Article:

Governance in the Building Industry

29 April 2017

Businesses of all sizes benefit from strong corporate governance ensuring such outcomes as  better leadership, improved risk management, reduced chance of failure and better long-term financial performance.  

In the building industry, one size does not fit all when it comes to the form governance takes and different approaches may be required. For example, large companies  should have several directors, ideally with at least one independent director.  If the independent person does not wish to be exposed to the risks of being a director, they could be an independent advisor to the board who attends board meetings but does not have decision-making powers and ultimate director responsibility.

For smaller companies the challenge is to distinguish between operational meetings and ‘director’ meetings which provide a forum in which important governance matters can be considered and debated.  An annual retreat is often a good opportunity to start this process but there needs to be follow up during the year so it is not just annual.  Companies that do not have the depth or experience internally should find an external person to facilitate and participate in the meetings.

There is a large number of issues that good governance addresses.  This article focuses on those that are more critical to the building industry.

Culture

An important role of the directors is to review and establish the culture of the organisation.   The culture is set from the top and must be reflected throughout the organisation.  A topical example for the building industry is how to incorporate appropriate attitudes to safety into the culture.  It is a case where actions of those in leadership roles are more important than just words.

Another example is the organisation’s approach to problems and difficulties on projects and the extent to which they are communicated and properly dealt with as compared to an inadequate fix by the employee involved and then “swept under the carpet” in the mistaken hope that it will not recur.  Those who have read a leaky building claim will know that every possible defect and substandard work process can be used to make things appear much worse than they need to have been.

Risks

The board or governance group should regularly consider the risks which the business faces, identifying these and providing guidance to management.  The review should also focus on ensuring that the company has appropriate processes to avoid or identify and manage relevant risks.  This extends to all business risks.  The “she’ll be right” attitude is no longer acceptable.

Identifying risks does not need to be rocket science. The subcontractors and creditors who were hit by the Mainzeal collapse and similar recent collapses knew they were being paid after due date and that payments were getting slower.  There was sufficient concern amongst subbies for an astute person to ask the right questions and find the warning signs. Some potential creditors/suppliers recognised the risks and either refused to supply or exited their contracts and avoided new contracts.  The lesson here is to recognise the possible risks so strategies can then be put in place to either avoid risks or minimise adverse impacts.

Strategies

It is the directors’ responsibility to determine the strategies for the organisation.   It is important that the strategies are clearly defined and carefully considered which will enable staff and management to more effectively implement them.   These strategies should include industry niche, emerging opportunities, capacity, financial, HR, IT, innovation, business development etc.

Reporting

Directors need and rely upon robust reporting to ensure effective and efficient decision-making.  It is important that an organisation has appropriate systems and procedures in place so that reporting is reliable, relevant and timely.  Break downs and delays in internal processes can easily lead to poor information, leading to poor or delayed decision making with adverse consequences for all stake holders in the organisation.  Profit margins are very tight for most industry participants and an out-of-control or mismanaged project can be the death knell of an organisation with disastrous consequences to all staff, creditors and owners.

Succession

The board is vitally concerned about the longevity of the organisation and must apply appropriate time to succession planning.  There should be a succession plan and replacement plan for each key person in an organisation as the loss or the retirement of a key person can have a significant long-term impact. 

Succession is a massive issue for the industry as a high proportion of business owners are approaching the time they wish to sell their business.  Without proper planning, many will have no choice but to close the doors.  In many cases the best purchaser will be an existing senior employee or group of employees who have the necessary knowledge and client relationships to continue the business.  Even if the employees don’t want to buy, an external purchaser will need them so that the business value is maintained. If the senior employees are the same age as the owner, they will be ready to retire at the same time so some very careful long-term planning as well as strategies to develop and retain key staff become critical.

Supervision

While the board is not responsible for management, it is responsible for the oversight of the management functions. This should include a robust analysis of the strengths and weaknesses of the management team and putting in place appropriate support to develop the necessary skills or redeploy or employ people with the appropriate skills.

With appropriate vision and leadership from the board, the management team and staff can be empowered to run the business efficiently to the benefit of all stake holders.