The board and corporate disorder

76

Bothwell P. Nyajeka

LAST week I attended an event in Salima, on the shores of Lake Malawi, where one of the speak­ers reflected on the concept of entropy. In simple layman’s terms, entropy suggests that if things are left unattended, they naturally drift towards disorder, decay and eventually death.

The speaker used a simple but powerful example. A well-maintained swimming pool appears clean and blue. But if left unattended, algae gradually grow, the water turns green and the pool becomes unusable. Disorder does not arrive suddenly. It emerges quietly and progres­sively through neglect.

That discussion made me reflect deeply on how rel­evant the concept of entropy is to organisations and cor­porate boards.

By definition, a company is an open system consisting of interconnected parts, being people, technology, struc­tures and processes. These elements interact with each other and with the external environment through inputs, operational processes and outputs in the form of goods and services. The ultimate objective is to create sustain­able shareholder value.

In my view, the board’s role is fundamentally about preventing organisational entropy.

The board exists to ensure that all parts of the organ­isation function cohesively and effectively to transform resources into sustainable value in an ethical and respon­sible manner. It must ensure that the company’s systems remain aligned, disciplined and responsive to change.

If the board fails in this responsibility, the organisation slowly gravitates towards disorder and chaos.

Corporate entropy manifests itself in many forms. It can be seen through unreliable financial reporting, in­creased fraud, unethical conduct, weak internal controls, deteriorating customer service, declining product quality, and insolvency. It can also be reflected in disengaged em­ployees, weak accountability and an organisation’s fail­ure to innovate or adapt to changing market conditions.

What makes this particularly dangerous is that entro­py in organisations is often gradual and invisible at first. It begins with small failures that go unaddressed, for ex­ample, recurring customer complaints, a delayed recon­ciliation, an unresolved systems weakness, a culture of silence, etc.

One of the most difficult realities of governance is that boards are structurally separated from the operation­al core of the organisation. By design, boards do not sit inside the company’s operating system. The board exer­cises authority largely through information.

What eventually reaches the boardroom has already gone through interpretation, filtering and selection by management. Behind every board pack, CEO report or management presentation lies an operational reality that directors do not observe directly.

Management decides what information is escalated, how it is framed and how risks are explained. Language therefore becomes extremely important. An overly opti­mistic tone can minimise serious risks. Politically correct reporting can soften uncomfortable truths. Problems can be described in ways that appear manageable when they are not.

In many organisations, management acts with integ­rity and professionalism. However, there are instances where executives consciously or unconsciously under­state problems. Sometimes this is done to avoid panic, protect reputations or buy time. At other times, managers may genuinely believe certain issues are not “board-level material” and therefore do not escalate them.

At times, strong company performance can worsen this risk. When an organisation is doing well financially, there is often less urgency to escalate operational con­cerns. Over time, people stop pushing difficult informa­tion upwards because everything appears stable.

Zimbabwe has witnessed several companies, both listed and unlisted, descend into corporate rescue, cu­ratorship or insolvency despite previously presenting seemingly robust financial reports to shareholders. In many of these cases, the reports later produced by corpo­rate rescuers or curators revealed deep operational irreg­ularities, governance weaknesses and delayed escalation of critical issues.

What often emerges from such failures is not neces­sarily the complete absence of information, but rather the failure for important information to reach the board quickly, clearly and honestly enough. By the time the full picture emerged, options had narrowed and the damage had become difficult to reverse.

In some cases, information trapped within informal organisational channels never reached the boardroom at all. Recurring IT failures, unresolved customer com­plaints, excessive product rejects, deteriorating staff mo­rale or unethical practices may be widely known at op­erational level while remaining largely invisible at board level.

The structural risk of adverse information not reach­ing the board can never be fully eliminated. However, it can be managed. Boards must deliberately act to reduce the gap between reported reality and operational reality.

From my experience, there are several practical ways boards can do this.

 Firstly, boards should physically visit op­erational sites at least once a year. Directors should interact directly with heads of depart­ment and operational leaders. One effective ap­proach is to combine these engagements with annual budget reviews, where each departmen­tal head presents both current performance and future plans directly to the board. In one organ­isation I previously worked with, this process was conducted over two days and provided directors with invaluable operational insight beyond the executive summary contained in board papers.

Secondly, heads of human resources, risk management, safety, compliance and internal audit should present directly to their respec­tive board committees. This allows directors to hear issues without relying solely on the CEO’s interpretation and gives committees an oppor­tunity to probe deeper into emerging concerns.

Thirdly, boards should meet external au­ditors separately from management when an­nual audit findings are being presented. Such sessions often create space for more candid discussions around internal controls, reporting quality and unresolved governance concerns.

Fourthly, the board chairperson must delib­erately create psychological safety within the boardroom and across the organisation. CEOs and executives must feel able to escalate un­comfortable issues without fear of punishment or embarrassment. Organisations where people fear raising concerns inevitably become vul­nerable to hidden risks.

Finally, boards must cultivate a culture of curiosity and interrogation. Directors should not only analyse what is included in manage­ment reports they should actively question what may be missing including questioning the assumptions management is making about the environment, customers and supply chains.

In my opinion entropy teaches us that dis­order is the natural state of neglected systems. Sustained performance requires constant atten­tion, renewal and disciplined oversight.

The board’s responsibility is not merely compliance or oversight in the narrow legal sense. Its deeper responsibility is to continu­ously ensure that systems remain aligned, ac­countability is maintained and the company continues adapting to its environment.

Nyajeka is a business consultant and board advisor. He has vast experience as a corpo­rate executive and has sat on various boards in Zimbabwe, Botswana, South Africa and Uganda. He is currently the chairman of ACR Solutions and is also a seasoned trainer and facilitator for the Institute of Directors Zimbabwe. For business consulting, board advisory and executive coaching email him on: bnyajeka@acr4solutions.com