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This chapter is from the book

This chapter is from the book

The CPR Framework for Corporate Governance

The CPR framework defines corporate governance as follows:

    Corporate governance is the systematic pattern of behavior of the board, management, and staff of a corporation that is directed toward the corporation achieving sustainable financial results. The behavior that is corporate governance must be directed toward the four primary assets of the business:

    1. Infrastructure

    2. Clients and external stakeholders

    3. Internal people and process

    4. Value creation

    by managing the current and creating the future state of the corporation by expending effort in three dimensions:

    1. Conformance—to legal and regulatory requirements

    2. Performance—financial and otherwise

    3. Relating Responsibly—maintaining rapport with relevant stakeholders

    To ensure success, the behavior that constitutes corporate governance must be ordered within a framework established by the board that aligns and informs day-to-day decision making, objective setting, achievement monitoring, and communication.

There are a number of important distinctions made in this operational definition of corporate governance:

  1. The aim of corporate governance is clear and singular: sustainable financial results. However, sustainable financial results cannot be achieved solely by directing the management of the current state of the organization; it also requires directing the organization toward its future state. The ancient Greek philosopher Heraclitus considered "becoming" as preceding "being," To him, if "becoming" should cease, then all things, including "being," would cease. Therefore, it goes with corporate governance: a governance framework that focuses on regulating the "being"—the current, steady state of an organization is not sustainable. What is required is a governance framework that propels it toward what it is to be, a governance framework that focuses on "becoming." Danny Maco (2003) echoes this sentiment by stating that ". . . what a company is now is less important than what a company plans to be."

  2. Governance is primarily behavior that constitutes a relationship between the corporation and its relevant stakeholders. Stewardship is perhaps the best word that captures the nature of such behavior. While artifacts like systems, policies, and controls may enable (and in some cases disable) governance, they do not constitute governance itself. Governance is constituted by behavior, and it is that behavior which constitutes the relationship among relevant stakeholders, including owners/shareholders, the board, and top management. This view stands in sharp contrast to other positions on what constitutes governance, including those that see governance primarily as decision making (as behavior includes action as well as decision) or those that equate governance with its mechanisms and artifacts.

  3. Effort expended on governance should be driven efficiently from the right source. The right source is the corporate board, hence the requirement in the CPR definition of corporate governance that "corporate governance must be ordered within a framework established by the board that aligns and informs day-to-day decision making, objective setting, achievement monitoring, and communication."

  4. The corporate governance framework set out by the board must constitute a compelling vision and a simple set of policies and procedures that serves four purposes:

    • Clarifies the direction of the corporation

    • Motivates people to take action in the right direction

    • Prioritizes, informs, guides, and aligns the many decisions, actions, and communications made each day

    • Provides a basis for monitoring progress

  5. The object of governance is the four primary assets of the business: infrastructure, clients and external stakeholders, internal people and process, and value creation. Without effort along the right dimensions toward managing these assets, no business can survive or thrive.

  6. Governance requires effort in the three dimensions of CPR mentioned earlier. Conformance means ensuring that the corporation meets relevant legislative requirements. Performance means ensuring that the corporation achieves its performance objectives. Relating responsibly means paying appropriate attention to relevant stakeholders. Effort within each dimension is necessary, but each alone is not sufficient for sustainable results. Sustainable results require more than just driving toward financial performance and more than controlling, directing, and managing to avoid breakdowns, risks, and negative consequences. Sustainable results require the supporting and enabling of positive performance, appropriate risk taking, and "moving toward gain." As such, a governance framework must provide a mechanism for both seeking gain (maximizing value) and avoiding pain (managing risk). Just managing risk is not enough. While it is certainly necessary to prevent and mitigate situations and conditions that are, or could potentially, affect performance negatively, considerable effort and focus must be directed toward creating and driving situations and conditions that would positively affect performance. How one gets there also matters a great deal, which means that building and managing the relating-responsibly aspect with relevant stakeholders is also essential. The sections that follow describe the three dimensions more thoroughly.

The CPR framework for governance is depicted in Figure 19.3. The CPR framework includes the vital task of managing risk through controlled compliance to relevant regulatory authorities (Conformance). However, effort in two additional dimensions (Performance and Relating Responsibly) is a necessary part of good governance because governance, properly construed, cannot be just about mitigating risks, about avoiding the pain of lack of compliance with regulatory authorities (Conformance). Managing negative risks is not enough. No business would survive that had as its sole governance focus the avoidance of risk and pain. What every business must do is move toward gain (Performance) in financial and other relevant dimensions, while conducting itself in such a way that good relations (Relating Responsibly) with relevant stakeholders are maintained.

Figure 19.3

Figure 19.3 The CPR governance framework: conformance, performance, relating responsibly.

The sections that follow further outline the three dimensions of the CPR framework.

Conformance

Conformance is about ensuring compliance with relevant authorities as a means of minimizing risk to the business. It is about meeting the corporation’s financial and other legal, contractual, and regulatory obligations. It is establishing and managing the control objectives. Conformance activities consist of documenting what you plan to do, doing it, and accumulating evidence to demonstrate that you are indeed doing it. The goal of conformance is compliance with relevant authorities. The instruments for measuring conformance results are the KPI dashboard (continuous) and the audit (periodic).

