When I speak about “good governance” as a performance enhancement tool for business, I see a lot of eyes roll in the audience. Investors and entrepreneurs alike are skeptical about the positive impact they can attain through shareholding and Board structures, especially in early-stage, non-traded ventures. I assume that most of these folks have had at least one experience with a Board of Directors that was more “added pain in the neck” than “added value”. I’ve been there and I get that. Good governance takes collaborative effort and hard work around risk assessment & mitigation, strategic values & goals and aligning interests across diverse stakeholder groups.
However, if you’re unconvinced of the benefits of good governance, let’s take a look at the alternative. How does governance “failure” affect performance? If you are familiar with the Nation’s Capitol, the sad tale of the DC Metro is as good an illustration of the problem as you can get, with the added benefit of explaining why the greatest country on earth has increasingly crappy infrastructure.
I’ll start with the conclusions:
1. A shareholding structure that institutionalizes political friction does not promote good governance;
2. Politically appointed Boards, whose members are not held accountable to anyone or any specific long-term objective, do not promote long-term sustainability
3. A single return focus (“make the numbers”) ignores the social objectives of public transportation, specifically the challenge of providing the 99% with access to safe, convenient and affordable public transportation as well as the environmental benefits of reducing auto traffic.
4. Combine all of the above and you get a public transportation system that is increasingly unreliable, unpredictable and has to charge ever higher fares to deliver ever lower levels of service.
When Metro was built, it was a shining example of how design and policy could create a public transportation system that people would be happy to use. DC residents pitied New Yorkers with their dirty and (at the time) dangerous subways. We didn’t build on this early success though. Metro didn’t do much in the way of investing in new routes and greater access, and apparently it didn’t put anywhere near enough effort into maintenance and repair. How could this happen under our smart and well-educated noses?
Let’s start with shareholder politics. Metro “belongs” to three jurisdictions: Maryland, Virginia and the District of Columbia. Each jurisdiction wants good transport for its residents at minimum cost, but doesn’t really care what happens in other jurisdictions. Maryland and Virginia are States – they can change their tax structure or issue special-purpose bonds to support Metro, but DC doesn’t share the same rights. So even if all three agreed on how much funding they needed to provide, the follow-up isn’t a slam dunk…and they don’t all agree on priorities.
Countervailing shareholder influence could help overcome shareholder self interest: a federal ownership stake, long-term institutional investors (ie pension funds) or appropriate non-profits (transport, civil society). Each of these groups would bring a different viewpoint to the Board and strategy sessions. More shareholder appointed Directors would also bring a new form of accountability to the Board. Yes, Directors are required to vote in a manner consistent with the organization’s well-being, not that of any particular shareholder. Nevertheless, a political appointee is often accountable to no one (until the media weighs in), while a shareholder appointee is (or should be) monitored and evaluated by the shareholder.
Next, let’s look at Boards of Directors, which, like stock markets, often have a hard time taking the long view. Meeting the numbers today can seem more important than paving the way for sustainable performance tomorrow. Better to hit budget targets now by cutting back on things like maintenance outlays, than to face criticism for missing the targets in order to keep the trains running well over longer periods of time. This is especially true when the budget issue is a problem today, but sustainability issues may not emerge until someone else is in the hot seat!
Management usually tries to deliver what the Board wants. Boards that focus only on single return financial metrics and don’t think about long-term sustainability cannot, by definition, ask management to take the long view. Alternatively, Boards that recognize the value of pursuing a multiple bottom line by explicitly considered potential social and environmental returns or “impact” can act on these responsibilities and opportunities in a manner consistent with sustainability.
Whether or not you believe that good governance can boost your bottom-lines, you might want to reflect a bit on how bad governance can produce lousy results, bad press and unhappy customers. Ridden on the DC Metro recently? Longer travel times and greater unpredictability, combined with higher fares, make it a much less attractive proposition than in the past. What a shame!