This article was first published in the February/March 2019 UK edition of Accounting and Business magazine.

The last few years have been a considerable trial for anyone trying to make corporate boards more effective. There are innumerable guides offering advice on how to do it. But the landscape is littered with examples of corporate disasters – and many of these boards will have thought they were following the right advice. They will have worried about structure, diversity, culture, risk and tone from the top. But they will still have been undone despite, or perhaps because of, the regulation and guidance coming from all sides. They have become ensnared in the maelstrom.

What they needed was to look upwards to a simpler credo to follow. Over the turn of the year I read the just-published autobiography of Paul Volcker, the man who the chief economic commentator of the Financial Times Martin Wolf recently described quite simply as ‘the greatest man I have known’.

Volcker is now 91, and his career in public service in the US is lengthy. He was the man who stuck to his guns between 1979 and 1987 as chairman of the Federal Reserve and took the actions that destroyed the scourge of high inflation, a feat that no one thought could be achieved. His other successes are myriad, and his book Keeping At It: The Quest for Sound Money and Good Government is packed with his recounting of how, with integrity his watchword, he doggedly won through, time after time.

The book is also full of his views on management and boards. ‘The larger, more difficult challenge,’ he says, ‘is to identify the fault lines and act before a crisis. A weak CEO, failures of internal controls and sloppy auditing practices are symptomatic but hard for an outsider to detect’, he says. ‘Alas, too often that is true for board members as well’.

The antidote, based on his experience, is smaller boards. ‘In the much larger boards upon which I have served,’ he says, ‘an individual director is unlikely to feel a strong sense of influence or responsibility.’ The job can become a sinecure. ‘Whatever their age, or other qualifications, every director should feel a real sense of personal responsibility, not merely for providing strategic vision or some market or technology insights – matters for which consultants can be employed – but for demanding strong operational, accounting and ethical standards.’

Learning the hard way

Volcker learned the hard way when boards on which he served went wrong. It was because the boards ‘were caught flat-footed by management miscues and failures to deal promptly with ethical issues’. An insistence on ethical behaviour is at the heart of what he is talking about. He refers to the Wells Fargo banking scandal of 2016 when a culture of incentives led staff to open around two million accounts and credit cards that customers had never authorised. The fines were massive. Several thousand staff, from top to bottom of the bank, lost their jobs. ‘It is a glaring example,’ says Volcker, ‘of deeply flawed incentive compensation systems, reaching down through the management and employee ranks, overriding the company’s prominently stated ethical standards’.

He relates this to ‘distorted incentives’ across the whole of business, but boards in particular. ‘A kind of contagion is at work,’ he says. ‘Stepping back, do the CEOs of today’s top banks (or other financial institutions) really contribute five to 10 times as much (in price-adjusted terms) to the success of their institutions, or the economy, as their predecessors did 40 or so years ago? I have my doubts. At least, it doesn’t show up in the economic growth rate, certainly not in the pay of the average worker or, more specifically, in an absence of financial crises.’

Volcker may be talking of the US experience. But the arguments are equally valid elsewhere. No wonder the Financial Reporting Council is filling its most recent guidance on board effectiveness with an emphasis on the long term and the strengthening of ‘the employee voice’ in the boardroom. Boards need to think integrity. And think Volcker.

Robert Bruce is an accountancy commentator and journalist.