Corporate governance—the concept and the practice—has been the subject of much debate over the past two or three decades, especially as researchers, shareholders and the public have sought to make sense of the extent and meaning of the term and the appropriate role of the board.
A cacophony of ideas and understandings have now pervaded our academies and directors' institutes (including that the scope of corporate governance extends well beyond the boardroom to include the whole of the organisation). As a concequence, the appropriate role of the board is not clear. Is it one of oversight and control, or is the pursuit of performance more important? The answer to this question is dependent on one other: What exactly is corporate governance? Many directors have become confused about these questions and, as a result, the appropriate role and contribution of the board.
Thankfully, a straightforward answer is at hand.
The term 'corporate governance' was coined just 56 years ago by Richard Eells, an academic. He used the term to describe "the structure and functioning of the corporate polity" (the board of directors). Sir Adrian Cadbury added that corporate governance is "the means by which companies are directed and controlled". In other words, corporate governance is an overarching term to encapsulate what boards (should) do as corporate goals are pursued. Corporate governance frameworks (such as those proposed by Tricker and Garratt) provide the underlying detail: they describe how the board should steer and guide the company it is responsible for governing.
Directors expecting to make effective contributions in 2017 and beyond would be well-advised to consider this what–how distinction very carefully: a common (and agreed) understanding is crucial if the board is to work harmoniously and decision-making is to be effective.
Henry D. Wolfe
Peter - I could not agree more that boards need a common understanding. As you well know, I think that common understanding should be performance focused or more specifically, boards should define their primary responsibility around ensuring the optimization of capital allocation and the maximization of company performance and shareholder value. That focus is clearly the foundation of the private equity portfolio company governance model and needs to be applied to the public company model.
Thanks Henry, your comment pierces the heart of the matter. Many directors have a view of why the company they govern exists but, sadly, the number of boards with a singular and agreed statement of purpose that they govern to is less than one-in-four in my experience.
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Thoughts on corporate governance, strategy and the craft of board work; our place in the world; and, other things that catch my attention.