Given recent events, David Duffy (pictured) must be well pleased with his decision a year ago to co-author a book on corporate governance. Public confidence in financial and telecoms companies is at an all-time low, following the report on endemic illegal practices at National Irish Bank and the revelations of overcharging at AIB, Bank of Ireland, Eircom, O2 and Vodafone.
And then there’s ESB, which actually undercharged some of its customers but has still taken flak for announcing that it would chasing this group of customers, many of whom fall into low-income bracket, for back payments.
While none of these Irish examples are on the scale of an Enron or a WorldCom, they have nonetheless put the spotlight on how Irish companies operate and the quality of the internal controls they put in place. This is the area addressed by Duffy’s book – ‘Management of Management – A Practical Guide to Corporate Governance’ (co-authored with a colleague, Justine McCarthy).
Duffy, the founder and managing director of Prospectus Strategy Consultants and lecturer at the Institute of Directors’ Centre for Corporate Governance at UCD, is quick to deny that he is simply jumping on the corporate governance bandwagon. He emphasises that the book, which took a year to write and produce, was based on 10 years’ experience of consulting in the area.
“This book arose out of our experience in helping organisations to improve governance in both public and provide sectors,” he says. “It focuses not on what corporate governance is, but instead on providing practical guidelines to improving it.”
His motivation for writing it was that while the US market is full of books on the topic, there had not been a single reference manual for Irish organisations. The book also had a partly altruistic motivation: the proceeds from its sales will go into the newly established Prospectus Fund, a charity that aims to provide modest levels of finance to start-up businesses.
In addition to building up the Prospectus corporate governance over the past decade, Duffy is also a consultant in wider business strategy and believes there is a synergy between the two areas. “If governance structures are poor either at management team level or board level, it is very hard to develop or implement strategy,” he asserts.
According to Duffy, any corporate governance policy should have three guiding principles: “Transparency – nothing should be hidden; accountability – somebody at a high level should be accountable for everything in an organisation; and having a set of common values – if you have people with different values on the board you’re going to end up with different standards of corporate governance.”
These principles were found to be sorely lacking in Shell earlier this year after the oil giant admitted that it had misled investors by overstating its oil and gas reserves by 22pc. The disclosures led to the resignation of a number of senior executives, a sharp fall in the share price, and a reduction in its credit rating. An independent commission later found a high-level cover-up in the business. One senior executive had even written in an email that he was “sick and tired of lying” about the company’s stated reserves.
It may be one of the hottest issues for businesses today, but is corporate governance having any real impact in boardrooms in this country? Duffy believes that outside of public companies, which are bound by different legal obligations, the application of corporate governance policies within the Irish corporate sector is still “very patchy”.
He also feels that many businesses only wake up to corporate governance issues after something goes wrong in their business and they receive a “jolt”. While unwilling to comment on any specific Irish case, Duffy observes that the boards many Irish businesses are now putting corporate governance structures in place precisely because they don’t want any unwelcome surprises.
One of the interesting consequences of recent scandals is the changing role of the ‘non-exec’, the traditionally low-profile board members who are paid for their strategic advice. Some 30 such individuals were interviewed for the book, which contains a list of questions non-execs should ask of a company before agreeing to accept a position. As non-execs only attend a handful of meetings a year, they have no way of knowing what is going on inside a business and so will want assurances that the proper governance structures are in place. In this sense, they are almost becoming quasi-guardians of propriety, Duffy argues.
“Certainly non-executive directors will be pushing this issue at board meetings much more aggressively than they would have in the past,” he says, noting that is increasingly common for non-executives, perhaps concerned for their reputation, to turn down a position if they have any doubts about the way the company is run.
For all the negative publicity surrounding the behaviour of big business in Ireland, Duffy doubts whether corporate scandals of the nature of Enron or WorldCom could happen here. He puts this down to the fact that whereas corporate governance in the US is rules based, in Ireland it is principles based. “Here, it’s more to do with the spirit and intent of the law as opposed to precisely what it says. I think that’s a very important distinction,” he states.
“Principles mean good practice – is it the right or the wrong thing to do? In the US, there are tomes of legislation and the best lawyers try to find their way around the rules. If you look hard enough you’ll always find a way around it.”
Yet, it is undeniable that Ireland, too, is becoming more highly regulated in recent years, with the establishment of the Office of the Director of Corporate Enforcement, the Company Law Enforcement Act 2001 and the Companies (Auditing and Accounting Act) 2003. Given the array of new legislation, Duffy has some sympathy with company directors who unknowingly find themselves on the wrong side of the law due to their ignorance of legal matters.
“There’s something like 100 reasons why you can go to jail under the Companies Act but I don’t know what they all are – even though we’ve spent a year writing this book!”
The effect of the slew of legislation combined with the high-profile corporate scandals from Enron to Rusnak has pushed awareness of corporate government issues to new heights in Ireland. With the awareness in place, Duffy feels that the required behaviour change will inevitably follow. “We’ve a long way to go but I think it’s happening.”
By Brian Skelly