Governance, fraud and the leader's confidante

---

Last week's 10th Annual Conference of Corporate Governance (#wccg09), explored alternative, hopefully more effective, means of corporate governance. What emerged clearly from the presentations and the discussion was that our current approaches to governance miss the mark. They are targeted at corporates rather than individuals, at the workforce rather than the directors, at catching rather than preventing, and are a shotgun approach when a rifle is needed.

My own paper was used to start the conference. This is a slightly modified version. I have split it into two parts for posting here.

Click here for Part 1: Governance and Fraud

Part 2 - The role of the management confidante

In recent years, we have seen a growth in the field of corporate responsibility (CR). When it began, it was called 'corporate social responsibility' (CSR), and it was about helping those who lead large organisations to see that they have a responsibility towards the societies in which they operate.

While CSR has continued to evolve and there are many excellent initiatives and third-party interventions that do genuine good for the world around us, internally it has struggled. My experience is that, in some wave of euphoria, positions were created within these businesses that have come under threat when the 'luck' I mentioned earlier has become less common.

Under pressure, the well-intentioned, individuals who filled them have had to dumb down their plans and redirect them on what should really be basic operational issues - the ways and means of reducing energy costs, limiting the risk of prosecution for environmental damage, and so on. While they were once, champions of a higher set of values in the leadership of enterprises, today they are too busy dealing with simple abuses. A few had the ear of the leaders, but most were chosen from within, for their breadth of knowledge of the business and its technical dimensions, rather than their independence, the robustness to challenge those in positions of power, and their understanding of emotions, and the emotional component of individual decision making.

Back in medieval times, a landowner, would employ a confidante - someone they knew was educated, understood the human dimension to work, worked to a set of reasonably defined 'higher values' and was not afraid to challenge the wisdom of decisions - such was the calibre of the confidante - at a time when, for others to do so, would often mean summary execution.

Of course, the role was open to abuse, and the risks were known, but were outweighed by the potential benefits - better decisions, more highly motivated staff, a greater appreciation of the softer arts of leadership, and access to an independent analytical mind. In those days, such advisers often came from monastic communities as these were the bases of education and the cultivation of personal values. The popularity of the Arthurian legends with their Merlin, of Gandalf in Tolkien's stories, of the Norse God, Odin in his wandering habit, and others indicate the degree of trust people place in this wise advisor role.

The role of the 'chaplain to a household' continued until the late Industrial Revolution. There were clearly some whose impartiality could be questioned, and whose personal circumstances made their objectivity doubtful, but such relationships were under constant review.

When armies were drawn together by personal allegiance, the chaplain to the household, would often accompany the troops, and in the Boer War and especially the First World War, chaplains became an essential integrated part of the Army. Their job was not simply to counsel the young soldiers facing death, or to minister to those who had died, but to act as confidante and advisor to those in power - bringing an emotional and spiritual dimension to decision making.

While the British military stick to fairly conventional definitions of faith and religion in defining the role of chaplain, the US has opened up considerably, recognising the importance of a far wider grasp of ethical, emotional, and spiritual issues in service decision making, and while they still have a shortage, their chaplaincy today recognises and tries to represent nearly 250 different paths to the role.

While the respect once held for Faith has diminished, and many people are no longer happy with established religions and their creeds, surveys suggest that most people now see the benefit of a wider emotional and spiritual contribution to the ways in which we govern our society. Even in the fictional world of Star Trek, the Captain of the Enterprise had his own spiritual counsellor, Deanna Troy, who provided precisely this understanding.

I am certainly not proposing that chaplains, per se, should become the guardians of morals within corporates, but I do believe that by making it the norm to have identifiable individuals with clearly credible skills, acting as emotional and spiritual advisors to the leaders of larger businesses should become an important aspect of their public governance.

Many public bodies, such as NHS Trusts, already appoint such individuals as non-executive directors. There are a growing number of businesses appointing Quaker advisors to their management boards.

Is it unreasonable for us to expect the annual Company Report, to document the specific actions that each director has undertaken for their continuous professional development? Is it unreasonable to include in this a record of the number of hours of 'supervision', as the psychological profession call it, and perhaps even the credentials of the supervisor in the fields of emotional, spiritual and ethical development?