All business must conform to relevant laws, regulations, guidelines, and expectations, including:

  • Financial requirements such as those put forth by the SEC and IRS

  • Legal requirements, such as the Sarbanes-Oxley Act

  • Health and safety regulations such as HIPAA and the Clean Air Protection Act

  • Market expectations of customers and professional associations, such as quality certifications and hotel ratings

  • Professional codes of behavior and ethics

Theoretically, all conformance areas are mandatory, but enforcement varies. While government enforcement springs to mind when the topic of conformance is raised, the market will enforce conformance to areas relating to quality and ethics.

Performance

Performance is about ensuring efficiency and effectiveness. It is doing the right things right. The goal of performance is efficiency and effectiveness in maximizing shareholder and customer value and creating predictable, sustainable value, profit, and wealth, ensuring the long-term financial viability of the business. The instruments for measuring performance results are the KPI dashboard (continuous) and the assessment review (periodic).

All businesses must measure, monitor, and manage to performance indicators from the perspective of all relevant key stakeholders, in areas such as

  • Infrastructure

  • Client satisfaction, including customer fulfillment

  • Product capabilities

  • Employee productivity, including learning and growth

  • Internal business process

  • Agility in all the aforementioned areas

  • Business value, including the all-important financials

As you can see, these areas extend further the balanced scorecard idea of governing beyond financial performance indicators as a means to sustainable results.

Relating Responsibly

Relating Responsibly is about ensuring that the business relates to relevant stakeholders in a consistent and responsible way. It covers social values and standards, providing transparent performance statistics, demonstrating integrity, and balancing the interests of stakeholders, including

  • Meeting professional, social, and ethical responsibility

  • Delivering on commitment to values

  • Providing transparent, timely, accurate disclosure of information regarding financial situation, performance, ownership and governance of the company; it is important to note that this aspect is not intended to duplicate the Conformance dimension—the focus here is on how conformance is done, rather than what is done, and whether or not the "how" enables or disables key relationships

  • Demonstrating integrity, accountability, and fairness to, and balancing the interests of, owners, shareholders, and relevant stakeholders, including regulatory authorities

  • Managing perception as well as the reality

It is about ensuring that how you do things (the means) is welcomed, rather than rejected, by relevant stakeholders. The goal of relating responsibly is stakeholder satisficing (where satisficing is defined as "good enough and just a little bit better"), meaning that good relations exist with relevant stakeholders. The instruments for measuring relating responsibly results are the KPI dashboard (continuous) and the survey (periodic), which entails asking key stakeholders about their perceptions of the firm and its offerings.

All businesses must relate responsibly with relevant stakeholders such as those in Table 19.2.

Table 19.2 Typical Stakeholders of a Corporation

Stock owners

Partners

The board

Contract staff

Executive management

Customers

Management

Industry bodies

Employees

Consumers

Suppliers

Interest groups

Partners

Industry analysts

The press

Industry associations


Ensuring a focus on relating responsibly also acknowledges that, as pointed out in the CIMA Discussion Paper on Enterprise Governance, "...with strategic alliances, joint ventures, etc., the single-company view of corporate governance is too narrow." In other words, while it is vital to do so, it is not enough to relate responsibly with clients and shareholders, those stakeholders "internal" to the company. Relationships throughout the firm’s "value constellation" must be governed.

Maintaining rapport with key stakeholders is as vital as how you get results and ultimately affects the results you get. Unidentified stakeholders and unmanaged stakeholder relationships represent a significant risk to the business. In the words of Guy Kawasaki, author and columnist for Forbes magazine, "good reality" is necessary. However good reality—the actual, objective situation and performance—while necessary, is not sufficient for sustainable results: good perception by key stakeholders is also necessary. Ensuring good perception requires the systems and shrewdness of the politician, not just the technician. As Danny Maco (2003) states in CIO Wisdom, politics by definition is the art or science of governance.... Politicians, if nothing else, understand the importance of relationships as the means of getting things done within an organization.

CPR: Toward a Common Communications Channel and Protocol for Governance

The three governance dimensions—conformance, performance, and relating responsibly—are like two-way radio channels. The board and each corporate department simultaneously monitor, transmit, and receive on all three channels. For example, the board might

  • Request a report from manufacturing to monitor status on environmental compliance.

  • Transmit a request to engineering to map projected product development in a context of fiscal performance against the corporate business plan.

  • Receive a description from IT describing the value it brings to the corporation in terms of the services it provides to corporate departments.

The point of this illustration is that no department should have a private communications link with the board with its own protocol, terminology, and timing. All departments must communicate along a standard interface with a standard protocol using standard terminology to avoid the creation of unnecessary risk and inefficiencies. All departments must strive to describe their activities with the same business-oriented, goal-based vocabulary. In all cases, the board should reasonably expect to receive timely, descriptive, and jargon-free replies.

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