Sunday, August 10, 2008

Raising the bar of good governance

Business Times - 09 Mar 2007

The 75% voting system can diminish any underlying uncertainty in working conditions where many dissenting voices can create confusion and hence poor management implementation


THE National Kidney Foundation (NKF) saga is really an eye opener. Given the organisation's high profile as well as the constant spotlight on its fund raising activities, it really illustrates the adage: 'the safest place for a thief to hide is the police station'.

Good governance can be hard to qualify and quantify, whether it be in charitable organisations, commercial conglomerates or even condominium management. Can good governance then be improved by simple measures? One suggestion I have is to raise the bar of consensus on all matters which need approval at committee or board level from the current 'more than 50 per cent' simple majority to 'at least 75 per cent clear majority'.

Closer to home, for me, than NKF, is being on the council of my condominium. When I asked my 13-year-old daughter what percentage voting system we should use to manage a condominium, a 'more than 50 per cent' figure was her prompt reply. On the surface, the '50 per cent' rule of thumb appears to be a straightforward, natural figure.

This in fact has been the practice of our condominium council and likely many others, in coming to decisions requiring approval in all matters whether it be financial, maintenance and enhancement or general policy matters. Fifty per cent is a convenient figure. Anything over this number means, 'majority' decision and issues can be pushed through neatly and quickly. However, a simple majority of anything more than 50 per cent may NOT always be the magic number to determine outcomes which are sometimes contentious and require a careful process of weighing pros and cons.

Obtaining just over a 50 per cent majority indicates that there are close to 50 per cent who may disagree i.e. the committee is divided on the issue and there is therefore much room for discussion.

In Parliament, only a simple majority of votes is required, except for an amendment or change of the Constitution whereby a 2/3 majority of votes are needed. In the case of Members of Parliament, they have already gone through a vigorous selection process, so first level safeguards are already in place.

At the Condominium level, serving on the council is almost akin to doing community service, and there are few contenders vying for the posts. That is, almost anyone who wishes to have a seat on the council often faces no competition and simply gets voted in. Character, competency, and commitment to serve and make good decisions in the best interests of the condominium are assumed, but never actually put to the test at the point of voting.

We are assuming that council members, each with a stake in the same real estate, have similar goals, that is, to manage the condominium in the best way possible for the benefit of all. However, apart from the common thread binding council members i.e. each owning a piece of the real estate, members may have very diverse views, visions and philosophy of how money should be spent or saved. This is indeed a good and healthy situation. It means that there is enough diversity so that issues can be approached from different angles and surfaced for discussion.

Having said that, it is important to remember that running a condominium is NOT like running a business in that there are no 'commercial' decisions relating directly to Profit and Loss.

Making decisions for a condominium requires a conservative (rather than gung ho or risk taking) approach to ensure that the assets are well maintained, funds are well spent, and that enough monies are in the sinking funds for asset replacement. To ensure proper checks and balances, committee members must act first with their heads, then their hearts.

Although the process of condominium management is uncomplicated, it does require careful assessment of pros and cons before proceeding (or not) with a plan of action which often entails expenditure which is forked out ultimately by condominium owners. Careful brain-storming and analysis of issues and projects are needed and hopefully through this, more consistent right judgements made by the Council will prevail.

This essentially implies that we need a 'BAND 1' decision, hence the 75 per cent majority voting recommendation. A 75 per cent majority system has its benefits:

Collective rather than factional decision: The 75 per cent majority voting system forces partisan members to work together. Council members who initiate ideas would have to study and think through the proposal before putting up to the council for deliberation. At present, the set of by-laws that is applicable to the private condominium allows factional interests to thrive. With the simple majority system, there are times where half-thought out issues are pushed through because of the 'group think effect'. On the other hand, a clear 75 per cent mandate would ensure that 10 different ideas coming from 10 council members become synthesised and distilled eventually to one.

Clear mandate for implementation; with the 75 per cent voting system, there will be less flip-flops in the Council decision making process, as decisions made this way are likely to be usually well thought through.

This would make the job of the condominium manager easier as well, since decisions are made with a clear 75 per cent mandate, and the condominium manager can safely take action based on decisions made, and need not spend his time appeasing the other dissenting voices which are in a clear minority.

Hence, the 75 per cent voting system can diminish any underlying uncertainty in working conditions where many dissenting voices can create confusion and hence poor management implementation.

Closing the loop: This will also ensure that only issues that are well trashed out at Council level, are allowed to be tabled at the AGM.

Given that the Singapore residential landscape comprises mainly of high rise buildings which require collective effort to manage, it is timely to step up the level of prudence in its management practices. As many of these collective real estates age, unless there has been prudent management of the sinking fund to service the cost of asset replacement, we may be in danger of pushing this liability of a depleted sinking fund to the next generation of home owners.

Thus, it is time that we need to raise the bar to a 75 per cent voting system at the council level to ensure higher level of prudent governance in our real estates. Should the same rule apply to clubs, charity organisations, non-profit organisations, or even public listed companies? Well, the ever prudent Warren Buffett has essentially two rules. Rule 1: Don't lose capital. Rule 2: Remember Rule 1.

Whilst I don't have the first hand knowledge to make an affirmative statement, I would not be far wrong to state that a higher level of collective decision leads to more prudent management of assets and capital.

Therefore, the answer to greater governance, corporate or otherwise, can be achieved by pushing for more prudence i.e. merely raising the simple majority voting system bar to 75 per cent on all issues presented at Council or Board level. It just does not make business sense to have a paper thin 'simple majority' system that easily allows cracks to develop, which can then lead to exploitation or mismanagement. Good governance through clear majority decisions will go a long way in ensuring solid consensus building and management.

(The writer is a mechanical engineer by training, and a business consultant by profession, with CEO Search & Services )

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