3 Governance Misconceptions That Can Lead to Failure

Corporate governance is a phrase that most people, even those involved in it, think they fully understand when they don’t, or know they don’t but don’t ask.  Either way, misconceptions about what good corporate governance is and is not are bad for business, and bad for the people involved.

When is the last time you and your board revisited your understanding of good corporate governance?

There are three understandings of governance that fall short and lead to serious problems.  They are:

1. Defining corporate governance simply as trying to control CEOs and through him or her, the company.
2. Defining corporate governance solely as helping a company achieve its growth and profitability goals.
3. Defining corporate governance as leading the company if and when management falls short.

Defining governance purely in terms of controlling things sets the board and the CEO, if not other stakeholders, up for a fight.  “I have to control you” is far different from “We are in this together and must work as a team to achieve our goals”.  Today’s boardrooms and C-suites have become battlegrounds; costly and ineffectual places to get things done.  It’s no wonder, given the prevalence of this first sort of misconception.

The second misconception defines governance as getting to bottom line profitability alone. This may make the occasional shareholder happy, but only in the short run.  More likely, and certainly in the long run, such a narrow focus on financial goals will lead to decisions that are inconsistent with the non-financial or personal financial goals of a myriad of other stakeholders.  For example, employees care about compensation and working conditions, which a focus on profits alone can overlook.  Minimizing production costs can enhance a company’s bottom line, but must be balanced with quality and environmental concerns, that are especially important to customers, regulators and community stakeholders.

The third definitional pitfall may avoid making decisions that exclude multiple constituencies’ wants and needs, but can cause other problems.  Some directors, ever eager to help company management and contribute to success, over-play their roles, and actually step into the shoes of management.  Although uncommon among the largest, well-resourced large companies, this hazard is extremely common in smaller companies, whether family, investor or publicly owned.  Stepping beyond governing and into managerial shoes, even with the best of intentions, leads to confusion, inefficiency and interpersonal conflict.

Getting right the definition or understanding of governance is not an academic exercise.  Good leadership and good governance are the defining traits of high performing companies.  Good governance and good business go hand-in-hand.

Corporate governance is best defined as the structure through which a board of directors helps a company meet its goals and objectives, while simultaneously ensuring that it meets its obligations to multiple stakeholders.

There are three key elements in this definition:

• Assistance
• Company Goals
• Stakeholder Obligations

Assistance (not doing). Boards govern.  Management leads.  The two roles are complementary and must overlap only as and when carefully agreed upon, spelled out and communicated between directors and company executives.  When boards go beyond helping management they can become obstructionist.

Company goals (not management’s or the board’s own). As they govern, boards must promote the company’s goals and objectives.  Inherent in boards’ fiduciary duty is the promotion of the goals of the company, not those of management or the board and certainly not those of individual directors.  Companies must be crystal clear with their boards about all goals and boards must understand their role in furthering them.

Multiple obligations (not solely to one stakeholder).  As boards help management achieve company objectives, they must do so cognizant of the goals of various and varied stakeholders, each of whom not only has a vested interest, but a powerful ability to contribute to, or thwart, a company’s success.  Ignoring them can be costly and also lead to contentious conditions for all players.

If you haven’t revisited the definition of good governance lately, it is possible you or your board has been harboring misconstrued notions.

Don’t court failure. Have a conversation about the importance of the above three elements of good governance and what they mean to board roles.  Revisit the flaws of the three common definitional mistakes to root out latent unconstructive views about responsibilities.  A lack of clarity in the roles and responsibilities of the very people charged with leading and governing corporations is a dangerous thing.  Without clear roles and responsibilities, boards are more likely to impede progress than aid it.  Worse, misunderstanding good corporate governance can lead to major headaches for boards and C-suites — such as problems with activist shareholders, regulators and employees.  If you and your board haven’t revisited the definition of good governance lately, knowledge of these three misconceptions and how to remedy them could get you on the right track.