How many nights have you tossed and turned wondering whether you are making the right decisions, doing the right things for yourself and the company? And, if you run organisations or departments, how many times do you lose nights of sleep wondering what your subordinates are up to? Have you got all the systems in place to ensure that you and they are within the law – in this country and others? The consequences of mistakes in governance are all too well-known. Martyn Sakol describes how one multi-national found a balance between taking risk and imposing unnecessary rules, and this was to ensure that each member of the organisation had ownership over issues of governance.

It’s 05.30 am one morning in June of this year and my mobile phone is ringing. It wakes me out of a deep sleep from my bed in the Bonham Hotel in Edinburgh. A call at that time in the morning had to be from my wife, and it meant that something must be wrong. I was relieved not to hear Fiona (my wife) at the end of the telephone. My anxieties however were raised when I heard the agitated voice of Stephen, the European Chief Financial Officer of one of the world’s leading manufacturing businesses. We had recently helped him implement a programme which integrated the separate service functions within the organisation with a span of control covering several countries.

Prior to the shared services implementation, a Financial Director in each of the countries was accountable for all aspects of financial management, including governance, but now Stephen had active accountability for all of Europe. On paper, his task, to set up the overall organisation, had been clear. It was to create shared and on-time knowledge, shared resources, shared processes and systems. He also had a ‘softer’ objective (but arguably more difficult to achieve) – to build one European finance team. The main preoccupation of this Chief Finance Officer during the implementation phase had been to manage resistance to change, particularly from some of the Financial Directors who were less than thrilled with their changed roles, diminished power and reduced staff. However, his call to me that Wednesday morning was not to seek my advice on managing resistance to change.

He had had a restless night. He could not keep images of WorldCom and Enron out of his mind. What was keeping Stephen awake at night was the fear that someone somewhere was contravening local or European financial law, and that he (Stephen) was (inevitably) going to end up in prison.

5.45am: ‘Help – what can I do?’

I spent the first 5 minutes reassuring him. Jeffery Archer would be released by the time Stephen was sentenced, and at least he wouldn’t have to share a cell with him. Stephen was not laughing, and so I realized that he was seriously worried. He had no evidence that anyone was contravening the law, but of course he really didn’t know. The first problem he faced therefore was lack of knowledge. He had numerous Financial Directors, together with their direct reports, from different countries, operating under different local legal systems, within different business cultures, and with idiosyncratic ways of doing things. How was he going to get the information he needed to determine whether he did indeed have something to worry about?

We decided that he needed to ask some questions

It is obvious that he should ask questions, but critical to getting pertinent information, would be whom he asked, what he asked, and how he asked. I suspected that direct questioning about governance and only governance might not reveal very much. It is such a much-used word, with so many definitions that our results could be misleading. Further, there are many different business practices, such as information systems, whose huge impact on issues of governance often goes unnoticed. We would not be getting to the heart of the matter by simply asking questions. I therefore suggested that we use this anxiety as an opportunity to seek the Financial Directors’ views and ideas about the shared services transition. This would increase their involvement in the shared service implementation anyway, give us insights about any risks to successful implementation, and we would also be able to find out where people were on issues of governance – in our terms of definition.

By the time my alarm went off at 6.30 am, Stephen’s PA was looking at the availability of the European Finance Team to attend a meeting at one of Heathrow’s hotels within the next 3 weeks. I had agreed to facilitate this meeting which was to be headlined as “Building One European Finance Team’, and to construct a pre – workshop questionnaire around the issues that caused Stephen’s insomnia. The finance directors completed this anonymous questionnaire and all of them e-mailed it back to me one week prior to the meeting. I would use the responses to the questionnaires as the foundation for the meeting.

The questionnaire covered many detailed issues around recording of revenue and expenses, closeness to standardising how these were recorded, perceptions about the quality of technology, and management information. It also asked questions about what their ideal systems would look like, and also personal questions about job satisfaction and motivation. In addition, we asked whether any of them entertained similar fears as Stephen about the possibilities of someone, somewhere, contravening either corporate or local governance issues. Were they too losing sleep?

So what about the governance question?

Now none of the Finance Directors who completed this questionnaire were in the least bit naïve and I did wonder what kind of response we would get to the questions about governance. It may well surprise you and shock you as it did Stephen and myself, to learn that 74% thought that someone somewhere was contravening local laws in relation to financial governance. (Do note of course, that they did not report that they thought that 74%of Finance Directors were contravening local law, but that 74%thought that someone somewhere was.)

The results shocked all of them, and to their credit Stephen and his team worked hard to understand where and how they could take swift and effective action to reduce the likelihood of financial irregularities, and then took that appropriate action.

How does this happen and how can we prevent it?

This company is not an exceptional case. This was not an Enron or World Com. This was a firm with a long and distinguished history. Why then, do individuals within large organisations take decisions and actions that could be risky and possibly even contravene the law? Are they under undue pressure from the organisation to perform? Do they lack integrity? Are there just too many risk-takers in large organisations? Or do they simply not know that they are contravening the law? Or, does the answer lie within the organisation itself?

Co-ordinating mechanisms, anonymity and pressure

In his classic narrative, The Great Crash, the economist JK Galbraith invented ‘the bezzle’ to describe all sharp practices within large organisations that only become exposed when a bubble bursts. However, this is, I think, not to suggest that these practices are thought of as ‘sharp’ or ‘unethical’ by those who carry them out. I think that ‘the bezzle’ results from a general difficulty that large organisations face in developing effective mechanisms to co ordinate and control their heterogeneous assets and activities. Herein lies the problem. Sometimes it is logistics. Sometimes, as with Stephen’s attempts at integrating services, it is simply the difficulty in managing more than one location. The quality of a firm’s co-ordinating and controlling mechanisms has a profound effect on the possibility that someone somewhere will systematically and probably unknowingly break the rules and go unnoticed. And, this is compounded in an organisation like Stephen’s where profits result from the joint effort of different functions and people. It is often therefore very difficult to evaluate their relative contribution. This difficulty in measuring individual contribution also means that individual actions, including financial irregularity, can easily go unnoticed.

The problems that arise due to this heterogeneity are not solved through simple structural remedies, such as multi-divisional organisational structures, but rather by focusing on the capacity to co-ordinate routines, processes, norms and values that influence the behaviour of employees and managers. As a result of this initial meeting, many changes have been made. In the workshops that were run as a result of our intervention, it was found that people wanted clearer direction in terms of penalties for contravening governance, more clearly defined policies, regular training, and strengthening of internal control in terms of auditing. Part of this internal control was to be gained from improving the systems, and by educating finance professionals on the importance of integrity. There was also a desire to promote issues of corporate governance over those of local laws. Interestingly, there was also a desire to promote a no-blame culture. Good governance is as much about people and culture as it is about systems and control. Stephen has begun a process of asking questions, involving his European finance directors in developing, designing and therefore owning European-wide processes. Now the likelihood that irregularity will go unnoticed is hopefully significantly reduced.

What is clear from this tale, is that the combination of inadequate co-ordinating mechanisms, lack of information and anonymity within a global organisation like Stephen’s is a powerful concoction for a sleepless night – both for the overall Finance Director, and those at local level. But good communication, ownership of systems, global and local knowledge would appear to be the Night Nurse in waiting.

For further information, please contact Martyn Sakol:
T 44(0) 1223 31594
E martyn.sakol@erconsultants.co.uk