Governance: The Foundation for Strategy and Planning

Governance entails the distribution of responsibilities and rights among various stakeholders and defines the procedures and rules for making decisions on organisational affairs.If governance is put in a locked box, in a tall tower, in a remote castle, in a land far away, authority will be exercised in an unchecked manner, those in control are unlikely to be held to account, and the management of resources will remain arbitrary and subjective.

Of late, I have been in a lot of conversations about governance. Conversations which, like the title of a Clint Eastwood western, could be described as the good, the bad, and the ugly.

The Good: those revolving around the AICD Company Directors Course in which governance is deeply meditated and considered essential.
The Bad: conversations with line managers and staff who ask, 'what is governance', but generally seem uninterested in pursuing the topic.
The Ugly: confrontations with senior line managers who 'know' what governance is and think it's something that happens in banks and has little or nothing to do with the business they run or is the sole preserve of the board and C-Suite and not something with which 'junior' staff should trouble themselves.

The inexorable conclusion I am drawing from these many and varied conversations is that governance is much like history or philosophy — it underpins human interactions and yet most people see it, if they see it, as perplexing and not core to organisational processes.

In no small part the responsibility for these bad and ugly conversations fall to me for the simple reason that when challenged on governance, I have not had a decisive and concise explanation which I can rigorously defend. Much less have I had a thesis with which I can go on the offensive and roll out governance frameworks in troubled programs or organisations — until now.

A Brief History of Governance

It was Shakespeare who put into the mouth of Margaret of Anjou:

Is this the fashion in the court of England?
Is this the government of Britain's isle,
And this the royalty of Albion's king?
What shall King Henry be a pupil still
Under the surly Gloucester's governance?

Henry VI, Part 2, Act 1, Scene 3.

In this scene, Shakespeare is using governance in the sense of control or rule. It is from this archaic definition that we get the more contemporary understanding — the action of governing a state or organisation. In the context of this series, I am looking at corporate governance, that is governance in an organisational or business environment. In such a setting, governance retains much of the sentiment it had with the earliest companies (enterprises that existed as separate from their owners).

A noted example of this was the East India Company which had a governance structure recognisable today:

Court of Proprietors: people with voting rights, equivalent to a board of directors / shareholders.
Court of Directors: people tasked with running the company, equivalent to a management team.

During the nineteenth and twentieth centuries, as a growing middle class began to deploy their growing capital in more speculative investments, such as owning shares in companies, it became impossible to bring the ever-growing numbers of 'owners' together for decision making. Perhaps this, more than anything else, led to an increase in the power of directors as owners ceded ever more control to elected boards. In turn, elected directors granted increasing decision-making authority to managers who were becoming more and more specialised.

In an era in which instructions to managers from the board could take weeks or months to arrive, the ceding of authority to 'people on the spot' was not always voluntary.

Combining the Shakespearean notion of governance as rule with the development of company management, and we have an organisational construct of corporate governance as being concerned with rule and administration of an organisation for the benefit of shareholders.

This emphasis on shareholders began to change following the First and Second World Wars, as political movements increasingly sought to reverse the trend of placing governing power in the hands of the few and instead sought to return it to the hands of the many. What this meant for organisations was a widening of the circle of interested parties to include society at large and the idea that organisations enter a 'social contract' with all stakeholders.

This process reframes corporate governance as that which governs the interactions between key stakeholders for the control and direction of the organisation. As Sir Adrian Cadbury put it:

… [corporate governance is] concerned with holding the balance between economic and social goals and between individual and communal goals… The governance framework is there to encourage the efficient use of resources and equally to require accountability for the stewardship of those resources. The aim is to align as nearly as possible the interests of individuals, corporations and society.

Clarke 2007.

A view shared by the ASX Corporate Governance Council (ASXCGC):

[corporate governance is] the framework of rules, relationships, systems and processes within and by which authority is exercised and controlled in corporations. It encompasses the mechanisms by which companies, and those in control, are held to account.

ASXCGC, 2019

Taking governance beyond 'rule', it encompasses seven key elements:

Shareholders / members.
Other stakeholders.
Societal expectations.
Company and statute law.
Self-regulatory codes.
Regulatory bodies.
Royal Commissions.

This reinforces the way governance affects all stakeholders of an organisation because without active engagement with a governance structure, authority will be exercised in an unchecked manner, those in control are unlikely to be held to account, and the management of resources will remain arbitrary and subjective.

Given the wide-ranging implications for governance, and the diverse range of interested parties, it is hopefully clear why all levels of an organisation should be engaged with enacting good governance. It also explains why it becomes a bad or an ugly conversation to classify governance as perplexing and something with which only the board or CEO should concern themselves. This is because to put governance in a locked box, in a tall tower, in a remote castle, in a land far away is equivalent to saying that resource management or staff culture are 'add-ons' to an organisation.

Yet to not relegate governance to a part time aspect of organisational work undertaken by a handful of specialist officers creates its own problems. Namely, how does an organisation address this broader definition of corporate governance? A question that by way of answer requires a plan for the distribution of responsibilities and rights among various stakeholders, and the definition of procedures and rules for making decisions on organisational affairs.

To understand how governance forms the foundations for strategy and planning and, most importantly, for performance to be monitored and objectives achieved, we need to dig into the how of governance with respect to the differences between governing, leading, and managing. For this, see the next article in this series Governance and Performance — out next week.

Good night, and good luck.