Simone Heidema’s take on Good Governance

Interview Simone Heidema by the Royal Actuarial Association

Simone Heidema is highly respected as an authority on governance. As founder and CEO of CPI she connects with executive directors on a daily basis. Her CPI team supports organisations in the design and implementation of finance, risk management and good governance. Heidema is also chairwoman of the Corporate Platform for Good Governance. More laws and regulations don’t lead to better governance. “Everyone agrees to that”, says Simone Heidema. So, what will? “I strongly suggest to pay closer attention to the behaviour of the organisation”.

In an interview for the Royal Actuarial Association Heidema explains her vision. “Questions often refer to legislation. Generally speaking, this is what governance is compared to. However governance isn’t synonymous to laws and regulations, it should be seen separately. Good governance is all about serving the long term interests of the company. An orgnisation is a collection of people, including employees, shareholders, customers and suppliers. It really is that simple.”

“Things tend to go wrong when people lose sight of the long term. For instance, when an organisation is focussed on quarterly figures. Or other interests come into play, such as people’s ego. When everyone is busy attending to his or her own territory and no longer with the company as a whole. Sometimes one of the stakeholders’ interests is served, such as shareholders or the director of a charity foundation.”

According to Heidema good governance becomes a challenge when the company grows in size and with it the stakes get higher. “For an organisation it can be complicated enough to get a clear picture of what lies ahead in the future, how to serve these interests and who are the stakeholders in order of priority. When the number of people increases human pitfalls come into play. For instance, there may be an increasing number of managers who wish to protect their own position, even if it’s not in the best interest of the company. This manager has a good job, with perhaps hundreds of employees below him. This feeds the ego. He won’t let go of it easily.

So what’s the solution?
“Going back to small cell organisations? Well, that’s not the world we live in. Let’s try and look for a solution, given the fact that large, complex organisations exist. Good governance will not work by adding more laws and regulations. Even though everyone agrees, it’s still happening. And on the basis of it, there are some good principles. For instance, you simply need enough meat on the bones, to be able to deal with the risks that you face.” “But at some point all these rules are shoved into models and everyone’s staring at spreadsheets. This results in a false sense of security: ‘If only the spreadsheets add up and we’ve ticked all the boxes, then we’ll be free of all these issues that might topple banks or insurance companies.’.”

“Instead, I strongly suggest to look at an organisation’s behaviour. We must learn that things aren’t covered once it’s on paper, but only when you’ve gained a sense of trust as a person. Increasingly, this is an approach that is taking hold. Just look at a central bank hiring psychologist who don’t sit in a board room with a list of 200 questions, but who simply observe the dynamics.”

Isn’t that a bit vague?
“Not at all. It does require us to really submerge into an organisation. When things go wrong and the board is taken by surprise, often there is a culture that suppresses bad news to rise to the surface. Listed companies feel the pressure of shareholders. Keeping a lid on bad news, to avoid a loss in shareholder value and a loss in bonus. In a culture of fear the board of directors sees dashboard reports, with green lights, that should be red, because when a red light emerges the messenger gets scrutinised. In a culture like that, you can continue to improve on your models and reports as much as you like, but if you don’t address the behaviour and remove it from the organisation, you will continue to run into unpleasant surprises.”

“In other words, when dealing with governance one needs to look closely both at the hard and the soft side. The hard side is: do you have the right reporting and the right people who can take decisions based on these reports? Are their responsibilities clear? Often this isn’t the case. Hard also includes whether someone always takes decisions without countervailing power. Formal governance is looking inside an organisation to see where the risk manager should reside. Who should be his equal? This is all fine. However, these mandates are pointless if the risk officer lacks the necessary competences to challenge, no matter how high in the organisation. It’s also pointless, when historically a culture has developed where the business will always take the decisions and the second line was merely designed for show. Now, this is the soft side of governance. Is the risk officer strong and competent enough to challenge and to be taken seriously? This doesn’t have to be abstract or vague at all and it is exists on all levels.”

When it comes to governance, serving long term interests, organisations need to address both the hard and the soft side. Designing both the hard and the soft side of the organisation ensures having the right people, in the right places taking the decisions. Don’t be fooled. Often people who are incapable don’t leave the organisation when they should, instead they are simply transferred to another department, which doesn’t always solve the issue for the organisation.

CPI supports clients in Europe and Asia on risk, finance and governance from offices in The Netherlands, Shanghai, Hong Kong and Singapore. For more information on how CPI can help your organisation please contact our office at +31 88 10 10 200 or for inquiries from Asia contact Simone Heidema directly via mail or mobile +31 (0) 622 41 65 39.