Boards in the dark

As stories continue to emerge from China this week about GlaxoSmithKline's operations there, it must be an anxious time for the Company Board. Four top Chinese employees have been arrested and are reported as likely to serve long prison sentences for alleged crimes of bribery and price fixing of the company's products - some of which, it is alleged were sold at 10 times their true value. The English head of GSK China, is reported to have left on a one-way ticket in June, and rumours abound about the scale and diverse nature of the alleged fraud. Chinese police claim the total to be over £300m in the last 5 years. Recent annual sales figures for GSK in China have reached £750m.

The alleged scam allegedly involved the use of travel agents to pass money intended for conferences and seminars directly to doctors in return for prescribing GSK products. This type of activity could be difficult to detect as books would balance, and "rewards" in the form of expense claims could easily be made to look legitimate.

How can a Board effectively oversee an operation in another continent, with an unfamiliar culture, where the legal system’s interpretation, responsibility for investigation and ultimate judgement rest with the dominant political grouping? And how can they ensure that their corporate ethos prevails?

A recurring theme in our field, strongly reinforced by our latest research, concerns boards that not only don’t know what is really going on inside the business but don’t even know that they don’t know what is going on – until they discover the gap in their knowledge during a crisis. We call it the 'unknown knowns' problem because it frequently turns out that lots of people internally knew something was amis.  But behavioural and organisational risks have typically kept the board in the dark through an information 'glass ceiling' that prevents unwelcome information moving upwards.  And other behavioural forces can prevent the board’s good intentions from percolating down to the rest of the business.

The GSK board now knows that it may not have known what was really going on in their Chinese business.

The worrying question remains for all boards: to what extent can the board be confident that it knows what is really going on in the business, especially the unwelcome stuff?

Boards need to be aware of vulnerabilities such as these.  It's not easy, but boards need to find and fix these unknown knowns before they cause serious harm.

Mike Bell
Reputability LLP
London
www.reputability.co.uk