How our understanding of corporate governance is holding us back
Corporate governance has for a long time felt remote from the real world of wealth creation? Why?
One reason for this sense of unreality, which I discussed last week, is the assumption that companies are the same and need the same corporate governance arrangements.
Yet that is not the only problem with the teaching and the practice of corporate governance. Its foundations need re-excavating.
Here is how the Chartered Corporate Governance Institute of the UK and Ireland -formerly the Institute of Chartered Secretaries and Administrators, defines it –
Corporate governance refers to the way in which companies are governed and to what purpose. It is concerned with practices and procedures for trying to ensure that a company is run in such a way that it achieves its objectives. This could be to maximise the wealth of its owners (the shareholders), subject to various guidelines and constraints and with regard to the other groups with an interest in what the company does. Guidelines and constraints include behaving in an ethical way and in compliance with laws and regulations. From a shareholder’s perspective, corporate governance can be defined as a process for monitoring and control to ensure that management runs the company in the interests of the shareholders.
This definition is reasonably representative of current discussions. It acknowledges that companies may vary in their purposes. It looks beyond shareholders to ‘other groups’, although it coyly fails to mention by name customers, employees, suppliers or community.
Yet the thinking behind it now dated and inadequate. Such a definition does little justice to the realities of wealth creation.
Time and evolution
Companies are not static, timeless institutions. They are – or need to be – dynamic, entrepreneur-initiated, market-driven, fast-learning and adaptive.
A doctor cannot assess a patient without knowing their stage of development and their level of activity: are they secure or unsettled; toddlers or teenagers; emerging adults or in mid-career, or in retirement? Given their age, how dynamic are they? Are they prematurely sinking into the armchair and slippers or still looking for new adventures?
So it is with a company. The discipline of corporate governance has to start with an understanding of corporate trajectory. Who started the company? Why? How did the company evolve as other sources of capital came? Is this a young enterprise which is disrupting markets? Is it a mature enterprise with an established customer base which is finding difficulty in renewing itself?
The neglect of time also leads to a defect which becomes more serious with every passing month. The CGI definition does not suggest that corporate governance might have anything to do with the wellbeing of future generations.
Ownership and spirit
Secondly there is the element of ownership – emotional as well as financial. In Entrusted Ong Boon Hwee and I describe the stewardship spirit of the world’s enduring companies , like Ayala in the Philippines or Tata in India. What is striking with these companies is the way they have evolved their governance and future ownership to reinforce the spirit of the company and its founders. This is about far more than ‘trying to ensure that company is run in such a way that achieves its objectives’ or ‘ensuring that management runs the company in the interest of shareholders’ in words used by the CGI.
Ten years ago in Tomorrow’s Business Forms, Tomorrow’s Company argued that it is the job of a company’s board to keep its business form – its ownership, governance and legal status – under constant review to ensure that it remains at the service of the underlying purpose and values. Handelsbanken is a good example: in 1973 the 150-year-old bank created a staff profit-sharing foundation that has become the banks’ second largest shareholder and gives employees a voice in the boardroom.
The CGI definition nowhere refers to the spirit of the company. Nor does it see values as are inextricably linked to the company’s entrepreneurial success: instead ethics appears as part of the guidelines and constraints along with compliance that the board must cover in its oversight. .
Connected not insular
Thirdly there is in this definition little hint of systemic understanding. It is as if the company were some mediaeval city state, living within its own fortifications and, in normal times, untroubled by wider events. It sees the job of the board, like that of the medieval town council, as being to govern with reasonable fairness as between the merchants and the ordinary townspeople and the poor of the town, while warding off invaders.
A more appropriate image, missing from our governance assumptions, is that a company is a moving part within a large and fluid system. It is part of something bigger, seeking profitability by being a servant of human and societal purposes
Our understanding of corporate governance is holding us back. It needs reframing so that it truly equips a board or an owner to feel the pulse of the company of which they are a steward. Twenty years ago, in a Tomorrow’s Company report entitled Lessons from Enron, I offered this definition. Let’s start from here.
The company is a living system. Employees are its life-blood. Management is the heart which keeps the blood pumping. Strategy is the brain and measurement and communication the central nervous system. Culture is the DNA. Leadership and continued entrepreneurial energy are its soul and spirit. Governance and accountability are its rhythms and disciplines, like exercise, a means of keeping this living organism fit and lean. Unless we understand governance in this wide context, we will continually fail to manage risk, sustain performance and earn trust.