Whatever the title of these confidantes, I believe it is time for us to try different approaches and I hope that above all, these crucial aspects of management will be incorporated by future generations. The new generation, Generation WE, is demanding a new approach, and they explicitly mention spirit in their manifesto. It is up to us, baby boomers, to respond.

Best wishes

---

Working behind the scenes, helping leaders achieve things they never dreamt they could
t 07785 222380 | grahamwilson.org - inter-faith.net - thefutureofwork.org - corporate-alumni.info

---

Governance, fraud and management of emotion in decision making

---

Last week's 10th Annual Conference of Corporate Governance (#wccg09), explored alternative, hopefully more effective, means of corporate governance. What emerged clearly from the presentations and the discussion was that our current approaches to governance miss the mark. They are targeted at corporates rather than individuals, at the workforce rather than the directors, at catching rather than preventing, and are a shotgun approach when a rifle is needed.

My own paper was used to start the conference. This is a slightly modified version.

Part 1: Governance and Fraud

Our approaches to corporate governance in recent years have tended to revolve around regulatory frameworks, reporting structures, and operating standards. As if to justify the time we devote to them and, more importantly, the time we expect other people to spend on them, we delude ourselves that we are defining ways of achieving good outcomes for the day-to-day management of an enterprise. It seems extraordinary but some people seriously believe that filling in this form, following that procedure, making this statement on the bottom of our emails, or secreting a link in tiny print at the bottom of our website to a load of legalise, both absolves us of almost any personal responsibility and magically impacts on the bottom line of the business. It is a joke - a delusion. If we look back over the last 18 months we see that just about every one of those institutions that contributed to the economic 'meltdown' had all these components in place.

In practice, however, what we are really trying to address is the propensity for fraud to happen in business environments.

These frameworks, structures and standards are translated and imposed on organisations that have little or no need for them; where fraud relatively rarely happens and, when it does, it is of far less substantial scale. The end result is an ineffective approach and a bureaucratic burden, applied too widely, that achieves little.

These measures try to strike a balance between the preventative, the deterrent, and the retrospective. In practice, many so-called preventative measures merely define the technical system through which the fraudster must navigate. Deterrents have existed ever since formal legal systems emerged millennia ago and yet the courts still have a steady stream of increasingly sophisticated corporate frauds to deal with. For the kind of people determined to defraud, deterrents simply don't work. Retrospective measures may make us feel vindicated in the long-run, but do nothing to stop the hurt that is caused by the frauds. Our focus therefore has to be on prevention.

In the last two years, a number of businesses, indeed whole industries, have been exposed for their irresponsible behaviour - where they failed to assess adequately the risks they were taking with the assets of others. These have been so extreme, that the global economic system has been shaken. There are signs of recovery, and sadly, I believe that the opportunity is rapidly being lost to reinvent many of these pointless Governance measures and to replace them with more effective and targeted approaches.

While organisational theorists can identify dynamic processes (group think, collusiveness, scape-goating, and so on) that are happening well beyond the ken of mere mortals, I prefer a slightly more down-to-earth perspective.

Despite what corporate lawyers will tell you, companies do not do actually do anything. They are inanimate. It is people that do things and when they do so within the structure of a corporation it may appear as if the company is doing something, but - at the end of the day - it is the people inside it that are doing so. Even when it is of the magnitude of the recent debacles, corporate fraud always emanates from one individual, or at most a small handful, usually with one persuasive leader.

Our approach therefore has to focus on individuals.

Most corporate fraud appears to happen in democratized countries within large businesses. There are obviously exceptions, but this appears to be the commonest environment. Large businesses are actually quite a small part of the world of work. The largest employers in the world are the Chinese Red Army, Indian State Railways, and the National Health Service (NHS). While I am sure that they have their problems, there are relatively few instances of large-scale individually-generated, corporate fraud associated with them. There appears to be a difference in the set of values espoused by those who work 'not-for-profit' to the values that drive people who work in the world of 'profit'. Corruption is about values and our approaches to governance need to reflect this.

