Page 133 - (DK) The Business Book

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MAKING MONEY WORK 13 1
See also: Profit before perks 124–25 ■ Who bears the risk? 138–45 ■ Profit versus Jamsetji Tata
cash flow 152–53 ■ Balancing long- versus short-termism 190–91
Born on March 3, 1839 in
South Gujarat, India, Jamsetji
limited or no understanding of the
Tata might have appeared an
risks their company faced. This
unlikely candidate to be the
suggested a flaw in the ability of the founder of a business that
board to hold executives to account. would grow to be one of the
Most of the time, in most largest conglomerates in the
companies, executives make sound world. Tata followed his
decisions that require minimum father—who had broken the
scrutiny. However, good governance family tradition of being a
ensures that the board is always Brahmin priest—into business
alert—so it will be fully aware of at 14 and soon showed
what is happening when a mistake potential, graduating from
is made. Such a mistake might be Elphinstone College in
Companies that bury their heads related to strategy (an overpriced Mumbai in 1858. After
in the sand—like the proverbial ostrich— takeover bid, for example), or to working for his father, Tata
may be reluctant to be held accountable the ethics of a particular situation. took on his first enterprise—a
for actions and decisions, with damaging Independently minded nonexecutive cotton mill—in 1868. One of
consequences for business ethics. his dreams was to found a
directors should be in a prime
steelworks, and although this
position to question, for example, business aim would not be
of the business and its owners— whether the company is right to achieved in his lifetime, Tata
the shareholders. Nonexecutive be using very low-cost suppliers, Iron and Steel Company was
directors have an important role or whether a contract has been set up in 1907 by his son
to play in corporate governance: won using questionable means. Dorabji. The steel industry
they are not company employees went on to be the foundation
and should be able to quiz When things go wrong for Tata Group’s global success.
executives with impunity. The importance of good governance One of Jamsetji Tata’s
was made clear in the case of overriding principles was
Board-level scrutiny Japan’s mighty Olympus camera fairness, which permeated
his entire business approach.
In 2011, consultants McKinsey & business in 2011. Newly appointed
In terms of accountability, his
Company published findings from Chief Executive Michael Woodford
vision was simple: “We started
a survey of 1,597 board directors, found that a $1.7 billion cover-up
on sound and straightforward
providing fascinating insights into of losses had been made when
business principles, considering
the proceedings of board meetings. acquiring other companies. The
the interests of the
The survey showed that in Asia, Olympus directors had hidden shareholders as our own.”
no more than a third of a board’s these losses from the published
meeting time was spent scrutinizing accounts and therefore from public
management actions and decisions; scrutiny. The board responded
far longer was spent on strategic by firing Woodford. Only after a
planning. Although this sounded successful campaign by Woodford
sensible, it suggested that did the Japanese authorities charge

accountability and governance key Olympus directors with fraud.
Accountability breeds
received less time. By contrast, in Eventually the whole board
response-ability.
North America nearly two-thirds of resigned. The case demonstrated Stephen R. Covey
board time was spent on scrutiny. how ineffective Olympus’s
US management consultant (1932–2012)
More surprisingly, the same nonexecutive directors had been
sample showed a lack of satisfaction in holding the board to account,
with fellow board members. and how important good governance
Directors thought that more than and accountability are to the
30 percent of their peers had well-being of every company. ■