Sarbanes Oxley led to a new wave of IT solutions to shore up the information and business intelligence deficit of corporate boards. But almost ten years after the Worldcom-Enron-Tyco shocks the specter of dysfunction still hovers and its become clear that the model of corporate social responsibility (CSR) is likely more part of the problem than the solution.
Spare a thought then for the hapless Jim O'Leary, former Chief Economist at Davy Stockbrokers and luminary at the National University of Ireland who presided on the non executive board of Allied Irish Banks between 2004 and 2009. During his time in the top job the bank saw a complete collapse in shareholder value by 99% before the Irish government stepped in to shore up this 'too big to fail bank' by taking an effective 35% stake and control of the board. Allied Irish Banks together with most of the other commercial banks in the Irish market lost track of credit risk in the rush to compete in an overheated property market. But why didn't cooler heads prevail on the board to asseert more discipline over governance, risk and compliance? In a rare and extraordinary mea culpa from the industry, Jim O'Leary explained the simple and surprising answer:
A critical impediment to be overcome in the delivery of good corporate governance outcomes is asymmetry of information. Put crudely, the starting position is that a company’s managers possess all the relevant information while the board or at least the non-executive directors have none. The board is given as much information as management is prepared to share with it. By information, I don’t just mean raw data; I mean the wherewithal to interpret the data intelligently. Nor do I mean only the kind of information that is amenable to quantification or communication in discrete form.
All too human really - 'we didn't have the information to govern and hold management to account and even if we did we wouldn't understand it anyway' seems to be the logic. So what to do? The answer amongst AIB's board was to invest all in trust as a proxy for accountability:
The existence of the asymmetric information problem means trust is crucial........ Pressed to identify the overarching reason for bank boards going with the flow during the boom years, I would say it was that directors placed too much trust in management.
Feeling queasy yet?
You see, time and again we are told that the chief raison detre of a CSR strategy is to generate the trust of broader stakeholders in the company and its business model. Indeed, since 2003 Allied Irish Banks non executive board has operated a board subcommittee which examines and drives the philanthropic endeavours of the firm. But it begs the question -- if the non executive board had asymmetry of information to inform them on the risks associated with the business strategy immediately at hand how did they ever get beyond this myopia to take a view on what its responsibilities were to society?
Yet the board went on to extend its commitment by appointing CSR expert Jennifer Winter to the non executive board at AIB to Chair the CSR committee. Jennifer was then the CEO of small local charity before going on to become functional head of CSR at Astrazeneca. A progressive, inspired and surprising appointment to the supervisory board of a NYSE listed firm? It could have been if the bank had taken a more integrated approach from the start. While Jim O'Leary is setting out his case to retrieve his reputation, the account I'd really like to hear most is that of Jennifer Winter. What was obstructing the CSR vision of the board that they could not connect the social risk the banking business model created for society? To be fair to Jennifer, I know of few boards who yet possess that vision and Jim O'Leary's account shows the AIB board already struggling with the basics.
There is a cautionary tale here about taking a top down, tick the box approach to siloed CSR whcih can lull the corporation into a false sense of security. Over at Ethical Corporation similar questions are being asked about BP's approach to CSR. The real problem here is the PR set who create and run away with attractive messages without creating any connectivity to strategy. Before you know it executives are believing and, worse, trusting in the hype. This is why CSR can create distraction on boards especially where there is already a problem in receiving and understanding information essential to govern and a propensity instead to reach for the currency of trust as proxy such as at AIB.
What is really needed is an inside out approach to sustainability starting with making sustainability central to the strategy and executing against it holistically right across the enterprise. In this way, good management gives way to good PR and CSR not vice versa.
As an aside, its interesting to see the positive development of the CSR strategy at AIB in recent years. Its earlier reports were purely philanthropy driven but in the latest statements the group is reporting energy and CO2 reduction performance, sustainable supply chain management, green lending funds and so on.
Back to Jim O'Leary, he now poses big questions searching for big answers:
The comprehensive failure of the existing system of bank governance to prevent the current crisis poses some big questions. Does the existing system (unitary boards of directors elected by shareholders) need to be entirely replaced? Is the crisis to be seen as the outcome, not of institutional failure or deficiencies of organisation, but of human behaviours that will not be greatly changed, much less eradicated, by the kind of reforms that are feasible in a liberal democracy?
Philosophical indeed but I think the answer is far more simple than that. Its about integration of sustainability at total enterprise strategy level and not as a PR/CSR bolt on. When it comes to sustainability and corporate governance we need to move from asymmetry of information to asymmetry of impotence.