Defining Governance

April 4, 2013

In a previous post, we defined management; this post seeks to achieve a similar definition of governance.

Governance is the act of governing. It is the way rules are set and implemented, and relates to the way decisions are made that define expectations, grant power, and verify the performance of people within the entity being governed.

To distinguish the term governance from government, governance is what a governing body does. It might be the governing body of a geo-political entity (nation-state – typically referred to as the government), a corporate entity (typically the Board of Directors), or another type of organisation. When looking at organisations and corporations (Corporate Governance), the governing body may be the individual that owns an organisation, but more typically is a small group of people at the apex of the organisation’s hierarchy.

Sir Adrian Cadbury (2002) defined the aim of corporate governance as aligning as nearly as possible the interests of individuals, organisations and society. Corporate governance is concerned with holding the balance between economic and social goals and between individual and communal goals. The governance framework is there to encourage the efficient use of resources and equally to require accountability for the stewardship of those resources. It is the system by which business corporations are directed and controlled.

Stewardship is an important governance concept. It includes:
Fealty: A propensity to view the assets at ones command as trust for future generations rather than available for selfish exploitation.
Charity: A willingness to put the interests of others ahead of ones own.
Prudence: A commitment to safeguard the future even as one takes advantage of the present.

The governance framework, set by the governing body, specifies the distribution of rights and responsibilities among different participants in the corporation, such as the board, managers, shareholders and other stakeholders, and spells out the rules and procedures for making decisions on corporate affairs. By doing this, it also provides the structure through which the company objectives are set, and defines the means of attaining those objectives and of monitoring performance.

The Functions of Governance
The governance function has two key aspects; the first is deciding what the organisation should be and how it should function. These governance decisions are communicated to management for implementation and the primary outputs from this part of the governance system are:

  • The strategic objectives of the organisation framed within its mission, values and ethical framework.
  • The policy framework the organisation is expected to operate within.
  • The appointment of key managers to manage the organisation.

These aspects are best developed using a principle-based approach that recognises and encourages entrepreneurial responses from all levels of management.

The second aspect of the governance system is oversight and assurance. The governing body should pro-actively seek assurance from its management that the strategic objectives and policies are being correctly achieved or implemented. The assurance and oversight functions include:

  • Agreeing the organisations current strategic plan (in conjunction with executive management). The strategic plan describes how the strategic objectives will be achieved.
  • Suggesting or approving changes to the strategic plan to respond to changing circumstances.
  • Requiring effective assurance from management that the organisations policy framework is being adhered to.
  • Requiring effective assurance from management that the organisations resources are being used as efficiently as practical in pursuit of its strategic objectives.
  • Communicating the relevant elements of the assurances received from management to appropriate external stakeholders.
  • Assurance to the organisation’s owners the strategy and policies are being adhered to by management and the organisation as a whole.
  • Assurance to a wider stakeholder community (including regulatory authorities) the organisation is operating properly.

The role of management is the mirror image of governance:

  • Providing input to develop the strategic plan
  • Implementing the approved strategic plan within the policy guidelines set by the governing body.
  • Providing assurance to the governing body that the management structure is:
    • Operating ethically and accountably
    • Providing effective stewardship of the resources available to the organisation
  • Providing timely and accurate information on achievements and issues.

Managing the organisation and making the executive level and operational level decisions needed to implement the agreed strategy and run the organisation within the ethical and policy framework set by the governing body are the core skills and responsibility of management.

Governance and sustainability
The key challenge for the governing body is balancing the competing needs of the organisations stakeholders, including but not limited to its owners, employees, suppliers, customers and society at large, so as to align as nearly as possible the interests of each stakeholder, the organisation and ‘society’ in a sustainable way.

Tripple bottom line

The four elements of sustainability are the three depicted above plus time. The current governors of an organisation need to be cognisant of sustaining the organisation into the future and governing so that the organisation can continue as a valuable contributor to the needs of its stakeholders in the medium and long term, as well as the current short term.

