CORPORATE GOVERNANCE: Flawed logic – A simple division of labour

If predominantly compliance view of governance is accepted as the modus operandi of boards, those assigned the responsibility for governance could be expected to be ambivalent about performance. However, should those assigned the responsibility for governance be striving for exemplary performance, there ought to be fundamental and urgent concern over the commonly stated functions of governance – given they often leave performance and leadership to chance.
There is complete absence of broader contextual process or framework for governance – other than the requisite lists of what directors supposedly do. This absence can be resolved by viewing governance and management as the division of labour: The division of labour between that concerned primarily with governance (as ill defined as that may be) and that of ‘employees’ primarily concerned with management.
The strategic management process provides tool through which exemplary performance is achieved. That no such equivalent exists for governance continues to escape the attention of many involved in the governance debate. Namely, there supposedly exists some second parallel process that boards, not management, follow. Yet, after three decades of governance research and some three centuries of practice, this process is yet to be identified.
The strategic management process is typically depicted as either being stepwise and deliberate or being the interaction between strategic position, strategic choices and strategy in action. Whatever the case, the strategic management process is the only framework through which the functions required to set and meet the organisation’s objectives can be allocated between those assigned the responsibility for management and those assigned the responsibility for governance.
The critical issue that arises from this discussion is the appropriate allocation of functions as opposed to the allocation of individuals to roles.
Strategic management is the process used by an organisation to determine its purpose, formulate its strategy and then relate that strategy to operational and functional management. Therefore, strategic management refers to the entire process by which resources and situations are manipulated, in an environment of uncertainty, to achieve the organisation’s purpose. Managers are most often involved with operational planning and control. However, the emerging model in New Zealand of boards effectively ‘excluding’ management from the strategic debate is, at best, flawed logic.
The five strategic management functions are typically better recognised as series of tasks used to establish the organisation’s direction; scan the environment (external and internal); establish strategy (the identification and analysis of alternate courses of action, and selection); implement the strategy; and, evaluate and control the process.
The first task of strategic management is establishing, or revisiting, the organisation’s direction. An organisation’s direction can be described through some combination of vision or strategic intent. The actual process of formulating organisational direction may, however, be of more importance than formal evidence of the outcome. An organisation’s direction statement should also identify an organisation’s stakeholders – whom the organisation is seeking to serve – as well as the process through which those stakeholders are likely to be served.
The first task of those assigned the responsibility for governance, therefore, must be to determine the organisation’s strategic direction, whom it intends to serve, the minimum level of performance to be achieved, and the ethical stance to be adopted. The identification and setting of strategic direction, then, requires leadership from governance.
Herein lies the first paradox of strategic governance – that of duality. With duality one person has the primary responsibility for the organisation’s management (CEO) at the same time as having the responsibility for chairing the board. Duality is common phenomena of founder-led/entrepreneurial organisations. The majority of successful private sector businesses appear to have benefited from duality at critical stages of their histories.
The downside of the duality paradox is that all too often the CEO is regarded as the organisation’s critical decision maker at the expense of his/her responsibility for governance.
To be fair, with duality there remains significant obfuscation between the tasks undertaken by the person as CEO and those tasks undertaken as the chair of the board. This is not an argument against duality. Far from it. It is simply an observation that the responsibility for strategic governance has been largely misappropriated to the role of management rather than that of the board.
The second task of strategic management is environmental scanning. Invariably the process of analysing the external and internal environments is led and undertaken by management. Yet this pro-cess should also be led by those assigned the responsibility for governance. For it is through the knowledge directors bring to the organisation from their external ties that they are likely to make significant contribution to strategic decision making. The exclusion of directors from this role mitigates the benefits to be had from their contribution to the process.
The third task of strategic management refers to the development, and eventual selection, of strategy. It is about strategic choice. There are numerous tools and techniques available for strategy formulation including stakeholder analysis, the balanced scorecard, strategy as either stretch and leverage or fit, SWOT (heaven forbid), and generic business strategies such as cost and differentiation. The role of the board appears to diminish further throughout the duration of this task, until the point when strategic decisions are made.
While the board must accept full responsibility for the decision – for it is their shareholder’s scarce resources that are being allocated amongst competing alternatives – they are also responsible for the creativity associated with the identification of strategic choices.
In accepting responsibility for the decision the board then absolves management from strategic decision making and provides management with mandate for subsequent operations. The buck stops with the board.
Strategic implementation is the subject of the fourth task, namely, the process of putting strategy into action. This, agree-ably, remains the domain of management.
The fifth, and final, task is the measurement of strategic outcomes through various forms of evaluation and control. These outcomes will include profit, competitive advantage (profit relative to competitors), achievement of triple bottom line performance measures, and strategy. Strategic control provides the organisation with means of correcting errant and ineffective strategy.
Management controls the organisation in an operational sense by comparing planned targets with the outcome. In the absence of executive directors or duality, the governance function may suffer from information asymmetry, reducing the board’s ability to effectively exercise strategic control.
Strategic governance, then, recognises but does not necessarily resolve the conflict between management and governance. Those assigned the responsibility for the organisation’s governance must also address the potential conflicts that are provided by the broader stakeholder group and provide an appropriate means for their input into the governance of the organisation.
The responsibility for strategic governance is accepted by anyone who seeks to influence the purpose of the organisation and the subsequent achievement of that purpose. Sadly, the vast majority of contributions to governance are grounded in compliance-focused view better served by the professions of law and accounting. The process of strategic governance does not supplant the need for compliance,

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