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This chapter is from the book

This chapter is from the book

Corporate Governance: An Evolving Concept

In the wake of the previously unthinkable business debacles that marred the early days of this century, everyone seems to acknowledge the need for corporate governance. But what is corporate governance, precisely? Specifically, who performs it, to what end, and by what means? At times there seem to be as many answers to these questions on the nature of corporate governance as there are people talking about it. As shown in Table 19.1 and outlined in the paragraphs that follow, while the end game of corporate governance has not changed, who performs it and by what means has evolved considerably from traditional concepts.

Table 19.1 Toward a New Concept of Corporate Governance: The CPR Framework

Corporate Governance

Performer

End

Means

The traditional concept

The board, top management, financial auditors

Sustainable financial results

Avoidance of realization of risks to financial results through control

The CPR framework

The board, all management, a variety of auditors, all staff, external entities

Sustainable financial results

Managing and leading for results in three dimensions: CPR for the four assets any business must govern: infrastructure, clients and external stakeholders, internal people and process, value creation


Corporate Governance: Unchanging End, Changing Means

Historically, the end game of corporate governance has been sustained financial results by means of a focus on financial management, so much so that in the recent past, corporate governance was virtually synonymous with the measuring, monitoring, and reporting of the financial condition of the enterprise. While focus on sustained financial results is an appropriate and timeless end, the landscape upon which business is conducted has changed such that the means to achieving that aim must change in a number of important ways. The paragraphs that follow outline how the business landscape has changed and how the means of governance must change to fit that landscape.

Today’s organizations are complex, distributed, networked entities in a complex, distributed, networked marketplace. In the past, it might have been possible for a single person or small group of people to "get the whole system in mind" and exercise governance. This is less and less feasible and is impossible in some cases. The impact is that who performs corporate governance must change. In the traditional view, corporate governance was the responsibility of the board and its immediate delegates (top management and financial auditors), and the focus was financial. In today’s complex organizations, where the corporation’s "value constellation" is made up of a constantly changing set of entities (some outside of the corporation’s direct control), governance activity must be extended both down into and outside of the organization to include an expanded role for internal staff and external entities. In addition, as IT and security have emerged as significant risk areas to the business in addition to financial practices, IT and security auditors must be added to the mix.

The networked nature of today’s businesses and marketplace means aspects beyond financial ones can have an immediate and lasting impact on the organization. The result is that the scope of key performance indicators (KPIs) that must be managed to achieve sustained financial results must be expanded beyond the financials. About a decade ago, Kaplan and Norton (1996) highlighted the fact that focusing on financial performance alone was not enough to ensure sustainable results. Kaplan and Norton dramatically extended the factors to be considered in corporate governance, recommending a balanced scorecard of governance dimensions: financial performance, business process, customer fulfillment, and learning and growth (Figure 19.1).

Figure 19.1

Figure 19.1 The Balanced Scorecard.

Weill and Ross (2004) highlight the object of governance as six key assets to be managed:

  • Human

  • Financial

  • Physical

  • IP

  • Information and IT

  • Relationship

Both the Balanced Scorecard and Weill and Ross’s work are certainly contributions to the industry and useful tools to be included in any governance framework. These frameworks are working to answer the question, What are the principal assets of a firm that any business must mind in order to thrive? Pultorak (2001) attempts to update the answer to this question in the form of the Technical and Operational Architecture (TOA) dashboard, which is shown in Figure 19.2. The TOA dashboard is a technical and organizational architecture dashboard because it encompasses both the technical (infrastructure) and the organizational (clients and external stakeholders, internal people and process, value creation) architecture that all firms must have to succeed.

Figure 19.2

Figure 19.2 TOA: Technical and organizational architecture. The four assets any business must govern.
Source: Adapted from Pultorak, D., "Yes We Can Do It—And This Is What It Will Cost." Presentation to the itSMF Annual Conference, 2001, Brighton, UK.

The TOA dashboard is intended to capture the four assets—infrastructure, clients, people and process, and value creation—that any business must manage, whether it is a bakery, a mid-market manufacturing firm, or a Fortune 500 financial services company. All businesses must have a solid infrastructure as a foundation for doing business, with high enough levels of availability given the cost required for further levels of availability. They must serve their customers in ways that make customers want to come back. They must ensure relationships with external stakeholders are maintained in a manner that enables rather than disables the business, because the organization’s reputation is often its most valuable asset, the most easily lost and the most difficult to regain. They must take care of the people who serve the customer, including suppliers, and ensure that business processes are optimized. Lastly, they must ensure the value creation capability of the firm is maintained and enhanced so that the firm has the basis for driving toward business value and financial performance. The TOA dashboard in combination with the CPR framework, outlined later in the chapter, are intended to form the bones of a sound governance framework that can be used across the corporation.

In the current business landscape of highly networked enterprises in a highly networked marketplace, normal operating conditions include a relative frequency and variability of demands (opportunities and threats) that are high and increasing. In this climate, the scope of mechanisms for achieving sustained financial results must be extended beyond merely controlling for business risk to driving toward business opportunity. While some see risk management as including understanding and managing both negative and positive risks (positive risks being opportunities), many do not. Controlling risk is an appropriate focus, and the need for such focus is clearly increasing, but today’s complex organizations may not be able to achieve sustainable results if driven solely by the avoidance of risk. Achieving sustainable results requires more than just "avoiding pain" (e.g., controlling, directing, and managing to avoid breakdowns, risks, and negative consequences); it requires "moving toward gain" (e.g., supporting and enabling positive performance, and appropriate risk-taking.) As such, a governance framework must provide a mechanism for both seeking gain (maximizing value) and avoiding pain (managing risk). Control is but one of many means to the end of sustainable results.

The business landscape of highly networked firms in a highly networked market means the number of stakeholders relevant to a firm’s sustained success might be an order of magnitude greater than in a landscape that is not networked. As a result, the scope of stakeholders relevant to sustained financial results must be expanded, and along with it, the scope of effort required to manage both the reality and perception of the corporation’s functioning. Many corporations have stumbled as they worked toward achieving sustainable financial results for two reasons: first, they overlooked important, relevant stakeholders, and second, the way they conducted themselves "turned off" rather than "turned on" relevant stakeholders. Proper governance requires attention to both what you do and how you do it in the eyes of relevant stakeholders.

Any useful operational definition of corporate governance must address these issues. The TOA scorecard forms part of such an operational definition, identifying the four assets any business must manage in order to thrive. What is missing is the specification of the dimensions along which these assets must be managed. The CPR framework, first introduced in Pultorak (2003) and presented below, is just such a framework. The CPR framework, used in combination with the TOA dashboard, is intended as a governance framework applicable across the enterprise.

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