The Governance of PPP
Within this overall framework, the governance of project, program and portfolio management (PPP) is simply an integral part of the overall governance process. Whilst there are specific skills and elements associated with governing PPP these are governance requirements, the responsibility of the governing body.

Similarly the management of the organisation’s portfolios, programs and projects at both the overall enterprise level and the operational level is an integral part of the management process. So whilst there are specific skills and elements associated with the overarching management of the PPP domain at the enterprise level, these are management skills, and are the responsibility of the management team. In short, Governors govern, Managers manage.

To access our other papers looking at different aspects of governance see: http://www.mosaicprojects.com.au/PM-Knowledge_Index.html#OrgGov


Governance is seen differently by Directors and Managers

February 10, 2013

A survey undertaken as part of our work developing a paper on ‘project governance’ highlights a distinct difference between the views held by managers and directors. To gather data, we ran a short survey between 23rd January and 9th February 2013 on four closed Linked-In groups; two of the groups were for project management association members, two for company directors. In all cases you had to be a member of the association to be a member of the group ensuring the sample communities were quite distinct.

The survey question was:
Who is responsible for the governance of an organisation? This poll is focused on governing, rather than implementing policy unless you feel implementation of policy is itself a governance function.

The four options included in the survey were:
– The Board of Directors or equivalent:
– The Directors plus Senior Executives:
– The Senior Management group:
– All managers in governance roles eg PCBs: (project control boards)

Whilst the total number of responses were low a significant difference of views emerged between the two communities.

The overwhelming majority of directors, 86% see governance as the exclusive responsibility of the Board of Directors or its equivalent.

Whereas more than 70% of the project managers see ‘governance’ as the responsibility of either ‘The Directors plus Senior Executives’ or ‘The Senior Management group’ and less then 30% agree with the proposition that governance is the exclusive responsibility of the Board of Directors or their equivalent.

Whilst it would be useful to validate these findings with a larger sample, the stark difference between the two communities is consistent with our observations and other anecdotal evidence. The project management community perspective that ‘governance’ is a management function is simply not supported by other managers and directors.

We have been advocating for several years that:
“Governance” is what a “governing body” does. It might be a geo-political entity (nation-state), a corporate entity (business entity), a socio-political entity (chiefdom, tribe, family etc.), or any number of different kinds of governing bodies, but governance is the way rules are set and implemented.
(Source: http://en.wikipedia.org/wiki/Governance)
It is encouraging to see the directors of our businesses have a similar view.

The damage caused by the ‘project management’ communities’ view of governance is set out in a letter-to-the-editor published in this months PM World Journal, see: http://pmworldjournal.net/article/on-the-subject-of-the-january-series-article-enterprise-project-governance-how-to-manage-projects-successfully-across-the-organization-what-is-enterprise-project-governance-by-paul-dinsmore-luiz/

For more papers on this subject see: http://www.mosaicprojects.com.au/PM-Knowledge_Index.html#OrgGov1


ISO 26000, CSR and Stakeholders

January 22, 2013

Numerous studies have consistently shown that organisations that support overt corporate social responsibility (CSR) activities, either by allowing staff to participate in voluntary work or by donating to charities, or 100s of similar options for giving back to the wider community do better than organisations that do not. It is an established fact that organisations that embrace CSR have a better bottom line and more sustained growth, however, what has not been clear from the various studies is why!

Two options regularly canvassed are:

  • Because the organisation is doing well for other reasons it has the capacity to donate some of the surplus it is generating to the wider community whereas organisations that are not doing so well need to conserve all of their resources. Factor in the effect of taxation and great PR is generated at a relatively low net cost.
  • Because the organisation does ‘CSR’ it enhances its reputation and as a consequence becomes a more desirable place to work and therefore attracts better staff at lower costs and is also seen as a better organisation to ‘do business with’ and therefore attracts better long term partners and customers again at a lower cost than other forms of ‘public relations’ and advertising.

