Is this really good governance?

By Malcolm McGready, Ensors Chartered Accountants

Earlier this week I met with one of my clients who operates in the travel and tourism sector. Their business had, unsurprisingly, been adversely affected by Thomas Cook going into administration.

Our discussion covered the wider implication of those involved in the travel and tourism supply chain and then moved onto why it had happened. A large part of that discussion focused on how the business was run.

Many of the businesses I act for locally are owner managed. It’s interesting to contrast their governance model with that of businesses like Thomas Cook. The very nature of an owner managed company means that ownership and management are mostly aligned. The difficulty other businesses can face is that the interests of owners and managers, and indeed other significant stakeholders, are not necessarily aligned.

This is of course where corporate governance comes in. It aims to establish a system by which businesses are directed and controlled. Apart from the shareholder, there are many other stakeholders involved in a business. For example, customers, employees, suppliers, communities and public bodies.

They may have competing interests and a company needs to find a way to treat them fairly. It is for the directors of the business to manage the company and they need to be both accountable and responsible for their actions which need to be discharged in a transparent manner. Their annual reports include several pages dedicated to the high standards of corporate governance that the company’s board of directors’ exercise.

And that brings us back to the Thomas Cook failure and numerous others that spring to mind in the last year or so. Unravelling the failure of these companies can be a complex affair and take a long time to resolve. In the early stages we may see the directors called before a parliamentary committee to explain themselves; often an uncomfortable experience for both the directors and their advisors.

However, the failures keep coming which suggests there is something wrong in the governance of these companies. Not in the way it is beautifully explained in their annual reports, but in the way it is exercised in practice.

The failure of the one company is bad enough. However, the impact on those around it, often smaller businesses and more like the ones I deal with, magnifies the impact of these corporate governance failures many times. It is like throwing a large stone into a pond. The impact on an owner-managed business is more keenly felt as the directors have their own capital at stake.

We can only hope that when the dust settles, and the investigations are complete that those who were responsible are held to account for their actions. Otherwise, good corporate governance is just a notion to which lip service can be paid and what we have seen of late will play out repeatedly putting the livelihoods of many of the stakeholders of these businesses at increased risk.Malcolm McGready is a Partner at Ensors Chartered Accountants. E: malcolm.mcgready@ensors.co.uk T: 01473 220022 or visit ensors.co.uk