The Governance Problem: How it Started
A look at the root of the governance problem today, in response to a Jan. 24, 2013 Globe and Mail article about Bob Monks by Janet McFarland, “Storming the boardroom: Sound, fury and little else.” (Report on Business section, page B8). Opinions, ideas expressed in this video were formed and influenced by Policy Governance(R) principles. Policy Governance was designed by Dr. John Carver and is in use by boards of all types around the world.
An excellent article appeared in the January 24, 2013 Globe and Mail’s Report on Business. It was by Janet McFarland, “Storming the Boardroom: Sound, fury, and little else.” This article tells us about the frustration and disappointment with the pace or lack of true governance reform felt by shareholder advocate, Bob Monks. He says, “When I hear the word ‘reform’ I want to vomit, because it means we’ve lost the battle of terminology.” He also says he is results oriented and really doesn’t see any material change in corporate governance, despite all the disasters and fiascos we have seen the past dozen or so years.
Bob, I couldn’t agree more.
So, what is wrong with governance today, anyway? I believe it all starts out with a fundamental lack of common understanding around what governance is.
We can see how this problem evolved when we look at the evolution of a typical company, and the roles and relationships that form. Let’s start with the humble business owner. Let’s call him Joe. Joe has an idea and starts a business. He is the business owner, operator, chief bottle washer and everything.
The business grows and Joe decides to hire staff. Now Joe is the business owner and a manager.
Then at some point the business owner/manager decides to get together with an investing partner or two to be able to grow the business. Now the business owner is a partner and probably still a manager as well.
Then as this business gets bigger and bigger, the owners or partners decide it is time to incorporate, which requires forming a board of directors. Naturally, since Joe started this whole thing, he needs to not only be on the board of directors, but it is accepted that he should be the chair of the board, and of course maintain his role as the leader of the operational side of the organization. In other words, Joe must also be the CEO.
This sets up the problem, however. With the legal and fiduciary responsibilities of a board of directors comes the principle that board authority is group authority. No longer do you have a single individual at the top of the heap, but a group of individuals, who exercise authority as a group. And yet, we still have Joe, who founded the business and therefore needs and wants to remain in charge — of both the board and operations. Then even when Joe retires and someone new steps in, somehow the same problematic configuration of having one person as both Chair and CEO seems to stick.
Joe’s two hats create a conflict. How is it going to work when, as CEO, he is accountable to a board, of which he is chair? He will he exercise his board responsibilities, when the scope of his power extends far wider and deeper than that of his fellow board members? Are the other board members simply playing an advisory or supporting role, or are all board members truly governing as a group?
Meanwhile, what appears to be missing or forgotten in this picture? Ah, the owners, or shareholders. Remember when Joe started out? He was the head honcho, because he owned the idea, the product, the business. Now, who knows. If the company went public, or has owners beyond the board of directors, we really need to know and understand that the head honcho, the TRUE head honcho in this whole picture, is the legal ownership group, or the shareholders, whoever they may be. And it is the board of directors that must ensure that the long-terms interests of the company are executed effectively on behalf of the shareholders. THIS is what governance is. Whether you have a singular business owner, a group of partners, or a board of directors acting on behalf of shareholders, one principle remains the same: the ultimate authority in a company or organization starts with ownership. From that premise, the jobs of boards is to govern on behalf of ownership, with all power and authority flowing through the board before it gets to the CEO. This means boards need to engage with their ownership, to translate expectations into written, comprehensive (and concise!) policy, and to monitor policy compliance.
I think that the sooner everyone can agree that authority flows from ownership, to board, to CEO, to staff, and that staff are accountable to the CEO who is accountable to the board who is accountable to the ownership, the sooner we can truly achieve governance reform, and see Bob Monks happy.