Both of these factors have a degree of truth about them and frankly, if an organisation does not seek to maximise any competitive advantage its management are failing in their duties. However, this post is going to suggest these are welcome collateral benefits and the reason CSR is associated with high performance organisations lays much deeper.

We suggest that observable CSR is a measurable symptom of ‘good governance’. The Chartered Institute of Internal Auditors define governance in the following terms:
Governance is about direction, structure, process and control, it also is about the behaviour of the people who own and represent the organisation and the relationship that the organisation has with society. Key elements of good corporate governance therefore include honesty and integrity, transparency and openness, responsibility and accountability.

Consequently, a well governed organisation will generally have a good reputation in the wider community; this is the result of the organisation’s stakeholders giving that organisation credibility and loyalty, trusting that the organisation makes decisions with the good of all stakeholders in mind. It can be summarised as the existence of a: a general attitude towards the organisation reflecting people’s opinions as to whether it is substantially ‘good’ or ‘bad’. And this attitude is connected to and impacts on the behaviour of stakeholders towards the organisation which affects the cost of doing business and ultimately the organisation’s financial performance.

Therefore, if one accepts the concept that the primary purpose of an organisation of any type is to create sustainable value for its stakeholders and that a favourable reputation is a key contributor to the organisation’s ability to create sustainable value. The importance of having a ‘favourable reputation’ becomes apparent, the reputation affects stakeholder perceptions which influence the way they interact with the business – and a favourable reputation reduces the cost of ‘doing business’.

However, whilst a well governed organisation needs, and should seek to nurture this favourable reputation, it is not possible to generate a reputation directly. The organisation’s reputation is created and exists solely within the minds of its stakeholders.

As the diagram below suggests, what is needed and how it is created work in opposite directions!

Governance-Stakeholder-Reputation1

What the organisation needs is a ‘favourable reputation’ because this influences stakeholder perceptions which in turn improve the stakeholder’s interaction with the organisation, particularly as customers or suppliers which has a demonstrated benefit on the cost of doing business. But an organisation cannot arbitrarily decide what its reputation will be.

An organisation’s ‘real reputation’ is not a function of advertising, it is a function of the opinions held by thousands, if not millions of individual stakeholders fed by all of the diverse interactions, communications, social media comments and other exchanges stakeholders have with other stakeholders. Through this process of communication and reflection the perception of a reputation is developed and stored in each individual’s mind. No two perceptions are likely to be exactly the same, but a valuable ‘weight of opinion’ will emerge for any organisation over time. The relevant group of stakeholders important to the business will determine for themselves if the organisation is substantially ‘good’ or ‘bad’. And because the sheer number of stakeholder-to-stakeholder interactions once an opinion is generally ‘held’, it is very difficult to change.

The art of governance is firstly to determine the reputation the organisation is seeking to establish, and then to create the framework within which management decisions and actions will facilitate the organisation’s interaction with its wider stakeholder community, consistent with the organisations communicated objectives.

Authenticity is critical and ‘actions speak louder than words’ – it does not matter how elegant the company policy is regarding its intention to be the organisation of choice, for people to work at, sacking 500 people to protect profits tells everyone:

  1. The organisation places short term profits ahead of people.
  2. The organisations communications are not to be trusted.

The way a valuable reputation is created is through the various actions of the organisation and the way the organisation engages with its wider stakeholder community. Experiencing these interactions create perceptions in the minds of the affected stakeholders about the organisation. These perceptions are reinforced by stakeholder-to-stakeholder communication (consistency helps), and the aggregate ‘weight’ of these perceptions generates the reputation.

The role of CSR within this overall framework is probably less important that the surveys suggest. Most telecommunication companies spend significant amounts on CSR but also have highly complex contracts that frequently end up costing their users substantial sums. Most people if they feel ‘ripped off’ are going to weight their personal pain well ahead of any positives from an observed CSR contribution and tell their friends about their ‘bad’ perception.

