Strategy

Learning from failure and from success

Governance | 1 Nov 2006

Gillian Lees explores what the charity sector can learn from the failures of Enron and Worldcom as well as the problems in recent years at Marks and Spencer, Marconi and Cable & Wireless? Does the enormous success of Tesco provide any useful lessons?

In response to the major corporate collapses of the early nineties, the International Federation of Accountants (IFAC) commissioned a major project to consider why corporate governance often fails in companies and what must be done to maximise the chances of success.

CIMA (Chartered Institute of Management Accountants) played a leading role in the project which analysed 27 case studies of listed companies, covering:

• ten different countries, including the UK, US, France, Australia and Italy;
• ten different sectors such as retail, telecoms, pharmaceuticals, banking, energy and computing;
• successes and failures, where a failure could be complete collapse or major difficulties, such as those experienced by Marks and Spencer before their recent recovery and;
• corporate governance and strategic issues.

This multi-faceted approach meant that it was possible to draw broad conclusions that would be of value to organisations of different sizes and sectors across the world.

Corporate governance issues

There were four key corporate governance issues that underpinned both success and failure:

Culture and tone at the top: for example, Enron directors would proclaim values of integrity and excellence, but employees soon learned that the only real performance measure was the amount of profit that they could produce. The code of ethics would be ignored if it proved an inconvenient obstacle;

The chief executive: there were numerous examples of dominant chief executives who were able to exert unchallenged influence over the other executives and board directors. Bernie Ebbers, the former chief executive of WorldCom, now languishing in a US jail for a 25-year term, was a prime example; 

The board of directors: some would fail to challenge the executives adequately or would fail to take action at the right time. A good example was provided by Marks and Spencer a few years ago when it was agreed that a new chief executive needed to be found, but nothing was done to progress recruitment. A damaging boardroom coup was the unfortunate consequence; and

Internal controls: such as in the case of Enron where the emphasis on earnings growth and individual initiative meant that inexperienced managers were given too much leeway without the necessary controls to minimise failure.

No particular issue dominated all were interrelated. However, in some of the success cases, good governance did not feature strongly. This does not mean that good governance is unimportant for success. Instead, it shows that good governance is a necessary, but not sufficient foundation for success.

Strategic factors

Again, there were four key factors underpinning success and failure:

1. Choice and clarity of strategy: the best example here was the UK retail giant, Tesco. Whatever your views about it as a company, there is no denying that Tesco has a very clear, four-part strategy which is articulated consistently by the executive management and board;
2. Strategy execution: again, Tesco provides a good example with some of its recent initiatives, such as its measured approach to online retailing, which has been quoted as best practice;
3. Ability to respond to major and/or abrupt changes: negative examples were provided by the telecoms companies, all of which invested  in global networks without appreciating that this was resulting in overcapacity and falling prices. As a positive example, Li and Fung, a Hong Kong-based middleman between wholesalers and retailers, reinvented itself as a manager of complex supply chains in response to industry change; and
4. Ability to undertake successful mergers and acquisitions: lack of success here was the most significant issue in strategic failure.

What this all means is that organisations need to focus on both corporate governance and strategy if they are to achieve long-term sustainable success. The problem in the corporate world in recent years is that there has been so much emphasis on improving governance in response to major corporate scandals that relatively little attention has been paid to strategic issues.

The enterprise governance framework

To address this issue, the enterprise governance model was developed. The framework of enterprise governance seeks to address this problem by stressing the need for organisations to balance corporate governance and compliance issues with the importance of strategy, performance and value creation. Too much focus on sticking to the rules may mean inadequate attention on the issues that drive future success.

The conformance dimension

This is what is commonly referred to as corporate governance and covers issues such as board structures and committees as well as accounting and reporting standards. Such issues tend to be best dealt with through codes of best practice, standards and, in some cases, legislation. There are also well-established mechanisms for ensuring effective board oversight, in particular board committees, such as the audit and remuneration committees.

The performance dimension

As indicated above, this dimension focuses on strategy and value creation. Its focus is on helping the board to make strategic decisions and to understand its risk appetite and key drivers of performance. These are not issues that lend themselves to formal codes of best practice. Instead, organisations need to use best practice tools and techniques, such as balanced scorecards, in a way that is suitable for their circumstances. Unlike the conformance dimension, there is no mechanism to ensure effective board oversight of the performance dimension. In effect, there is an oversight gap.

As a means of addressing this gap, CIMA has developed the CIMA Strategic ScorecardTM and is currently working with organisations, including not-for-profits, to implement it. The scorecard has four dimensions:

• strategic position;
• strategic options;
• strategic implementation and;
• strategic risks.

Each dimension prompts the board into asking the right questions of management on a timely basis. The scorecard would be used at board meetings, thus providing a robust process for the board's involvement in strategy.

A full discussion on the case studies can be found in Enterprise Governance - getting the balance right at www.cimaglobal.com/enterprisegovernance

Further work on the CIMA Strategic ScorecardTM can be found in CIMA's discussion paper at www.cimaglobal.com/cimastrategicscorecard.

Gillian Lees is a governance specialist for the Chartered Institute of Management Accountants (CIMA)

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