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Taking responsibility for Corporate Governance

It is one of the great ironies of modern life that the subject, Corporate Governance, became popular at about the time the companies were hyping themselves into outer space and major financial institutions were gearing up for the grotesque fiasco of subprime lending. It goes without saying that the regulators in these areas failed spectacularly, despite their own guidelines and forms of governance.

It all goes to show that it is next to impossible to legislate for personal qualities such as integrity, commitment and ability. All the systems, guidelines and procedures in the world are no substitute for people who have the courage of their convictions and who are prepared to take responsibility for their own decisions.

When the owner of a small family business makes a decision that turns out badly, he or she will take the hit immediately on the bottom line; the sanction is instantaneous and automatic. There is no shrugging off of responsibility or passing the buck. These are the real decision-makers in society. They do not have teams of researchers so every decision has to be made in a climate of uncertainty. Mistakes are part of life; the important thing is to admit them and learn from them.

In larger publicly quoted firms the top executives have more ability to conceal mistakes or at least to spread the cost of the errors among the shareholders. The shareholders may impose sanctions on the wayward executives. Think of all the egregious errors made by senior bankers over the last 10 years. Did any heads roll; were there any fines or other sanctions imposed by the regulators?

Sanctions are important for efficiency, honesty and good governance. In the private sector there are some sanctions, but in the public sector there appear to be no mechanisms for ensuring responsible behaviour by Ministers, senior officials or advisers.

In the first place there is no bottom line. Taxpayers' money can be spent with impunity and the Comptroller and Auditor General can only police a tiny fraction of such expenditures. It can be safely assumed that the instances of poor value for money that become public are only a small proportion of the totality. Some years ago there was a legal fiction that the minister was the "corporation sole" and so was ultimately responsible for the decisions emanating from his or her department. There is now more "burden sharing", with senior officials supposedly taking responsibility for the day-to-day running of their departments. But these demarcations are far from clear, and any text, legal or otherwise, is open to different interpretations.
The electorate is very forgiving partly because we don't expect very much from our politicians - apart from some local favours. It is very easy for a minister to claim that he or she did not know about some imminent problem. No one is going to contradict them. Resignation is never even considered. Wonderful phrases have been invented to suggest that resignation would be in fact a sign of weakness. For example, "I don't walk off the pitch in the middle of the game", or "I've never been a quitter".

There is a tendency to laugh at British politicians who resign over matters of principle. . Resignation is not the only option, however. The electorate would be happy if a minister apologised genuinely for a mistake and promised to learn from it. Irish President McAleese once apologised for a verbal gaffe and so genuine was the apology that she rose in the estimation of everyone.

The most serious problem arises when a minister doesn't just make one or two mistakes but when he or she loses control of the department and the agencies under its wing. This situation is dysfunctional and a minister may be duty-bound to resign because there is a good possibility that someone else can do a better job in the national interest. The government as a whole has the responsibility to perform root-and-branch surgery on the dysfunctional department and agencies.

Part of the problem is that many decision-makers are political appointees who have little qualifications for the jobs they are assigned to. This demoralises senior officials and makes it easy for them to switch off. Why should they do the heavy lifting for a political boss who doesn't even understand the basic issues? If he or she doesn't ask probing and challenging questions they are not going to get any answers. Bureaucrats don't raise their game unless they have to. Demoralisation trickles down to all levels of the organisation and a vicious circle sets in.

If people are afraid of responsibility they will run away from decisions at every opportunity. All anticipatory action goes out the window. The system merely reacts to events. In practice this usually means cleaning up after mistakes have been made.

Inability to take decisions usually results in the setting up of endless committees, task forces and State bodies. The epidemic hiring of consultants is further evidence of the ill-fated and costly attempt to outsource decision-making - and the responsibility that goes with it.

The trouble is that if we don't practise decision-making the ability to do so will wither away.

It is hard to avoid the impression that opposition parties are not critical enough of the serial mistakes made by government and of the systemic problems that cause them. Maybe they know deep down that if they were in power they wouldn't be able to do much better.

Michael Casey is a former senior executive with the Irish Central Bank and member of the board of the International Monetary Fund. Article is slightly abridged. Published Dec 29, 2007 The Irish Times