Preparing directors for the governance backlash
Executive Summary
- Following the GFC – governance practices will almost certainly be questioned
- New governance requirements are likely to be introduced
- Historically new requirements are introduced reactively
- There is a risk new requirements will not add value
- We should anticipate these developments
- It takes longer for management to respond than for the board to ask
- We should identify the key areas that need to be governed
- We should check we have effective systems to monitor the key areas, and introduce new mechanisms where necessary
- Governing major projects is one area worthy of attention
- New Standards AS8016, HB280 have much to offer.
A backlash against lax governance
The Global Financial Crisis (GFC) will inevitably lead to higher levels of scrutiny. It is likely to expose the high rate of failure of large investment projects. The Australian Institute of Company Directors highlight the problem in a number of modules in their highly regarded Company Director Course:
- ¾ of mergers and acquisitions never pay off
- most large capital projects fail to live up to expectations
- majority of efforts to enter new markets are abandoned in a few years
- 70% of new manufacturing plants are closed in their first decade
Leading audit firms have commented that management of such large-scale expenditures is a fiduciary duty and imply that current practice, with IT projects in particular, is “tantamount to negligence” [i]. Until now this matter has not received much attention and boards have not been held accountable. The backlash following the GFC is already being felt and the lax levels of supervision are unlikely to be tolerated in the future.
Boards and their advisors are strongly encouraged to implement regimes that will increase the success rates of their investments. The six questions from Standards Australia’s handbook on the corporate governance of projects [ii] is a framework that would make a difference. In the presentation below, some of our early work is presented to suggest how the questions could be implemented in practice.
A version of this article was originally prepared for submission to the Australian Company Director Magazine. The key points were also presented at an ISACA Summit held in Sydney on 31 March 2009.
[i] Deloitte, What the Board Needs to Know About IT: Phase II Findings: Maximizing performance through IT strategy (Deloitte LLP, 2007)
[ii] Standards Australia, HB280 How Boards and Senior Management Have Governed ICT Projects to Succeed (or Fail) (Sydney: Standards Australia, 2006)