Riding the G-Force

When we began this story about the evolution and present day standing of governance we expected debate. What we did not anticipate is that in the holy of holies of corporate governance the Institute of Directors the word has all but been disowned.
“If you look at our literature we don’t use the word governance much. It turns people off,” says the Institute’s chief executive David Newman.
“We’ve moved on from the meaning of the word, but the word is still out there. We would rather have directors out there performing. Corporate governance is probably likely to move into sustainable development of business and triple bottom line reporting among other things.”
In the past the Institute and directors alike were well served by this definition of governance: “The defined interaction between the Board and Management in the pursuit of sustained wealth creation.”
But even that could be challenged. What or who defined, and what kind of interaction? What kind of wealth cultural riches? Community wealth given through the intangibles of service? Over and above those issues lay another question: Was governance really an enfeebling concept given that boards carried ultimate responsibility, but worked hands-off?
Today, governance is like sturdy brick building erected without foreknowledge of the future shocks which would shape business in the 21st century. The search is now on for new governance architecture while retaining the core elements of the old. In many ways the debates mirror the shifts of society undergoing rapid change, much of it technologically driven.
The trouble with governance, even before people had begun to treat it as the unwanted guest at the party, is that it has always meant very different things to different people.
“There is lot of misinterpretation and re-interpretation about what governance is,” says Gael McDonald, professor of business ethics at Auckland’s Unitec. “It’s one of the feel-good factors like integrity. People understand it but what about the practicalities of it? Intuitive understanding of these concepts is first step, but putting it into practice is another one.”
She says that in some organisations the concept and its implementation is well documented and reviewed. Not so in others. McDonald adds that some people believe governance is primarily the domain of the board and involves dealing with issues like conflicts of interest and the board responding to senior management. These and compliance issues do make up governance but the concept has been taken further, according to McDonald.
“Some have taken it beyond that and say it is not only the usual issues of compliance but also moral compliance. We’re about half way towards that level of sophistication of the triple bottom line which includes legal, financial and moral obligations.”
At Massey University, professor and chair of management and international business, Nick van der Walt agrees with her about the way some accept governance without necessarily considering its practicalities. “They are talking about it largely in abstract terms. When you start asking what sort of governance architecture do you see for the 21st century or the next 10 years, it’s very difficult to get an answer,” he says.
This year van der Walt and Sheffield Consulting ran series of seminars for directors on issues relating to governance one of the many ongoing international debates on the subject. In October for example, van der Walt attended the International Conference on Corporate Governance and Direction at Henley, run by the Institute of Governance Effectiveness. The debates there examined the way governance structures were changing for the 21st century.
“This was almost the central theme raised by finance institutions, consultants and academics,” he says. There were more questions than answers and at the end of it van der Walt was still searching for something concrete. So what has led to this upheaval in this once staid and stable area? According to van der Walt the background to them includes fundamental shifts in rapidly changing society, the geography of business and the style in which we do business. On his laptop he displays turn of the (20th century) tri-plane and contrasts it with today’s technological sophistication. For the aircraft, substitute present day governance.
“When you look at governance structures what strikes me is that people are saying we have to change these and they are correct in saying that because essentially the structures we have got reflect the old joint stock companies,” says van der Walt. Like the sometimes bewildering plurality of the new society, all sorts of organisational structures are now emerging and they pose questions for boards.
“Given the new forms how does the board serve its purpose in terms of stewardship, compliance, strategic direction and threats to the business?” he asks.
Even so, some things simply do not change or do they? Take the distinction between governing and managing. Most of the literature is emphatic about the fact that boards are there to govern, not manage. However boards have occasionally reached deep into the operational areas of companies. And van der Walt isn’t as unequivocal on this issue as the research.
“At the end of the day, to grow business in areas where there is significant amount of intellectual property, you sometimes have to reach down into the human capital of the business. So the reach of the board has to be further down than it has been in the past,” he says.
This is anathema to the traditional ?hands off’ style of some boards but it finds support from the IoD’s David Newman.
“The hands-off model which was preached for long time is starting to move. If you take the new economy companies it’s definitely starting to move,” he says. “I think boards are going to have to change in line with the new businesses that are emerging they are going to have to get to know what is happening in their companies far more than in the past.”
Newman sees the clear line between boards and managements beginning to blur and feels it is no bad thing. That may add tension but it is really business as usual. “The important thing is for the tension to be constructive,” he says, adding that part of the challenge was to bring the knowledge in the boardroom into the thinking of the executive.
According to Newman, future boards will know much more about what is going on in the boiler room though they will not manage. They will however work closely with management on developing strategy. Newman and others recognise there is growing awareness in corporate New Zealand that different companies operate under different regimes and have different values. “The board of an SOE is different from commercial model or the board of the Red Cross. The values you are being asked to deliver are all different,” he says. “I think it’s taken directors as group time to realise that the same rules don’t apply to every board.”
Newman believes the process of questioning some fundamentals surrounding present day governance began about two to three years ago after issues like compliance began to be taken as read. It has never really stopped and the issues surrounding structures and governance have now spread to Government. In August, Associate Minister of State Services Margaret Wilson announced that Crown entities were to have clearer governance and accountability arrangements. (Crown entities are not Public Service departments or State-Owned Enterprises which have their own common legislative frameworks.)
The move has parallels to the way rogue and reputable companies alike were reined in after the excesses of the 1980s and 1990s. The public service has no shareholders except the Government and that was part of the problem. Pushed by government monetarist reform, the sector moved far from its original ideals, towards market-le

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