NAB might have been weighed down by excessive corporate governance

John Hewson recently observed in The Australian Financial Review that rather than a lack of information at National Australia Bank there was substantial information but little willingness to accept responsibility.

Another explanation for NAB’s problems is that they are the outcome of over-governance rather than under-governance.

A dominant feature of the claims and counter-claims made by NAB directors and others is the lack of clarity regarding where both intermediate and ultimate responsibility resided.

Whatever else can be gleaned from the brouhaha over which directors should go and which should stay, the NAB affair ought to evoke fresh thoughts over the direction corporate governance is taking.

NAB’s labyrinth of committees – the board per se, its audit committee, risk management, internal control and the like – appears to have created a silo-like mentality in which, as Hewson suggests, information was collected on virtually everything.

But proprietary rights attaching to who knew what and who “owned” the information ensured a form of information asymmetry, fracturing the flow of information to those with the power to make decisions. Arguably, NAB illustrates how many of the governance problems relate more to over-governance than to under-governance.

Of course, that view runs counter to the current Clerp9 proposals and the ASX Corporate Governance Council’s guidelines.

Like the so-called Sarbanes-Oxley masterpiece in the US and the UK’s Combined Code, the Australian push is to layer governance mechanism upon governance mechanism to cover every possible kind of malfeasance and misfeasance.

Coverage of the NAB meltdown illustrates how the focus in most of the governance proposals is on individuals – personalities are tending to cloud the real issues regarding governance structures.

That is fair enough, in so far as once accused of improper practice one has to defend one’s reputation. But the cult of the individual has taken over, as the NAB affair now so vividly illustrates.

If governance proposals were more directed at the overall system of governance, rather than at providing the means of looking over every corporate officer’s shoulder, perhaps information would reach those who are not only empowered to make the decisions but are responsible for them.

We suspect that the layering of corporate governance mechanisms acts against that. Perhaps the NAB affair points to the need to rethink corporate governance reform.

It may be that the current swathe of governance proposals is attempting the impossible – fixing the system with additional layers of rules of the kind that have failed in the past. It could be that the modern corporate structure, complex and global, is ungovernable using the conventional means.

Rather than attack complexity with more complexity, perhaps a better outcome would be to invoke simplicity.

Rather than more rules and more board subcommittees creating information-silos (and producing more barriers between the board and the information they need to make the decisions) there needs to be less filtering and less sanitizing.

The best part of a century ago the educational philosopher Alfred North Whitehead explained that if something is said often enough, everyone begins to believe it.

That seems to describe the present corporate governance push – declarations that more compulsory procedures and more rules must be followed and that more mechanisms have to be in place to purge companies of their management ills.

It is noteworthy that the PwC report on NAB points to a focus on process, documentation and procedures manuals.

The same observation appeared in the HIH Royal Commission report.

What evidence is there that separating the functions of audit committees, internal control overseers, risk management committees, probity committees, remuneration committees, audit appointment committees and the like has achieved anything worthwhile? There isn’t any.

Contrary to the avowed intention, it could be that the path corporate governance reform is taking is making complex modern corporations ungovernable.

Perversely, the NAB affair might be a valuable catalyst for some new thinking on corporate governance.