The human factor is most important to re-establish a healthy economic rhythm

Management Review
Business Day
23 March 2009
Jonathan Yudelowitz

AT THE end of his life Montagu Norman, the governor of the Bank of England, the most powerful central bank in the world during the Great Depression, lamented: “It seems that, with all the thought and work and good intentions … nothing that I did … produced any good effect — or indeed any effect at all except that we collected money from a lot of poor devils and gave it over to the four winds.” (Heroes and Zeroes, The New Yorker, February 2 2009.)

This applies to the current economic mess, and begs the question: why didn’t the banks’ boards restrain them?

The boards’ role is to hold executives accountable for their actions on behalf of the shareholders. Prevailing governance culture values regulation over good judgment and courageous leadership. Good governance depends on trust and ethics which cannot be rationalised or legislated into existence. This truth is repeatedly ignored by lawyers, academics and politicians who design governance rules and dominate the governance debate.

Lawyers, academics and politicians do not fully participate in commercial competition, nor do they experience how business interests or personal preferences clash — inconveniently and unpredictably — with one another, strategy and the “greater good”. So, they fill the gap in their understanding with assumptions and judgments: fuelled by envy, theoretical ideals or self-righteous zeal, creating hindrances to working effectively in the “real world”.

The Sarbanes-Oxley Act and the emphasis on directors’ independence introduced after Enron and World-Com did not prevent frauds or dampen the corporate greed of bankers — the cause of current financial meltdown.

Compounding matters, boards turned a blind eye to bankers trying to slip huge bonuses to themselves: Merrill Lynch sanctioned bonuses totalling $121m to four top executives.

While highly paid boards sat on their hands post Enron’s collapse and in the current economic crisis, the architects of Enron’s corruption were re-employed, or consulted at huge expense, by Wall Street and City of London banks to conjure up illusions of success through fancy products.

Couldn’t the boards understand them? Were the structures deemed so up-to-the minute that it seemed churlish to question their structures? Or were the risks so glaringly obvious that they escaped notice altogether?

Good governance resolves tension between owners, managers, staff, customer and public interest in order to create value, and makes change feel like progress. Uncomfortable insights and opinions must be discussed, which implies robust, respectful relationships between executive and non-executive directors, directors and staff, the organisation and its customers, as well as the public at large. This is hampered by rigid rules that are drafted by lawyers, whose modus operandi deny that truth is many-sided and that each situation will be different. Lawyers are trained to win their arguments, and embrace the view that if you give credence to the opposition your argument is lost.

Because lawyers dominate governance models, many governance models recommend a clinical, legalistic approach which discounts the value of personal relationships. This creates an unhealthy and inappropriate insider/ outsider dynamic between the nonexecutive on the one hand and CEO and his team on the other.

When independent views are expressed in conversations between role players, conflicts are aired and resolved and boards can add depth of experience and insight to govern organisations effectively. Skilful leadership drives a board to promote progress amid inertia, fear and disagreement .

They must guide and facilitate deliberations according to specific circumstances, within the safety of boundaries afforded by rules.

Information technology is another area where systematic logic has overpromised yet under delivered; video conferences were touted to replace face-to-face meetings and customer relationship management was to crack the mystical secrets of market success.

The 21st century was meant to see unparalleled prosperity and enlightenment through the internet and other technological advances. Yet the world is experiencing the worst economic slump in 80 years. Technology does indeed increase efficiency, but it is the human factor that makes organisations and societies effective.

Albeit with worthy intentions, information age technology has displaced the art of reflection and face-to-face conversation. It s flood of information robs us of quiet time for reflection — so necessary to process dilemmas and arrive at workable ways to shift them.

It continues to supplant the role of human intelligence in sorting signals from noise, but blurs the distinction between spheres of influence and spheres of concern; confusing possibility and spin with probability and value created — and the broad economy with what actually affects one’s own business.

We need human ingenuity and trust to re-establish a healthy economic rhythm. Organisations require strong collaboration and partnership between all stakeholders to continually correct course — instead of being forced by crisis, when it’s too late to save the economic system’s integrity — to acknowledge the flaws in the assumptions on which our strategies were based.

In true collaboration, partnering skills are developed to table issues; each party declaring his agenda, conviction, observation and experience — paradoxically the only way of effectively separating issues from people.

Boards must engage in proper conversations and thoughtful, rather than reactive, correspondence in which all opinions about an issue are properly respected, to fulfil their mandate: to work with the executive leadership, to deal with what cannot be measured or controlled and those areas of business that defy rational problem solving.