A la carta

John M Green compares many company charters to comfort food – filling, but lacking nutrition.

Companies have rafts of charters, but how do we judge their effectiveness? The great charter, Magna Carta, gives us some clues. Much of it has survived, ancient rules that are now essential modern rights. No one’s liberty can be taken away except by the lawful judgement of peers, the law of the land or because you’re forever on hold to customer “service”.

And, no one can be imprisoned without credible evidence, although some ex-politicians seem to have twisted that one the other way round.

What’s in your company’s charters and codes? What isn’t?

Even the “great charter” included rules that modern eyes see as outrageous. Like not trusting women. In medieval times, the safest place to commit murder would have been inside a convent. That wasn’t due to the rules of sanctuary, but because Magna Carta declared as worthless any woman’s eyewitness testimony to a murder, except if it was her own husband’s.

High interest rates were a worry back then, but the bigoted solution Magna Carta enshrined not only failed to address the root causes, but made them worse.

If a man died while indebted to a Jew, his estate only had to repay the debt out of whatever was left after handing the widow a fully-staffed fortress on the sunny side of Nottingham, and after loading up the kids with the latest in turbo-charged steeds and homing pigeon credit.

There were clearly two kinds of medieval economists: those who couldn’t count and those who were Counts. So much for the risk/return tradeoff, let alone prejudice.

No board charters or codes of conduct today will have ludicrous or offensive rules like those, but it’s still sensible to review them regularly, as most do.

Yet even if you do that, it won’t be enough.

When a crisis erupts, directors are often shocked to find that, despite the most comprehensive codes and charters, what’s actually been going on inside the company is quite different, if not right across it, then in important pockets.

Most directors prefer to join boards of companies that are known for their culture. Good business plus good culture... it’s a formula for success. But how do you know what the real culture is? Plus, we need to remember that charters and codes are not culture.

Reliance on them alone is risky. Codes can be like comfort food: filling, in that they satisfy governance principles and are communicated widely, yet they can be lacking in nutrition, especially if we discover key managers deriding them as top-down fluff that gets in their way of making money and bonuses.

One of these columns two years ago focused on Barclays PLC and the UK’s Libor inter-bank interest-rate scandal. Up to that scandal, Barclays had boasted loads of charters and a great culture, one so good it helped the bank hold its head high and decline a government bailout during the global financial crisis.

After the scandal, the then outgoing chairman said it had “dealt a devastating blow” to the bank’s reputation.

Barclays was a stunning example of how fine-sounding codes, principles and corporate structures, while important, are not sufficient. Like comfort food.

Following Barclays, this column suggested that boards might consider pushing reputation risk and culture far closer to the top of their corporate risk matrixes, perhaps even as an overarching risk.

That was a relatively uncommon perspective at the time, but a new international survey suggests that a short two years later, it is becoming the norm.

Comparing the Marsh & McLennan/Risk and Insurance Management Society Excellence in Risk Management surveys for 2012 and 2014, we find that brand and reputation have rocketed up the list of most important corporate risks.

Top company management now see brand and reputation as their fourth highest risk (up from a bizarrely low 16th in 2012).

Anecdotally, many boards have been upping their game on this, which may in part explain why the managers surveyed have lifted their perspectives – their boards may have been pushing them.

The external focus on internal culture is also getting hotter. For example, the Australian Prudential Regulatory Authority is setting its own blowtorch on bank and insurer boards, “encouraging” them to get a far deeper understanding of the risk culture throughout their organisations.

Even if you’re not a director of a financial institution, you might find some of their efforts rubbing off on you, partly by choice – wanting to observe and learn from others’ work – plus, eventually, proxy advisers and institutional investors may come asking what you’re doing about culture to protect the company’s reputation and its profitability.

Finally, back to Magna Carta. It’s been with us such a long time that a tourist to Runnymede asked when it was signed. “1215,” answered a guide. “Damn,” groaned the tourist, “I missed it by 20 minutes.”

When we think about codes and culture, what are we missing?