However, as already demonstrated, actions really do speak louder than words – most of an organisation’s reputation will be based on the actual experiences of a wide range of stakeholders and what they tell other stakeholders about their experiences and interactions. Starting at Board level with governance policies that focus on all of the key stakeholder constituencies including suppliers, customers, employees and the wider community is a start. Then backing up the policy with effective employment, surveillance and assurance systems to ensure the organisation generally ‘does good’ and treats all of its stakeholders well and you are well on the way. Then from within this base, CSR will tend to emerge naturally and if managed properly becomes the ‘icing on the cake’.

In short, genuine and sustained CSR is a symptom of good governance and a caring organisation that is simply ‘good to do business with’.

Unfortunately, the current focus on CSR will undoubtedly tempt organisations to treat CSR as just another form of advertising expenditure and if enough money is invested it may have a short term effect on the organisation’s reputation – but if it’s not genuine it won’t last.

One resource to help organisations start on the road to a sustainable culture of CSR is ISO 26000: 2010 – Social responsibility.  The Standard helps clarify what social responsibility is, helps businesses and organisations translate principles into effective actions and shares best practices relating to social responsibility. This is achieved by providing guidance on how businesses and organisations can operate in a socially responsible way which is defined as acting in an ethical and transparent way that contributes to the health and welfare of society. Figure 1 provides an overview of ISO 26000.

 

Interestingly, my view that understanding who the organisation’s stakeholders really are and engaging with them effectively is the key to success, is also seen as crucial by the standard developers! For more on stakeholder mapping see: http://www.stakeholdermapping.com

Conclusion

This has grown into a rather long post! But the message is simple: Effective CSR is a welcome symptom of an organisation that understands, and cares about its stakeholders and this type of organisation tends to be more successful than those that don’t!


Governance System Outputs

November 24, 2012

In a number of blog posts and White Papers we have argued that:

  1. Governance and Management are separate systems and have separate functions
  2. Governance is the exclusive responsibility of the ‘governing board’ of the organisation
  3. The three functions within any organisation are:
    • the governance functions that establish the objectives for the organisation;
    • the management functions that direct and organise the work needed to achieve the objectives; and
    • the productive functions performed by workers to create the knowledge or products required to fulfil the objectives.
  4. PPP Governance is an integral part of organisational governance (not something separate)

These systems and functions are discussed in depth in WP1084 – Governance Systems & Management Systems and two linked White Papers on Corporate Governance and PPP Governance.

In my last post I looked at the communication challenges faced by the governing board, this post looks at the unique outputs created by the governance system.

As a starting point for the discussion, if governance and management are different systems, they should have different functions creating different outputs. We believe this is the case.

The functions of management were defined by Henri Fayol (1841 – 1925) in his general theory of business administration as:

  • Forecasting.
  • Planning.
  • Organising.
  • Commanding.
  • Coordinating.
  • Controlling.

Inherent in these functions are decision making and the primary output from management can be defined as information and instructions that have to be communicated to others. The communication is firstly to the workers so they understand what has to be produced, where and when; secondly to the governing body to provide assurance that the right decisions have been made and the right things are being produced in the right ways applying the organisation’s policy framework correctly.

The governance system operates at a higher level and is responsible for governing the organisation to create sustainable success for the organisation’s owners. This is of necessity, a multi-faceted process that requires the careful balancing of different, frequently contradictory, objectives from different stakeholder groups.

The governance function has two key aspects; the first is deciding what the organisation should be and how it should function. These governance decisions are communicated to management for implementation and the primary outputs from this part of the governance system are:

  • The strategic objectives of the organisation framed within its mission, values and ethical framework.
  • The policy framework the organisation is expected to operate within.
  • The appointment of key managers to manage the organisation.

