The Hidden Cost of Weak Governance

Poor governance always seems to negatively affect one stakeholder group, the shareholders, and often times also negatively impacts another one, the client. Shareholders are affected through the agency problem, i.e., the lack of governance standards manifested in the form of asymmetry of information between shareholders and managers, leading to a transfer of resources from the former to the latter. The impact on shareholders often derives from governance flaws resulting in a failed corporate culture. For example in the Wells Fargo cross-selling scandal it was the failure to build an ethical culture that finally caused massive reputational damage and loss in market value. The same can be said of high-profile money laundering cases such as HSBC Mexico and Danske Bank Estonia. In other cases it was the failure to create a culture of adherence to corporate standards that became a barrier to implementing innovation to the detriment of shareholder value, too.

Although damage to shareholders is the constant across all cases, it is not the only stakeholder group affected. At Wells Fargo the customers took a strong direct hit, as did the employees in this case and in the incident at Danske Bank. The severity of both impacts was extremely serious.

Observing the cases from the perspective of the governance triad (i.e., Shareholders, Board of Directors, CEO/Senior Management) and the three key governance relationships (Shareholders vs Board, Board vs CEO, CEO vs Rank & File) it is in the CEO vs Rank & File relationship that issues of poor governance seem to manifest themselves most vividly. It is when this relationship fails that an organisation fails to develop an ethical culture and a culture that entices people to adhere to corporate standards. In the Wells Fargo cross-selling and the infamous Societe Generale rogue-trader cases, it was the ethical side that failed because the respective CEOs and senior management prioritised sales outcomes over doing the right thing. In other cases it was the CEO that did not communicate to her staff the need for adhering to defined corporate processes that impeded innovation. In still other cases it was the CEO that did not demand the definition of information standards and that allowed excessive autonomy, which crippled the organisation when it attempted to become customer-centric in a global way.