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How governance works in practice !

In corporate governance on April 25, 2017 at 11:28 pm

 

Corporate-Governance

Establishing good corporate governance is a new desired objective for corporates. I am curious to explore how it works in practice. From institutional theory perspective, large institutions should become isomorphic over time. Another contradictory perspective is ‘how institutions differ from each other’. Simply put, there are three types of institutions: shareholder-focused, management-focused and stakeholder focused based on three prominent theories: agency theory (focus on shareholder), managerial hegemony theory (focus on management) and stakeholder theory (focus on stakeholder) respectively. I found issues with all three types of corporate governance during practice. My key question is: What should be the focus of Corporate Governance during practice?

Management-focused

When CEO has control over all management information and he/she reveals the minimal information to board. In such case, CEO has power to influence board decision making.  Enron is an example for this type of leadership. The major issues for Enron bankruptcy were lack of good corporate culture and adherence to poor corporate governance standards. When a high-performance company is not thinking about its employees’ welfare and development rather it conceals the frauds/misconducts in the race of the achievement of targets, the outcomes are different. This type of company often does not believe in investing in risk management. Several projects are delayed and from CEO to workers, all are working hard to deliver projects on time. Workers are paid overtime salaries, executives enjoy high bonuses, celebrations take place, awards are won, agents receive trips to Australia and Thailand and shareholders are provided high dividend. Is this approach good?

Shareholder-focused

In another company without board approval, even small decisions are not taken. All information is revealed to board, practically board is flooded with ambiguous information and clueless about what to do, how to do with a notion to safeguard their own position. Employees are indulged in monotonous work for decades, tired of filling same forms, similar reports and same weekly meetings with boss. Shareholder value maximization is the major agenda. Royal Bank of Scotland (RBS) is a recent example for this where decision for investment in IT is side-lined for years to maximise profits of shareholders in short term. In this situation, board is not concerned for management issues rather they want getting thing done. Executives work as agents for shareholders and their representative board. Delay in decision making or no decision making is one of the challenge of such organisation. To implement a single decision which is a non-priority issue for board may take years in execution. Operation losses, errors and delays become deep rooted in such culture. Adaptation, innovation and change in process and systems become very challenging for implementation.

Stakeholder-focused

In my research on large institutions, I observed that organisational values are deep rooted in large institutions. Plethora of new management approaches have been adopted to provide high value to stakeholders in short term and long term: Total Quality Management, Employee empowerment, Continuous improvement, reengineering, kaizen and team building. Value based management (VBM) provides value to all stakeholders upon which entire metrics can be built. In this method, value of company is determined by its discounted cash flows and companies like to invest capital at returns that exceed its cost of capital. VBM has influenced companies’ major strategic and operational decision making. Now my questions arise: what is the long-term value of communication, informal meetings, networking, and risk management? Fraud could result due to operational negligence and it may cost first year $500. It can easily be ignored by board and management as it is not worth value discussion. Next year, it becomes $5000, it is discussed within management. Third year, it is deeply penetrated and costed $500000. Now board, regulator, media, credit rating agencies, shareholders, customer and you name any other stakeholder suddenly become worried. It shows, values are not only financial in nature rather, values are ethical and professional. It also guides dos and don’ts.

I believe in these three types of organisations that there is misalignment between management and governance. If management performance is simply not evaluated based on the targets given, rather than it should also be based on following ethics, corporate governance code of conduct, good organisational culture, employee and team development, a part of the problems can be reduced. Another approach could be rather than giving annual targets and predicting long term targets, company can set vision for achievement of long-term goals and break down it in yearly targets with greater degree of flexibility or believe in continuous learning. Remember, vision without implementation has no value. Share goal, collaborative working and team efforts can be linked to performance in new era where governance and management will work together to achieve organisational goals. I feel still many questions remain unanswered. Kindly share your thoughts what you feel as good governance during practice.

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