These aspects are best developed using a principle-based approach that recognises and encourages entrepreneurial responses from all levels of management.

The second aspect of the governance system is oversight and assurance. The governing body should pro-actively seek assurance from its management that the strategic objectives and policies are being correctly achieved or implemented. The assurance and oversight functions include:

  • Agreeing the organisations current strategic plan (in conjunction with executive management). The strategic plan describes how the strategic objectives will be achieved.
  • Suggesting or approving changes to the strategic plan to respond to changing circumstances.
  • Requiring effective assurance from management that the organisations policy framework is being adhered to.
  • Requiring effective assurance from management that the organisations resources are being used as efficiently as practical in pursuit of its strategic objectives.
  • Communicating the relevant elements of the assurances received from management to appropriate external stakeholders.
    • Assurance to the organisation’s owners the strategy and policies are being adhered to by management and the organisation as a whole.
    • Assurance to a wider stakeholder community (including regulatory authorities) the organisation is operating properly.

As my previous post suggested, the governance communication challenges are significant! However, by clearly defining the different roles of governance and management the functioning of an organisation will be enhanced, and the communication challenges will be reduced.


Communication in governance

November 20, 2012

The effective governance of an organisation relies on effective communication between the organisation’s ‘governors’ and ‘managers’. If the communication fails, governance fails!

Governance is the exclusive role and responsibility of the governing body, in a commercial corporation this is the board of directors, and is their equivalents in other types of organisation. The role of governance is a subtle balancing of competing interests to optimise the long-term value of the organisation (see more on corporate governance). The outcomes from governance decisions are policies and strategies designed to guide the development of the organisation and balance the interests of its various stakeholder groups.

Management’s role is to implement the strategy within the policy framework defined by the ‘governors’ and to assure the governing body their policies are effective and are being implemented properly to achieve the organisation’s strategic objectives (or highlight issues).

The governance communication loop starts with the governing body communicating its strategy and policy decisions to management and is closed once the governing body receives assurance that this has occurred and is satisfied with the feedback. This process is not a one-off loop; continual adjustments are needed to the strategy, the policy, and their implementation to deal with changes in the environment, learned experience and the actual effects of the work undertaken.

The communication challenge is dealing with shades of opinion and expectation in areas where there are very few empirical measures. Let’s look at one practical policy area to demonstrate the challenge: optimising risk.

The role of the governing body is to develop a policy that defines the optimum risk profile for the projects and programs the organisation intends to undertake. Accepting too little risk leads to stagnation, too much risk may lead to failure. What is needed is a policy that accepts some long term, high risk projects in the expectation of higher rewards, and some low risk lower return projects that keep current operations functioning. The risk policy would also need to consider different classes of risk including safety, reputational and financial risks as a minimum.

Good practice suggests the best approach to governance is principles based rather than rules based so the policy should define the principles that management will apply in the management of risk.
Communication challenge #1 – this policy needs to be meaningful and then communicated to management in a way that can be implemented!

Having understood the policy intent, management then have to create the management systems to implement the policy by developing processes, procedures and guidelines that are capable of effectively delivering the policy objectives and communicate these systems to all levels of the management structure.
Communication challenge #2 – communicating the existence of the systems and way it is to be interpreted and implemented to other levels of management!

Ultimately individual managers (or committees) have to make decisions about specific projects and programs to implement the policy. Some of the decision points include:

  • Deciding which project and programs to select for investment at the portfolio level.
  • Deciding what risks can be accepted, and which risks require either contingencies to be created or the project changed to mitigate the risk at the project oversight level (sponsor or PCB)
  • Deciding what emerging risks need escalation to more senior management, and how quickly, at the project management level.

Communication challenge #3, – communicating the decisions correctly so they are properly implemented.

