Preparing For The Governance Backlash

1.0 | 31 Mar 2009 | ISACA Summit, Sydney e8 Consulting 2009 |

1

Preparing for the governance backlash

Presented by:

Dr Raymond [email protected]

1.0 | 31 Mar 2009 | Preparing for the governance backlash e8 Consulting 2009 | 2

Tough questions will soon be asked.

•The financial crisis has regulators, governments, and the media focused on economic stimulus.

•However tough questions will soon be asked about what went wrong.

•Ineffective governance will be one of the first targets, and it won’t be just the financial sector that faces increased scrutiny.

2009 Corporate Governance Conference. Toronto 6- 7 May


1991BCCI,

Maxwell, Polly Peck,

Rothwells(1986) Elders, Bond, Tricontinental,

Pyramid, Quintex, State Bank of VIC/SA,

AWA (1992)

A brief history of corporate governance

• Sarbanes-Oxley (2002)• Hampel (1998),Turnbull (1999)

Directors should have responsibility for all aspects of control and a duty to establish a robust system of risk management

• COSO, COCO, King,Bosch (1995)

tough penalties against directors who breach their duties of care, diligence or do not comply with the legislation

• Cadbury (1992) “Directors responsibilities include

safeguarding the assets of the company and preventing and detecting fraud and other irregularities”

Zeebrugge Ferry (1987), Kings Cross Fire(1987),

Lockerbie air disaster (1988)

2001Enron,

Worldcom, Adelphia, Tyco, Qwest, Parmalat,

HIH, One.Tel, Ansett

Greed is Good

1980’s

Reactive – to reassure public


Tough questions will soon be asked What’s wrong with our governance regimes?

•No one doubts effective governance has value 10-12% higher share price (McKinsey 2002) EPS, ROA, one year sales growth http://www.treasury.gov.au/contentitem.asp?

NavId=035&ContentID=1495

•but to paraphrase Warren Buffet “the tide has gone out, and Sarbanes-Oxley for example, looks like it was swimming naked”.

Investor confidence has not increased, management accountability is being called into question and the tens of billions spent by boards for compliance has not stopped or prevented the crisis.

Young (2009) Preparing directors for the governance backlash.

•few governance prescriptions actually improve performance or reduce risk


After GFC: New levels of scrutiny expectedReal Project Failure Rate Exposed

Oversight blind (29%) or nil (16%)

Increasing degrees of negligence

Level of scrutiny (benign economy)

1:5 projects perceived to fail

2:3 projects fail

New levels of scrutiny

• ¾ of mergers and acquisitions never pay off

• 2/3 of IT projects deliver no benefits whatsoever

• most large capital projects fail to live up to expectations

• majority of efforts to enter new markets are abandoned in a few years

• 70% of new manufacturing plants are closed in their first decade

• Management of large-scale expenditures is a fiduciary duty requiring careful oversight.

The results were “tantamount to negligence”.

Deloitte( 2007) What the Board Needs to Know About IT: Phase II Findings

• “A pay structure that rewards origination without regard to investment outcomes is not appropriate”

Michael Larkin, CEO Babcock and Brown (AFR 11 Nov 2008, p 84)


How does that affect me?Governance must add value

• Value post GFC:

Reduce cost,

Improve customer service,

Increase revenue

• An example of not adding value: audits of system X at a major bank

• Steering through major global trends

Shakeout, survival of the fittest (The great depression ahead 2009)

second industrial revolution

new organisational and business models to create the next leap in innovation … elimination of waste through real time production (Natural Capitalism 1999)

Alternative model of production

that can harness human skill, ingenuity, and intelligence more efficiently and effectively than traditional firms Wikinomics (2006)


OK

Som

eN

oF

ail

ROI30%

CurrentPerformance(68% under)

OK

Som

eF

ail

ROI135%

BetterPerformance(43% under)

The value of Project Governance

Reduce cost

36.6m

47.6m

86m-124m

Improve customer service Increase revenue


AccountingSarbox, ASX

COBIT

More strategic value has been destroyed in the past five years as a result of strategic mismanagement and poor execution…than was lost in all of the recent compliance scandals combined Booz Allen 2004

