decisions and personnel choices. Supervisors can do like wise because the overall conclusion is that correct behaviors are the key to effective governance.

Understanding the culture of each strategy

The key to changing the way people behave is to change the way they think. Accordingly, the paramount aim of this paper is to promote among board members, management leaders, supervisors, and shareholders a practical and effective way of thinking about effective governance.

Only by changing the way people think about governance can we successfully promote the particular, tailored changes that will improve governance in each institution.

Management should govern and supervisors and shareholders would determine governance differently if they believed the following:

Governance is an ongoing process, not a fixed set of guidelines and procedures. Management's key governance authority is to provide the directors the best way of understanding the business issues upon which judgment is required.
Diversity of governance approaches across the board is a virtue, not a vice. Non-executive directors, sometimes called "outside board members," must establish an independent, external perspective.
Endless detail is not a requirement for board effectiveness. Boards will need to dig deep selectively, as needed for understanding.
Board independence and test should create a high quality and value-additive contribution to board consideration and is not evidenced by the number of times a director says no to management.
Having smaller and expert committee's that require greater time commitment from their members is a far better approach than having larger boards that require only limited time commitment.
Effectively balancing risk, return, and resilience takes judgment. If a risk is too complicated for a well-composed board to understand, it is too complicated to accept. The best board in the world cannot offset a weak internal control and risk management architecture.
Supervisors need a strong and nuanced understanding of each strategy, governance approach, culture, leaders, and issues.
Institutional shareholders will not prevent the next crisis, but they can and should engage more productively in governance matters.
Values and culture are the best "software" that determines the behaviors of people throughout the organisation and the effectiveness of its governance arrangements.
The list above is not complete. The body of the report contains a wealth of insights and recommendations with the potential to influence thinking on effective governance.

Source; Harvard Review on Corporate Governance