Acting responsibly – recent governance lessons

In California the giant electricity utility PG&E requested bankruptcy protection. In New Zealand a former Prime Minister and her previous colleagues around the Board table of Mainzeal have been fined $36 million – although both sides are appealing that. Also in New Zealand Lime was forced to remove their electric scooters from the streets of Auckland and Christchurch, and failed to get a Wellington license. And Facebook, YouTube (Alphabet) and Twitter allow lies, deliberate deceit and hate to be propagated throughout their platforms.

These are all failures in governance.

Mainzeal

No conjecture required – Mainzeal’s directors were found by the High Court to simply not have done their job, in allowing the company to trade while insolvent. The board failed to combine understanding of their business and the law with action, and failed to protect creditors and shareholders. The company collapsed owing $110 million, and the $36 million fine, partially covered by directors insurance, still leaves creditors well short.

PG&E

PG&E neglected to maintain their decaying transmission network, delaying the maintenance on a 100 year old high transmission line that is strongly suspected to have triggered the 2018 California wildfires. Those wildfires killed 85 people and caused billions in damage, while previous fires likely also triggered by creaking PG&E equipment killed 22 more people.

By underinvesting in basic maintenance and safety PG&E chose short term profits over long term profits. Half of the board and the CEO recently lost their roles, and the company has filed for bankruptcy protection as their liabilities reach into the billions.

It’s also clear the blame with this lies squarely with the board of directors, while the CEO and management team at the helm who failed to act are also liable, but ultimately not as responsible as the board. There will be a lot more consequences all-round.

Lime Scooters

LimeBike, a venture capital backed US company, allowed its New Zealand operation to provide their customers scooters with a known sudden braking problem. These scooters catapulted riders into the street, and, it seems, this was triggered generally at very high speeds when the scooters hit bumps, exacerbating the potential impacts.

The company, knowingly it seems (given the same situation happened in Switzerland much earlier), placed their thousands of riders in danger, and several ended up in hospital.

The missives from the company made it clear that the technical problem was not initially at least definitively solved, and, reading between the lines, that the company did not put the safety of their customers first. It’s hard to see that anything has changed within the company. We, as riders, were deliberately and systematically exposed to harm, and potentially fatal harm at that.

Lime’s responses arguably indicated that the US board of directors (and their investors who have collectively placed over NZ$1 billion into the company) did not understand the seriousness of this inaction. The company lost, temporarily at least, its license to operate in New Zealand. They slowed their momentum, and exposed themselves to considerable liability under Australian and New Zealand Health & Safety laws. Short term gains may lead to very poor short term, let alone long term, outcomes.

As a foreign-controlled I suspect the local team was pushed to prioritise revenue and adoption by their US management team and their board, looking to drive short term numbers to justify the vast ongoing investment. I also suspect the local team just didn’t have the authority and power to make the changes required.

The issue under New Zealand law is that some of the people are “PCBU” – the person conducting a business or undertaking – and are potentially personally liable for their lack of action. I’m not sure what happens if the PCBU resides in the USA, but it may be wise for responsible US based Lime executives to consider avoiding travel to New Zealand. On the other hand we’ve seen far too little actual enforcement of the law in New Zealand.

Social Media

Similarly with the social media platforms – we seem to be fangless in our attempts to slow the stream of hatred and misleading information. The three platforms have accelerated the UK and USA into divisive politics, slowed the reaction to climate change and the hateful attack in Christchurch was a made for Facebook moment. It’s well past time these platforms were regulated here in New Zealand, and we assert our sovereignty. If they don’t play then let’s hit them where they will take notice. We have a continuum of weapons, from taxing their revenue at source, through to cutting their revenue by banning advertising and ultimately making it very difficult for users to find or use their platforms. If they cannot clean house then they need to leave.

The directors of these platforms have allowed this to happen – undermining the viability of the businesses as they sought to grow engagement at any cost. They need to be held to account too.

Some lessons

Directors can’t outsource the responsibility that the Board has, but if they are thorough in their work and diligent in their actions then they will be protected. Here are four lessons we can take from the above case studies.

1: Surface the issues, and dive where required

People do make mistakes and bad things do happen inside businesses – so directors need to foster a safe environment for these issues to be surfaced rapidly and dealt with. When issues do emerge treat the people involved with kind hands, and work together to solve the problem and pout controls in place.

