Get emotions and politics out of your decisions
CORPORATE GOVERNANCE
The Sarbanes-Oxley Act, AKA SOX, is a famous US American law, enacted July 2002. Earlier proposals with the same intentions died in the American senate. When the Democratic senator Sarbanes and the republican senator Oxley combined their respective proposals and the corporate world was shaken by the Enron and WorldCom scandals, the momentum was there and the Sarbanes-Oxley act was born. The ambition was to protect the shareholders of wrong general and more specifically, financial, information by controlling the disclosure of information to the public and by strengthening the internal controls and financial reporting.
It was the American side of a wave through developed countries, striving for more focus on control and transparency for stakeholders (and shareholders in the first place) of companies. In Belgium the Commission Corporate Governance was kicked off in 2004. In the Netherlands, a similar commission was initiated in March 2003, called after the minister Tabaksblat. It was not by accident, in March 2003, the scandal of the Dutch company Royal Ahold was called the European Enron. In Germany they anticipated. The ‘Regierungskommission Deutscher Corporate Governance Kodex’ dates from September 2001.
In the meantime (autumn 2016), corporate governance has become a strong foundation of corporate world. And the notion is also used in a formal way in companies that are not quoted on the stock market. Even smaller companies and non-profit organizations do publish their corporate governance charter to prove they’re transparent, reliable and to emphasize the focus on a variety of stakeholders as alternative for the neoliberal profit focus. Corporate social responsibility, the ecological footprint, control of the executive management, all things we do meet regularly in all kind of organizations, public, private, small, big, profit and non-profit.
At the outset the emphasis of Corporate Governance was with the relationship between the owners, the board of directors and the executive management, responsible for the daily operations. Clear directives on the decisions power, the remuneration and on control mechanisms (through audit committees) were (and still are) supposed to bring transparency and reliability in an efficient way.
What is not as dispersed yet, is the extended application of the notion (corporate) governance to strengthen the effectiveness of an organization. It’s worth it though to extend the notion ‘governance’ and to apply it to organize and direct the relations between different actors in an organization on all levels and not exclusively between shareholders and executive management.
What’s wrong about management
Nothing! Nothing is wrong about management. But corporate governance (the extended form) will help management. A metaphor to distinct governance and management and to outline the interaction . Let’s compare governance in the second, extended, meaning of the notion as the traffic rules. If the light is red, you have to stop, you have to drive at the right side of the road (at least in the US and on the European continent). Management, on the other hand, is driving the car. You decide yourself to go the right or to the left, but you will stay at the right side of the road. The traffic light is red, you just stop.
Thanks to the governance applied, the management can focus on the choice to go to the left or to the right. The governance helps to mitigate the risks and to stay aligned with other actors in the traffic. The alternative is ad hoc management, based on so-called not-formalized experience, but too often basis instinct, gut-feel-based. Every move depends on an ad hoc decision, every day again, in all circumstances, ad hoc actions and reactions are the base of strategic, or operational decisions. Unfortunately, common sense is not good enough. Ad hoc management is the root cause of politics and emotions in an organization. It’s the cultivation of exhausting, emotional management, everlasting discussions, often on the ‘how’(do we ride at the right or the left side of the road?) instead of the ‘what’(do we drive to the right or to the left?). It’s the ‘what’ though in the first instance that has to distinct you on the market from your competitors. It’s the ‘what’ that undersets the results of the organization. The ‘what’ is about effectiveness. Management decides to go to the right, or to the left. That will make the difference. A good governance model will help the management to waste too much time on the how. The governance, ‘drive at the right side of the road’, ‘stop for the red traffic light’ will minimize risks and improve efficiency … subject to an adapted governance design and a pragmatic application.
A PURELY hypothetical story
The fall of the leaves often is the trigger for the executive management to organize a meeting, off-premise in order to avoid being distracted by the operational fire-fighting. The outcome is a slide-pack, sometimes enriched with a spreadsheet with pro forma figures on the P&L and the balance sheet. After the white smoke, the middle management may digest the slide pack and confirm their loyalty to the ideas, communicated by top management. And on the 1st of January an improvisation show starts to get done what was decided. Without a reality check of the ideas, with a lack of resources, without an idea on the ‘how’. The management decided on the ‘what’, which is their duty, but the ‘how’ is missing. Which are the priorities? What comes first? How to allocate the limited resources to the longlist of initiatives and ideas? What with the idea, the CEO pops up with in March, as expression of his spring energy, although the idea doesn’t fit with what came out of the autumn session? What with the competitor who’s launching an aggressive campaign at the beginning of the summer to conquer market share? All that was not foreseen in the slide-pack (impossible indeed)?!
The management is not blind, neither stupid. The initiative of the CEO has been initiated in the meantime, a project has been launched because … it came down from the CEO. But another project, that was on the strategic list was sacrificed to free up the required resources. Not that it was a formalized decision to sacrifice that particular project, it did just happen.
And what with the threatening market shift? A first meeting of the executive management in the beginning of May analyses the challenge and decides to react. Top priority! A second meeting, one week later, discussed the ‘how’, how to counter the competitor? Another two weeks later, in the beginning of June, the first sunny days refresh the nature and a number of ideas are put on paper. But top management is aware of the problems the execution will cause. At the end of June they reflect on how the middle management has to be supported to get things done. Other projects, started at the first of January as part of the strategic plan are postponed, do have delays, budget overruns. The CIO complains about the limited resources for too much development. The COO underlines the maximum stretch of man and machines. The sales director, reporting to the CEO, complains about the lack of ammunition to defend his market.
The middle management executes. Initiatives are stopped, delayed or don’t start at all, the initiative of the CEO survives, the coherence of all initiatives progressively disappears into the turmoil of the fire-fighting. Ideas are executed partially. Frustrations, discussions, political maneuvers, wasted time and resources ….
THE ELITE COMPANY
A governance model would not hinder the competitor to attack the market. A governance model would not enrich the insight of the management in the market shift, would not help define the required reactions facing the competition. But a good governance would definitely accelerate the reaction on the external circumstances. A good governance would help the organization to execute the decision of the top management. It would streamline the decision of the top-management with all other decisions, initiatives, actions … within the organization. It would allocate resources in an (sub-)optimal way. It would mitigate risks, improve the quality of execution and allow top-management to test the decisions made.
As an elite solider is drilled to act without thinking, allowing him to stay focused on his objectives, a company with a strong governance, as we defined the notions supra, would act and react on internal and external events, drilled, without losing focus on the final objectives, handling in an almost automatic way. Special forces are trained, by repeating specific attitudes or habits (governance) to make them ‘natural’. When under fire, they don’t have to think any more on the ‘how’, the endless repetition during training directs their combat behavior. They can focus on the ‘what’. It’s exactly the same in an organization. Self-evident behavior for the ‘how’ and the brains, creativity and inventiveness fully focused on the ‘what’.
Governance will streamline the decision making process, it will improve the quality of the decisions and the efficiency of implementation, simply because it helps an organization neutralizing emotions and politics.