On the separation of governance and management

The assumption that governance and management should be held separate has been a cornerstone of boardroom practice for decades. Statements like "We can't go there, that's management", and "Is that management or governance?" are commonplace in boardrooms. The assumption, which is based on the agency theory of governance, has dominated governance research as well. But I think the assumption is flawed. Allow me to explain:

Agency theory describes the situation where the board is a proxy for owners who are not involved in the day-to-day affairs of the business. The separation of owners and managers, as described in Fama and Jensen's seminal paper, can lead to conflict because the actions of managers can depart from those required to maximise returns to owners. Structures and control mechanisms can supposedly mitigate the problem of divergent objectives. Much research has been undertaken to understand this, to try to identify the best configuration through which to minimise the problem and optimise company performance. Correlations between observable variables have been produced (independent directors, board size and gender, amongst others), but no consistent improvements in, nor predictions of, company performance or value creation as a result of these mechanisms have been reported.

The dearth of any conclusive evidence to link separation of governance and management with performance should not be a surprise. Structures and controls cannot guarantee effective governance, nor can they assure any future company performance. In fact, an inspection of corporate failure data suggests that the separation of governance and management has been the source of much confusion. The various defensive screens that have been erected by boards in response to failures—including claims of paucity of information; poor implementation of strategy; and, management fraud—expose the shortcomings of the core assumption. Consequently, the question of whether a clear separation between governance and management is the best model through which to achieve the organisation's aims needs to be revisited.

I've been working on this issue for about 18 months now, as a core theme of my doctoral research. My thoughts are starting to take shape, to the extent that a paper I've written is being peer-reviewed for the International Conference on Management Leadership and Governance to be held in Boston, USA in early 2014. A copy of the abstract is available here. If you'd like to provide some feedback, I'd love to hear from you.