Each of the specific management decisions made within the policy framework will have an effect. Assurance systems need to be in place to observe the outcomes of these decisions, with two primary objectives, firstly by observing the outcomes identify ways to improve the current practices and enhance the implementation of the current policy. Secondly to feed back to the governing body information on how the current policy is being implemented and suggestions for improvement.
Communication challenge #4 – understanding exactly what is occurring as a result of the management decisions (at all levels – this is a multi-faceted challenge).
Communication challenge #5 – providing effective feedback and recommendations to both senior management and the governing body.

None of these communications are simple. Decisions need to be made about what’s significant and what’s business as usual in an environment where very few of the matters under consideration have simple yes/no, right/wrong answers. An assessment of ‘significant’ depends on the perspective on the observer, not an empirical value. $500 may be significant to one manager $50,000 significant to another.

Given risk is only one facet of governance and similar communication loops are needed for all of the different facets of the governance framework, the magnitude of the communication challenge can begin to be understood. It therefor follows that it is a governance responsibility to ensure these critical communication channels are working effectively, which in turn requires a communication focused strategic intent, appropriate policies and for management to allocate adequate resources to achieve the intent.


New Governance & Management Systems White Paper

September 10, 2012

Our third White Paper focused on governance, defining the differences between management and governance, is now available for downloading. It incorporates the thoughts in our last two major posts on this topic updated with ideas developed during the ISO TC 258 Governance Study Group meeting in Pretoria

Note: these are our thoughts not the ISO Study Groups, although hopefully there will be a fair degree of consensus – to see our full series of post select ‘Governance’ from the Category option or: Click Here.

The new WP 1084 Governance Systems & Management Systems looks at the different but interdependent functions fulfilled by an organisation’s governance system and its management system. (Download WP 1084).

The other two White Papers in this series are:

  • WP 1033 focused on Corporate (or Organisational) Governance (Download WP 1033).
  • WP 1073 that deals with the subset of organisational governance focused on governing Projects, Programs and Portfolios, PPP Governance (Download WP 1073).

From our perspective, the next couple of developments in this space will be internal to the ISO Study Group. The intention of the group is to have its report completed by March 2013 and based on the findings achieve consensus on the way forward, hopefully to develop a formal ISO specification or standard dealing with the important subject of PPP governance.


The Central Role of Stakeholder Management

April 24, 2010

20 years ago, stakeholder management and shareholder/owner management were almost synonymous. In the intervening period, much has changed.

Most enlightened thinkers now place stakeholder management at the centre of effective business operations. The business needs to support, empower and satisfy the people working within the organisation, the general public and customers (now classes as Corporate Social Responsibility or CSR) and the owners of the business. All of these people are stakeholders.

Since the passing of the Sarbanes Oxley Act, organisational governance has become an important focus. For all types of organisation this is directly linked to governing the work of the people engaged in the work of the business; ie, stakeholders.

Since the GFC effective risk management has also become of increasing concern. Risk management is not the foolish attempt to avoid all risk – this is impossible, rather the effective management of risk within the risk tolerance thresholds of key stakeholders including the organisations owners and managers; ie, stakeholders.

Stakeholder Management

As summarised by the diagram above, business operations are intrinsically linked to, and require, effective governance, to meet the expectation of the organisations owners, within acceptable risk parameters to deliver value to society and the organisations clients or customers.

However, whilst stakeholder management is central to all of these processes, effective stakeholder management requires the allocation of scarce management resources to focus on the relationships between the work and the most important stakeholders. At the most fundamental level, the purpose of the Stakeholder Circle® methodology is understand ‘who’s who, and who’s important’ in the stakeholder community surrounding your work.

Once you understand this the effective management of stakeholders becomes possible. However, without the clarity of insight created by the careful analysis of the stakeholder community to determine who is really important the potential for wasted effort is enormous. As with most planning process, the payback from effort expended in analysis, is the reduced incidence of issues and problems as the work proceeds.

Can you afford not to focus some effort on effective stakeholder management?