Corporate governance seems to be something CEOs find they need to live with, the necessary evil of getting listed, the cost of running a business in a regulated environment. But does it have to be that way?
I think imposing corporate governance from above only means that those who has to make it work will always see it as someone else's device to keep tabs on what they do. This is just a recipe for failure.
I would like to introduce a different way of looking at corporate governance that would be accepted by all managers and, yet, meets the intention of the concept.
What people think
Ask people what they think of corporate governance and you get two types of responses.
The most common response is "compliance". People think of governance as the procedures and controls to ensure compliance. If that is so, why don't we use the terms compliance and controls? Also, it is not exactly very positive, is it?
The other response tends to limit the scope of corporate governance to minority shareholder protection and the board of directors. The former is really the result of financial scandals that led to losses by minority shareholders, who have no control over how the losses were incurred. This is can be considered the conditioning from media reports, etc.
The latter is more common and arises from the limitation of the listing regulatory framework, which for practical purposes stops at the Board of Directors. It really is not practical, nay, desirable, for any securities commission, agency or board to extend their regulatory requirements to the operational level.
The only exception here is in regulated industries such as financial services. Regulators here tend to ask questions of the senior management that would otherwise stop at the board of directors in other listed entities. Thus, financial services executives tend to have a broader understanding of the scope of governance.
Definitions of Corporate Governance
Is there a standard definition of Corporate Governance? Well, there are many, some more authoritative than others. As with most such pronouncement, the more authoritative it is, the more static and boring the definition. Take a look at the one from OECD below.
“Procedures and processes according to which an organisation is directed and controlled. The corporate governance structure specifies the distribution of rights and responsibilities among the different participants in the organisation – such as the board, managers, shareholders and other stakeholders – and lays down the rules and procedures for decision-making."
Source: OECD web pages
One would think from reading it that corporate governance is mostly about structure and processes.
The one from Cadbury is a little broader, but still static.
"Corporate governance is the system by which companies are directed and controlled. The boards of directors are responsible for the governance of their companies. The shareholder’s role in governance is to appoint the directors and the auditors to satisfy themselves that an appropriate governance structure is in place. The responsibilities of the board include setting the company’s strategic aims, providing the leadership to put them into effect, supervising the management of the business and reporting to shareholders on their stewardship. The board’s actions are subject to laws, regulations and the shareholders in general meeting."
Source: Cadbury report, European Corporate Governance Institute
From publicly available websites, I prefer the one from the Corporate Governance website, maintained by James McRitchie. It focuses on the outcome rather than the methods. It is also dynamic in that it recognise the broad range of stakeholders and the formal & informal tools & devices to achieve that aim.
"Generally, corporate governance refers to the host of legal and non-legal principles and practices affecting control of publicly held business corporations. Most broadly, corporate governance affects not only who controls publicly traded corporations and for what purpose but also the allocation of risks and returns from the firm’s activities among the various participants in the firm, including stockholders and managers as well as creditors, employees, customers, and even communities."
Source: Corpgov.net
Most of these definitions though deal with alignment with shareholders' goals and protection of minority shareholders' investments. Corporate governance from the management's perspective, particularly the CEO's, is normally incidental to shareholders' and the board's perspective.
What I tell CEOs
For me, corporate governance is about how the leadership has a vision, communicates that vision to the organisation at large and ensures that what happens on the ground is in accordance with that vision.
This is grounded in the proposition that leaders makes decisions with a vision in mind, be it a simple operational decision or a foray into a totally new strategy. This vision not only deals with the end-goal of the decision but also the path to achieve that end-goal. Leaders are normally very clear about how they expect their decisions to be executed. This normally varies with the value-system and the risk adversity of the leader.
A good leader will often want to validate the notion that whatever that is happening in reality corresponds with how the leader envisioned it in the first place, and that it is all progressing as planned towards the end-goal. The mechanism to provide this validation is the governance framework.
Now, substitute the word leader with shareholder, all shareholders as a whole, or managers at each level, and you have a concept of corporate governance that could appeal to all levels of the company. From the minority or majority shareholder who want the investment decision to be validated all the way to the operational manager who want some assurance that there is no surprises lurking in the department. They all want to know what is going on, insofar as to it relates to the decision they have made, investment or operational.
Such a concept also applies to different types of governance frameworks. A project governance framework implies that the steering committee and the project sponsor have their respective ideas of what their decisions would mean and how they are to be executed. A process governance framework requires validation that the process is achieving the intention behind the process by assuring that the process design is appropriate for the reality in which it is operating and that the reports generated by the process truly reflects that reality.
Now, wouldn't that appeal to every manager in the organisation.
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