In 2003: Fraud cost companies over $300 billion but performance failures cost companies over $3 trillion

CEO of Bain & Co

What is governance? The real role of the board is to ask the right questions

To ensure management is focussed on above average returns

taking account of risk (Hilmer)

#1 Performance#2 Conformance ValIT


Business processes

ICT Operations

GovernanceSupport

Changed Business Processes

Changed ICT Operations

Evaluate

InitiateDirect & Monitor

The right questionsHB280, AS8016

Investment:benefits or terminate?

Strategy/capability: how much change is required?

Investment & Strategy:Benefits / alignment?

Responsibility: Project Sponsor?

Performance & Behaviour:measures and motivation?

67%->40% 40%

5-23%

33-67%

0-13%

ITIL, COBITProjects

PMBOK, PRINCE2, etc

Conformance & Behaviour: culture for issues to be raised?

??%


Preparing for the governance backlashhave the right information ready before you are asked

Examples from • NSW Agency• VIC Agency

Exercise 5: Evaluate Your Own Project – Governance Checklist (AS8016/HB280) Supporting Tools and Processes

1. Benefits: “keep the end defined”

1-2-3 Are we clear on our outcomes? (or have we lost sight of them?)

1-2-3 Is there a consistent understanding of the outcomes?

1-2-3 If our outcomes have evolved since initiation, has there been a formal acknowledgement of changes?

1-2-3 Are our project/program priorities consistent with our corporate objectives?

Project Proposal and/or Charter

Outcomes logic map

Effective project chartering

Change of Scope

2. Change & Other Risks: “they are all change projects”

1-2-3 Are we sure we understand how much change is required to realise the outcomes?

1-2-3 Have we planned for the entire program of work needed to realise our outcomes?

1-2-3 Have we got the support of all the key stakeholders?

1-2-3 Are we adequately addressing all the other major risks that you are aware of?

Charter and Board ToR

Project Profile Rating Tool

Risk Register

Effective change mgmt, stakeholder mgmt and risk mgmt

3. Sponsor: “the key to success”

1-2-3 Does the Sponsor believe in the outcome and are they committed and passionate about driving through the change?

1-2-3 Does the Sponsor have the necessary authority/influence to drive the change?

1-2-3 Does the Sponsor have the competence/experience to drive the change?

Sponsor ToR

Project Profile Rating Tool

4. Measures: “motivate key stakeholders to focus on outcomes”

1-2-3 Are measures in place to evaluate whether the outcomes (vs outputs) are achieved?

1-2-3 Are the measures sufficiently motivating for the key stakeholders?

Outcomes Logic Map and/or Project Evaluation Strategy

Effective stakeholder management

5. Culture: “are there any warning signs?”

1-2-3 Is there a culture that encourages issues/risks to be raised?

1-2-3 Are decision-makers giving priority to issues/risks that may affect the outcomes?

(1 = lower priority issues (i.e. on time and on budget) get more attention and/or stated objectives are undermined)

Project Status Report

Reporting to DLT

Open, honest Project Sponsor/Board meetings and informal discussions

6. Monitor: “active or passive”

1-2-3 Are questions being asked to ensure the right information is being provided?

1-2-3 Is monitoring independent of the Sponsor and Project Team?

1-2-3 Are projects cancelled or re-scoped when outcomes cannot be realised?

Project Status Report

Open, honest Project Sponsor/Board meetings and informal discussions

Effective project monitoring and evaluation processes


ConclusionPreparing for the governance backlash

•Current governance practices will almost certainly be questioned

•New governance requirements are likely to be introduced Historically new requirements are introduced reactively There is a risk new requirements will not add value

•We should anticipate these developments It takes longer for management to respond than for the board

to ask Project governance is one area worthy of attention We should identify the key areas that need to be governed (eg.

HB280, AS8016) We should check we have effective systems to monitor the key

areas, and introduce new mechanisms where necessary


Questions & Discussion

Governance harmonisation

map

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