Sunday, October 6, 2013

Three Insights of Governance

Governance is not about maximization, but about optimization. 

Governance, per se, as a concept goes back 2500 years, deriving from Greek naval terminology, kubernesis or kuberneo, and referred to the act of piloting a ship - both providing direction to accomplish the ship’s purpose and its protection (risk avoidance) in that process. Plato used the term in a metaphorical sense—to lead or rule strategically. Wikipedia is pretty close in saying: … “ governance aim(s) to assure (sometimes on behalf of others) that an organization produces a worthwhile pattern of good results while avoiding an undesirable pattern of bad circumstances. Perhaps the moral and natural purpose of governance consists of assuring, on behalf of those governed, a worthy pattern of good while avoiding an undesirable pattern of bad.”

Corporate governance is most often viewed as both the structure and the relationships: It determines corporate direction and performance. The board of directors is typically central to corporate governance. Its relationship to the other primary participants, typically shareholders, and management, is critical. Additional participants include employees, customers, suppliers, and creditors. It is important to emphasize that governance is fundamentally about having a systematic approach to making decisions within the corporate entity. There needs to be a framework within which decisions are authorized to be made at each level, and supporting structures and conventions support governance bodies and officers of the company to make good decisions, ranging from strategic to operational decisions.

Corporate Governance is not about maximization but about optimization: Optimization could be a term applied to good governance. Governance is a neutral term which is useful in having the ability to discuss bad governance with terms such as waste, corruption, inefficiency, etc. Governance is the structure and processes of authority, responsibility, and accountability in a business or organization, the ability of boards to oversee and advise management so as to ensure the best fit between (short term) profitability (shareholders) and long-term sustainability (stakeholders: employees, government, society...)...

Governance discipline enables better decisionsGovernance is a sophisticated process that if well executed, will lead to better decisions. It will allow not only to protect the existing value but also to create new value for its shareholders. Distinguishing the processes that lead to that is essential and is not only risk management. Three things in concert:
1). Oversight of assessment - gauging conditions and choices
2). Oversight of appropriation - matching priorities and resources
3). Oversight of accountability - scoring activity and net results.


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