November 27, 2015 Outsourcing Corporate Governance
“You can delegate or outsource work but you cannot delegate or outsource responsibility.”
Those remarks were made by Andrew Bailey, CEO of the Prudential Regulation Authority (PRA) as he commented on the fine which the PRA has imposed on Raphaels Bank for “potentially putting its safety and soundness at risk by failing to properly manage its outsourcing arrangements.” In essence, the bank outsourced its ATM finance function to another entity, some of whose employees improperly transferred funds, taking steps to conceal their actions.
In imposing the fine, one of the criticisms made by the PRA was that the bank failed to undertake suitable due diligence or enter into suitable written agreements, as a result of which it had ‘inadequate oversight and control over its regulatory capital position.’
It’s a lesson which applies equally to organisations across the business spectrum. Outsourcing is increasingly becoming an intrinsic part of business life. Particularly in the SME sector, businesses are coming to realise that outsourcing functions such as HR, IT or marketing can bring them subject expertise without the need to maintain a permanent employee team. Businesses are also looking towards sharing expertise, combining their skills to offer a joint bid for a project which they would have insufficient resources to undertake on their own.
So for many businesses outsourcing can bring positive benefits, but it also requires business leaders to take reasonable steps to ensure that the venture is well researched and that there is adequate oversight and control on an ongoing basis. Good corporate governance doesn’t stop at the doorway and some of the principles of good governance including risk management and control, responsibility and accountability, apply as much to external relationships as they do to internal processes.
Put simply, you wouldn’t take on an employee without checking their abilities and their references and you wouldn’t leave your people to get on with work without having some measure of oversight in place; so why would you simply hand over responsibility for your organisation to a third party? No matter how well-defined the contract, unless due diligence is undertaken at the outset and there is some measure of ongoing monitoring and review in place, with inadequate oversight you are failing in your corporate governance duties and responsibilities.
Yes good corporate governance begins at home, and yes the corporate governance code encourages organisations to maintain a flexible, efficient and effective management framework within an entrepreneurial environment. But being flexible and promoting an entrepreneurial spirit doesn’t mean abrogating responsibility for the ongoing strength and growth of your business.