Similarly, the Gross National Product (GNP) of democratised nations is generally dominated by the micro-business community. Far more people work for themselves or for very small companies than do so for the large corporates and, while the ethics of some of their trading practices will always be open to criticism (as the victims of dodgy builders and itinerant car dealers will vouch), it is not the small fry that our approaches need to address. We need to concentrate on the behaviour of people within larger businesses.

Psychologists of crime, tell us that such people often begin with small misdemeanours and when they get away with these, so they slowly escalate. It is by no means a coincidence that a disproportionate number of speeding and parking offences are apparently committed by those in senior positions in business. When those in other positions of influence commit relatively minor offences, (such as a senior police officer caught speeding, a senior civil servant caught fiddling their lunch expenses, or a hospital administrator seeking personal favours) they are so exceptional that they hit the headlines. Such small scale offences are so common among business-people that it rarely even warrants a mention in the local newspaper.

Fraud, broadly speaking, falls into four categories;
That committed against an organisation by a (usually senior) member of it. This includes offences against shareholders and creditors by high-flying entrepreneurs.
That committed against an organisation by a client, such as insurance fraud, tax evasion, and abuse of benefits.
Acts committed by one individual against another, including the classic 'con' tricks and trade 'scams'.
And those where a number of victims are solicited indirectly, such as the Nigerian advanced fee frauds perpetrated via email.

When we talk of governance, we are largely addressing corporate fraud by one of a small number of senior members of an organisation against the other stakeholders in it.

To be successful in business calls for self-confidence, hard work, a preparedness to adapt to failure, the ability to cope with being alone, and large measures of good luck. Sadly, it seems that when things are going well, when luck is available in copious quantities, we often dismiss it, and perceive our success as being entirely down to our own skills and attitudes. In some people, (and, of course, no-one reading this paper or attending the conference could possibly be in this category), this perception breeds an arrogance, a sense of invincibility, that can lead even individuals who are otherwise quite law-abiding, to think that they are above the law, that they are a 'special case', indeed that they are not answerable to anyone.

We have known that an individual's perception that they are 'above' the rules that society creates, is embedded in their childhood - typically around 7 to 9 years of age. It is directly related to the relative absence of their father in their upbringing. Many social problems, especially those affecting young men, originate from the values developed through this absence, whether it was caused by the breakdown of marriages, military service, schooling away from home, or the 'long hours' working culture. If we are to look at ways of preventing corporate fraud, and many other ills, we need to better handle the phenomenon of single parent families, and parenting skills generally.

It seems that most of those who go on to commit commercial fraud have recently experienced financial strain or vulnerability. While they may appear affluent to the rest of us, they see themselves as being at a disadvantage, but it is often the consequential fear of loss of power, influence or status that they later report as the triggers to their criminal behaviour. This is an emotional response. It is rooted deeply within the individual and is not something that can be erased by simplistic awareness raising, 'compliance' training. Our approaches to governance need to recognise the emotional response behind fraud.

We need to provide those individuals most likely to be tempted to defraud with appropriately skilled, long-term counter-balances to help them 'normalise' their thinking. I stress again, that this doesn't mean company-wide immersion style interventions, but instead highly targeted approaches when someone begins to assume the degree of authority that might open the box of temptation to them. Corporate fraud is not always done for the direct personal gain of the individual - as I've said, it is often more complex than that.

Many frauds begin as a one-off response to the person's sense of vulnerability, albeit by an individual who has already learned that they can 'get away' with minor misdemeanours. Once their fraud is apparently successful though, we know that many begin to gain some secondary pleasure in the knowledge that they are fooling the world, and especially that they are demonstrating their superiority to others. The likelihood of committing fraud is therefore a long-term phenomenon - it is not a one-off event, but something that has a life-cycle. The emotional counter-balances that we provide to such corruption-prone individuals therefore need to be embedded within the norm of their day-to-day work, not one-off responses, or short-term fixes.

Part 2 will follow in a few days time.

Best wishes

---

Working behind the scenes, helping leaders achieve things they never dreamt they could
t 07785 222380 | grahamwilson.org - inter-faith.net - thefutureofwork.org - corporate-alumni.info

---