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No matter what size a construction firm may be, the damage from governance failure can be profound, especially for stakeholders impacted by a company closure – ©123RF.com

Good governance is key to viability – By Kirsten Patterson

Prominent UK journalist Dominic Lawson wrote: “In a boom, envy; in a bust, anger.” It’s a quote that has some application to our construction sector. But many New Zealanders are probably wondering why, during a national building boom – with a critical shortage of housing and major infrastructure projects underway in most major cities – construction firms are going bust?

There are many reasons that companies fail, of course. Whether it’s Mainzeal or a family-run local building company, the contributing factors can be complex. But when any company fails, attention rightly focuses on the role governance may have played. No matter what size a construction firm may be, the damage from governance failure can be profound, especially for stakeholders impacted by a company closure.

Directors have a key role in enabling trust and confidence in a business and its role in society. The four pillars of governance best practice underpin the role of directors and boards:

  • • Determining purpose – the board must take ownership of the entity’s strategic direction and its long-term business sustainability
  • • An effective governance culture – directors must lead with high standards of ethical behaviour and integrity
  • • Holding to account – the board sets the risk appetite for the entity, and oversees and monitors risk management
  • • Effective compliance – the board adds value by ensuring the entity is, and remains, solvent, the probity of financial reports, and a high standard of compliance with regulatory environments.

A team game

New Zealand is a nation of SME businesses. Ensuring good governance in smaller organisations, while often difficult – due to their size and multi-hats required – is especially important.

Governance is, above all, about people. It’s a team game and, like any team, the board’s composition, culture and dynamic are all critical to its effectiveness. Boards need a broad mix of skills and experience, now and for the future – including ensuring the board has industry knowledge represented around the table.

Individual attributes of directors are also highly relevant, such as integrity, courage, judgement, emotional agility, energy and curiosity. Getting the right mix and balance can be as much art as science. Putting time and thought into developing a skills matrix to determine the board’s needs is worth the investment.

While a balanced board is necessary, it is not sufficient to create an effective team. It is board culture that allows directors to work together to make the most effective decisions for the benefit of the organisation’s stakeholders.

What does this look like? It should be one where the board supports open debate, diversity, thoughtful challenge and constructive dissent. While the chair may lead this, all board members have responsibility for creating an inclusive culture that enables contribution with respect. Only then will all voices be heard, and all issues of the day will be able to be discussed in an open and frank manner.

Working ‘on’, not ‘in’, the business

The role of governance is to spend time working ‘on the business’ and not ‘in it’. That requires boards to be scanning the horizon for changes, issues, risks and opportunities that may be impacting on clients, the industry, or on regulation.

One such trend might be the amount of trade credit extended by SMEs to large businesses every year. In their recent report ‘Paying the Price’, AlphaBeta advisors reported that cashflow issues from big customers not paying on time were having a significant impact on SMEs in Australia – AU$216 billion per annum in credit. Management might see the issue as a one-off customer issue. A board sees the issue as a potential trend that will continue and needs to be planned for, with buffers built in.

It’s vital that companies are aware of factors such as changing markets, digital disruption and staff morale. Navigating change is an essential part of good governance.

This is where directors and boards add real value. Their roles are increasingly complex and demanding. This was highlighted by our recent discussion paper, ‘Always on duty: the future board’.

The paper, released by the Institute of Directors and MinterEllisonRuddWatts, highlights that today’s boards must be across a staggering array of issues and risks, such as business disruption, new technologies, cyber risk and climate change. They also need to be responsive to escalating stakeholder demands and expectations. This is at a time of heightened director accountability and increasing personal liability.

Continuous improvement

Despite significant change in the operating environment, boards have been functioning in much the same vein for decades. And many boards are now facing a time dilemma. They are weighed down by often voluminous board papers, compliance and risk, which can compromise time to discuss and debate critical strategic and performance issues.

Whether it’s in the construction sector or any other, boards’ traditional ways of working and traditional agenda items need to be challenged for directors to continue to add value and fulfil their governance responsibilities in the future.

Company failure doesn’t always mean governance failure. There is financial risk in every entity. However, where appropriate and where we can, the Institute of Directors will review and share learnings with our members when companies go under. We educate our members about their responsibilities under the Companies Act, including not trading while insolvent, to ensure best-practice governance is understood and followed. Focusing on the learnings contributes to continuous improvement in good governance so we can all benefit.

Just like any good construction project, governance is the strong foundation upon which a great business is built.

Kirsten Patterson is the CEO of the Institute of Directors, the professional body for directors, representing over 9000 members drawn from large private organisations, SMEs, state sector and not-for-profit organisations, and charities iod.org.nz

 


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