But if material issues are not surfaced the Board is still responsible. So directors also need to deep dive into areas where they see or suspect emerging issues, and to be unafraid to ask the scary questions.

The issues range from the obvious, such as company performance and solvency, to things like data security, content, food and industrial safety (even including staff safety at company events) and accounting treatments.

Directors cover all aspects of the business, from ensuring that strategy and execution are fit for purpose, to monitoring the company culture and behaviour of execs, checking in with end users and customers where appropriate, and much more.

This is not by any means an exhaustive list, and you’d be right to note that the governance responsibilities are well in excess of anyone’s capacity to perform the work. This is why the role is to ensure internal processes (including board processes) deliver the required outcomes rather than to do the work.

2: Disclose if required

If a director sees something materially illegal then they are obliged to act.

Obviously there are a range of illegal behaviours, and being aggressive on expenses is not the same as violence, industry collusion or systemic fraud. One litmus test is to ask whether or not action and/or disclosure would prevent directors being liable for prosecution, as liability as a director stops if you act when you become aware.

If, as a director, you see something materially bad then the disclosure obligation is more normally to the shareholders or other stakeholders, but sometimes external parties such as the IRD need to be informed. It depends on where the impact lies.

Obviously the choice to disclose at all resides with the board as a group, but what if you are alone in your dissent?

Was, for example, someone from the board or management team of PG&E, Lime, Facebook or Mainzeal pounding the table for action? Did any of them act? Or at least resign?

At some extreme level, if a board will not do the right thing, directors and executives can consider whistleblowing or contacting regulators or other authorities independently. However as yet no country, it seems, has solved the reputational downside to this behaviour. Directors will balance their own reputation, and their stakes in the company, before considering action. So it’s critical to have truly ndependent directors who are unafraid of doing the right thing.

While directors and management of the companies may have been dissenting, we did not see any public evidence of whistleblowing. While some individuals may eventually regret that, it’s rare for directors to be prosecuted. It is very hard though to consider hiring directors who were asleep at the wheel for other governance or executive roles.

3: Fix the issues

Thankfully these issues are very rare, but it’s normal for executives and boards to find internal issues and then get them fixed before they become problems.

Lime should have yanked their scooters off the streets, installed the updates and put them out again. They may have lost a day of service per scooter, but they ended up losing far more than that. Mainzeal’s board should have prevented or reacted to certain transactions, and PG&E’s board should have been monitoring a well informed safety management system and investing in maintenance and renewal. The social media companies should have acted years ago to clean up shop – as they proved they can do by removing extremist content in Germany, where it is outlawed.

The board are only the governors, not the doers. But they can require a company to implement policies and control systems to prevent issues from emerging, and if these are not forthcoming then they can appoint individual directors or external advisors to perform forensic work and implement controls.

But ultimately the board has only one real power – intervention by changing the CEO and executive team. Perhaps this needs to be more common.

4: Write it down

Along the way, for your own and everyone else’s protection, my own advice (and I am not your lawyer, nor even a lawyer at all) is to keep things in writing. Make copies of written communication and reports, ensure your own important requests are written, and make contemporaneous notes during or after meetings and calls. As long as you and your colleagues do the right thing then you should be protected. If you are intent on not doing the right thing, as in at least some of the cases above, then the absence of notes is not going to protect you. And if you are simply not able, or are not working hard enough, to be across the issues then consider whether or not a directorship of that complaint is the right role.

Lessons from Wynyard Group

The FMA made that clear in their investigation of the disclosure failures for the Wynyard Group, stating “While minutes were kept of Wynyard board meetings… … they did not contain the level of detail necessary to demonstrate compliance” The FMA went on to state emphatically that directors should take good notes:

“the FMA’s view is that contemporaneous records need to reflect discussions on important matters…

..failure to do so opens up risk that boards will not be able to demonstrate compliance.

…there is a risk that not accurately recording board discussions can be seen as providing directors with the opportunity to rewrite history to suit their purposes at a later point.”

5: Keep asking questions.

Being a director is a responsibility which requires ongoing diligence and improving skill to do well. Directors should be in full command and understanding of not just the core attributes of the business (end users, products, sales and marketing, people) they are governing, but also finance, HR, accounting, legal and safety matters. I would encourage directors to keep asking questions and requesting information until they are comfortable enough to be able to tell when the answers are coherent.