On governance

A definition

According to the Corporate Governance Institute, corporate governance is defined as a set of rules, practices and processes used to direct and control an organisation. Boards of directors are the primary force determining corporate governance.

Tangibly this covers:

• Risk management

• Accountability

• Compliance

• Control.

Less tangibly:

• Purpose and direction

• Decision rights and escalation

• Information integrity

• Culture and behaviour

• Board-executive dynamics.

Taking this definition, one can say that the board:

• Defines governance and the CEO enacts it

• Defines the strategic intent and the associated boundaries. The CEO (with the leadership team) fills in the details.

• Grants the CEO the right to modify the strategy.

But that was then

The traditional approach to governance evolved in an era of relative stability and predictable change and worked well in that context. It absorbed the shocks of occasional Black Swans upsetting the steady-state market. However the world has changed. Predictability has given way to uncertainty, complexity and even day-to-day chaos.

Governance, as traditionally practised, is no longer keeping pace with reality.

Unfortunately the standard response is to double down on the traditional approach:

• Closer scrutiny

• Higher guardrails and more of them

• Less trust

• Centralisation of decision rights.

  
  

Anyone who has been thrown to the ground more than once learns an uncomfortable truth: you suffer less injury when you relax into the fall rather than tense against it. It’s counterintuitive. It demands confidence and bravery. It takes an exceptional board to embraces this.

Microsoft, Haier, Netflix and Ørsted get this, governing direction and permission to adapt rather than fixed plans.

A tense time for governance

Increasing disruption gives rise to novel situations for the organisation. Such situations do not have an associated playbook / set of processes and so require an innovative response.

Innovation requires experimentation and the price of experimentation is greater risk taking. Thus failure is a feature, not a fault. Typically novel situations cause board members to shudder, particularly when they become the norm rather than the exception. So even if the CEO recognises that the game is changed, she is forced to play the old game, but in ‘double-down mode’.

This manifests itself in several ways:

• The leadership team resort to extreme cost management to masquerade profitability

• The workforce becomes stressed as they are the primary victims of this performance

• Customers notice the biscuits are smaller or the air stewards lack compassion

• A belief emerges that AI will get the organisation back on an even keel. It won’t.

  
  

Satyam, Carillion, HIH Insurance, Wirecard and Valeant Pharmaceuticals learnt the hard way what happens when compliance-heavy governance masks systemic fragility.

Who governs the governors?

Boards that cling to control and compliance despite what is happening outside the boardroom will drive their organisations into a tailspin. This is a serious issue, not least because the board is ungoverned on a day-to-day basis.

But there is a valuable role for the board if a more contemporary approach to governance is adopted.  A more adaptive boardroom:

• Focuses on intent, boundaries and legitimacy, rather than detailed plans

• Explicitly delegates authority to adapt

• Keeps the curtains drawn.

We are here to help

CEOs have the challenge of being the organisational interface between the needs of the stakeholders and the real-time functioning of the organisation. Consequently they are mentally ‘zooming in and out’ perhaps dozens of time per day. This is cognitively draining. It turns a competent adult into a fractious infant. So it is of no surprise that they do not have the cognitive bandwidth to either sense or make sense of the inbound signals emitted by the environment / market.

The board could be put to good use if they took on the role of sense makers. Even better if they ran scenarios of how the organisation might capitalise on the emergent reality. In this capacity the board is less ‘military police’ and more ‘wise aunt’.

Under pressure

We need to move on from the romantic notion of the CEO as organisational hero. In disruption, that myth becomes a liability, concentrating stress, distorting decision-making,and radiating anxiety into the system. Boards sometimes respond by stepping in as the de facto leadership team, which only compounds the problem.

We need to rethink both corporate governance and organisational leadership. But of the two, governance is the priority. Until boards learn how to govern for adaptiveness rather than control, leadership will remain trapped in a game it can no longer win.