Moving Away from Best Practices

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The public image of a corporation will quite accurately reflect the culture of that body. It follows, then, that good corporate governance has to be in the bones and bloodstream of the organisation since this in turn will be reflected in the culture. To carry the analogy further, in the same way that healthy blood and bones are reflected in the naturally healthy look of a person, so an organisation whose internal functions are healthy will naturally look so from an external perspective.

Corporate cultures and vision

Ernest Butten shortly after he founded the management consultancy Personnel Administration in 1943, issued a document which he called the P.A. Charter. The clear vision behind this document shines through, and was to drive the business forward through his sale of the business into trust for its staff and well through his retirement twenty five years later. “EB’s” presence permeated the company and guided its behaviour for a generation.

This intention and ability to create a vision and turn it into a way of life for the company may be regarded as nothing unusual until one compares a supposed entrepreneur and builder of multinational corporations, Robert Maxwell, whose empire collapsed after he died, with another entrepreneur and business builder, Thomas J Watson, whose creation, International Business Machines, is still a global force to be reckoned with over eighty years after he founded it.

Principles of good corporate governance

From the above examples, we can draw some conclusions and formulate a short set of rules regarding best corporate governance practice. All the “goodies”, to a great degree, abided by these rules. All the “baddies” to a large extent ignored them. The principles underlying these rules are:

  1. ethical approach – culture, society; organisational paradigm
  2. balanced objectives – congruence of goals of all interested parties
  3. each party plays his part – roles of key players: owners/directors/staff
  4. decision-making process in place – reflecting the first three principles and giving due weight to all stakeholders
  5. equal concern for all stakeholders – albeit some have greater weight than others
  6. accountability and transparency – to all stakeholders

Hence, with due respect to Milton Friedman who is quoted as believing that the social responsibility of business begins and ends with increasing profit, we contend that running the business successfully is not simply about market domination and shareholder value.

And best corporate governance practice is not simply about a battle between distant, disloyal institutional shareholders and greedy directors but about the ethos of the organisation and fulfilling its clearly agreed goals.

These goals may be set by the entrepreneur who starts the business, but they are accepted by all parties as being high-minded and in everyone’s interests. This is notwithstanding the fact that some parties have bigger stakes and some benefit more than others. And, of course, different parties want different things from the company. There has to be, therefore, a process of identifying the different needs and, as much as possible, harmonising them. This is the starting point for the smooth running of the business. Once dissonance in the common goal creeps in the danger of the standard of corporate governance deteriorating rises steadily.

Clearly external regulation can only play a limited part in ensuring that such a deep-seated and beneficial culture as that described above exists. Equally clearly, however, the task of ensuring this desirable state and adhering to best corporate governance practice belongs to the various stakeholders, who can and should, through their proper participation, bring this about.

Five Golden Rules

It takes the view that there is an over-riding moral dimension to running a business and that the standard of governance will depend on the moral complexion of the operation. Hence the approach developed is based on the belief that:

the business morality or ethic must permeate the entire operation from top to bottom and embrace all stakeholders best corporate governance practice is an integral part of good management practice also permeating the entire operation, and not an esoteric specialism addressed by lawyers, auditors and sociologists

The principles of this approach are therefore framed in relation to the conventional way of looking at how a business should be properly run.

Our Five Golden Rules of best corporate governance practice are:

  1. Ethics: a clearly ethical basis to the business
  2. Align Business Goals: appropriate goals, arrived at through the creation of a suitable stakeholder decision making model
  3. Strategic management: an effective strategy process which incorporates stakeholder value
  4. Organisation: an organisation suitably structured to effect good corporate governance
  5. Reporting: reporting systems structured to provide transparency and accountability

This approach recognises that the interests of different stakeholders carry different weight, but it does not, by any means, suggest that those with a major interest matter and the rest don’t. On the contrary, best corporate governance practice dictates that all stakeholders should be treated with equal concern and respect.

For obvious reasons, although the methodology we will propose involves taking major stakeholders into greater account when formulating strategy, it is designed to generate all round support because of the fact that every stakeholder, no matter how small, is given the opportunity to express a view, through the continuous monitoring of stakeholder perceptions. It is key to the approach that organisations truly respect the minority interests. Like the spirit of the US constitution, the approach can be said to embrace liberty, equality and community, but like the US economy, it aspires to produce the most powerful and effective result in the world.

Best corporate governance practice = best management practice

The regulatory approach to the subject would regard governance as something on its own, to do with ensuring a balance between the various interested parties in a company’s affairs, or more particularly a way of making sure that the chairman or chief executive is under control, producing transparency in reporting or curbing over-generous remuneration packages.

The essence of success in business is:

  • having a clear and achievable goal
  • having a feasible strategy to achieve it
  • creating an organisation appropriate to deliver
  • having in place a reporting system to guide progress.

There are very many websites and publications advising on how to do this, and of course, this is what is described as good management.

Best corporate governance practice is about achieving the stakeholders’ goal, and delivering success in an ethical way. Hence it follows that it must entail a holistic application of good management.

To demonstrate the totality, and the need for a holistic approach, we present below an illustration showing the pressures on a large organisation.

Pressures on a Company

Pressures on a Company

It is important that a wide perspective is taken when considering corporate governance because we cannot emphasise too strongly our belief that good management practices, as described in the rest of this section of the website, will deliver good corporate governance. Compliance with checklists of regulations and codes, in the setting of bad management or a lack of commitment to good management, will NOT deliver good corporate governance. The longer term consequences of this externally-applied regulatory approach will be a progressive introduction of more and more rules which are held in less and less regard, and which produce less and less effect.

The result benefits neither business nor its customers, and has only served to spawn a growing industry of specialist advisers in corporate governance and lobby groups. It has also failed to prevent more and bigger corporate failures. So while the most of the provisions of the various Codes of Conduct could certainly be considered best corporate governance practice – or at least good corporate governance, if they are imposed externally and not truly bought into by every part of the company and its stakeholders, and monitored effectively, there will always be those who try – and succeed – in hiding from or bending the rules.

As Professor Sir George Bain once said to us, the big advantage of the shareholder model over the stakeholder model in management terms is the simple goal it presents: maximise shareholder value. No such simple target attaches to the stakeholder approach, and yet without a clear goal, management faces an impossible task in trying to do its job properly – what exactly is its job?

The governance, the goals and the strategy of a business must be compatible, and there must be congruence between the expectations of the various interested parties. Clearly, in defining best corporate governance practice, this means that:

  • there is a common view as to the ethic by which the business is conducted
  • the views of all interested parties are taken into account when deciding the goal
  • an appropriate weighting is given to those views to arrive at a conclusion as to how to achieve the greatest good
  • a strategy is formulated to attain the chosen goal which takes account of the likely behaviour of the various interest groups
  • an implementation programme is drawn up which makes the necessary organisational arrangements to fulfil the strategy and to protect the interests of the various stakeholders
  • the implementation programme includes reporting systems which ensure transparency and regular feedback on matters which affect them to the various stakeholders