There is an authority vacuum in many firms, with no one really clear about how decisions are made or who makes them. It’s the stuff of failure, says Derek Smith
This article was first published in the June 2017 UK edition of Accounting and Business magazine.
That we live in a rapidly changing world is self-evident. The many fundamental political, social and economic changes that have become routine rarely surprise us any more. In a similar vein, we have probably become immune to the various business misdeeds that seem to have become a regular occurrence. Indeed, the last 20 years have been punctuated all too often with highly publicised scandals, from the collapse of Barings Bank in 1995 to the overstatement of profits by Tesco in 2014 (not forgetting Enron in 2001).
These failures are often highlighted because of their financial implications, but there are also non-financial failures and scandals involving such organisations as the Metropolitan Police and various NHS trusts.
Inevitably we ask if there is a common underlying cause. Just as inevitably, the answer is yes: the organisational and governance structures have failed, with the interdependency between the two not being recognised.
These events often end up raising the issue of what the accountants were actually doing. Surely, people ask, they understand good governance and organisational structures. Well, do they?
Give us guiding principles
Corporate governance is now a high-profile topic, and so are the underlying organisational structures that support governance. Increasingly, new generations express their dissatisfaction with traditional structures and governance, and look for certain guiding principles – namely, democracy, accountability, transparency, clarity about the role of boards or governing bodies, effective performance from the board and bodies that deliver organisational purpose and exercise control, and above all, boards that act with clear and understood integrity.
Fully embracing some of these principles may be a bridge too far for the average accountancy firm. All too often firms are so far removed from these principles that their organisational and governance structures remain a significant mystery not only to members of the broader team but also to those in senior positions in a firm.
All too often seemingly simple questions along the lines of ‘who decides how you do things here?’ are met with bemusement. Much of this is down to the historic atmosphere of secrecy common in many firms, but much is still based on a ‘need to know’ approach to information availability held dear in many firms. However, the view of who needs to know what may be based on some antediluvian attitudes.
Clearly, various factors differentiate small business operations from large business operations. One of them is the implementation of a formal organisational structure. That said, organisational structure is important for any business to provide guidance and clarity on specific human resources issues, such as managerial authority.
The organisational structure should help the whole team understand how decisions are made and by whom. Frequently there is an authority vacuum in many firms, and no one is really clear on how decisions are made. Too many people are involved in minor decisions while too few are involved in the vital strategic decisions of the firm. The title of ‘manager’ is often used in firms despite those holding it managing little beyond a work file.
Who does what?
Without a formal organisational structure, the team may find it difficult to know to whom they officially report in different situations, and it may become unclear exactly who has the final responsibility for what.
Organisational structure improves operational efficiency by providing clarity at all levels of a firm.
Frequently there is an attempt to embody the management structure in the partnership or shareholder agreement, but all too often this deals with particular transactions and is unwittingly breached almost daily. Nor is it uncommon for decisions to be unanimous on the assumption that this is the most democratic model (when it is, in fact, probably the least).
The 1992 Cadbury Report defined governance as ‘the system by which organisations are directed and controlled… and relate to their communities’. In effect then, governance is all about leadership.
So what should the governance or organisational structure seek to achieve? Clarity and understanding are fundamental requirements, but it is also important to determine the aims of the governance or organisational structure, where there are a number of key elements. The organisation must have:
- clarity about objectives, vision, mission and values
- efficient structures, policies and procedures
- a clearly identifiable executive body, with the right balance of skills and experiences.
Meanwhile the executive body must:
- manage and use resources to optimise potential
- be accountable in a way that is transparent and understandable
- be flexible enough to influence and adapt to change in the environment.
The executive body has three key roles to play in leading the firm, covering the fiduciary, strategic and generative spheres. For many firms the fiduciary role becomes dominant, with the emphasis being on short-term financial issues rather than the longer-term strategic issues confronting the firm. It is not uncommon for partnerships to have at least one person in a leadership role who envisages their role as more check than balance, and who consumes energy rather than creates it in an executive role.
The three key roles should operate as follows:
- fiduciary: concerned with legal and regulatory compliance, financial sustainability, and checks and balances on those who have management roles
- strategic, concerned with strategy and direction, plus a role in monitoring progress against the agreed goals
- generative, having an emphasis on innovation and creativity as well as ensuring that there is a clear purpose and mission for which the firm strives, with appropriate values and within an appropriate culture.
Is your firm fit for purpose in this regard? Who makes the decisions and how are they made? In our experience, many firms need help to address this issue, which can be extremely challenging for those who have previously been able to make decisions that may have suited them rather than the organisation.
Derek Smith is a senior consultant at Foulger Underwood Associates
"It is not uncommon for partnerships to have at least one person in a leadership role who envisages their role as more check than balance"