A renewed focus on effective governance is gaining traction. Whether in the form of initiatives such as French President Macron’s Paris Peace Forum or BlackRock CEO Larry Fink’s challenge regarding a new model of corporate governance. In each of these instances, the solution proposed to respond to caustic politics and public discord is to restore trust in the core institutions of government, civic society, and business.
Firms demonstrate good governance when they balance the profit motive with responsible management and a customer-centric ethic. This is particularly acute for the banking sector, where misconduct, self-dealing, and financial crime have damaged the reputations not only for individual banks, but for the sector as a whole.
In this article by Starling’s Stephen Scott and Karen Cook, the co-authors argue that effective governance is not only a social good – but it is in fact critical to profitability and perhaps even long-term survival. “Where a firm is seen to ‘cheat’ or to engage in bad-acts, faith in such a firm will weaken. Though typically spoken of in anodyne terms such as brand impairment, reputational or ‘headline’ risk, and loss of ‘good will’ (in accounting-speak), bottom-line impact is demonstrable.” When failures impact a number of firms, the loss of trust can impact entire industries. Even ten years after the Great Financial Crisis, the follow-on effects continue to be felt around the globe.
Leveraging the metaphor of the Four Horsemen of the Apocalypse, the authors describe how failures in governance and a loss of trust impact each of the four key stakeholders of the firm, regulators, investors, customers, and employees. The impact of such failures involve real costs in the form of loss of increased regulatory scrutiny, loss of investment, declining sales, or a failure to attract and retain high-value employees.
The authors conclude by calling for a new trust infrastructure that relies on new standards of governance.
Read the article: Risk Governance and the Politics of Rage
Stephen Scott is the Founder & CEO of Starling. Karen Cook is Professor of Sociology and Director of the Institute for Research in the Social Sciences at Stanford and an Academic Advisor to Starling.