CORPORATE GOVERNANCE
RE‐THINKING INSTITUTIONS
INSIGHT FROM HASELFRË

CORPORATE GOVERNANCE
“Corporate governance is the system by
which companies are directed and
controlled, in the interest of shareholders
and other stakeholders, to sustain and
enhance value”.
OECD
RE‐THINKING INSTITUTIONS FOR A GOVERNED
ORGANIZATION
At its core, corporate governance is not about power. It is about finding ways to ensure that decisions are made effectively at
all levels; that there is balance between performance and conformance.
Many corporate failures occur because the team of decision makers is tired. Managers get set in their ways. The current models
of corporate governance, generally prevalent, play into the weaknesses of human and organizational behavior and allow
mistakes to go uncorrected until they become catastrophes. It also does not encourage corporate renewal. What is needed is a
total re‐think of institutional mechanisms
RE‐THINKING INSTITUTIONS FOR THE GOVERNED ORGANIZATION
Given the real problems that lead to corporate failure, what is to be done? The answer lies in creating a model of corporate
governance in which the focus is not on monitoring managers but on improving decision making. The goal should be to
decrease the possibility of mistakes and to increase the speed with which they are corrected.
The most important step is to involve directors and shareholders in decision making. Just as a democratic political system
cannot work without involved citizens, corporate governance cannot work without the informed involvement of the three
critical groups: Directors should help managers make the best possible decisions, and major shareholders should be able to
speak directly to senior managers and the board about what they think about corporate policies and decisions. Input from
directors and shareholders can mitigate the behavioral problems that cause companies to cling to bad decisions. And it can
open decision making‐fostering debate, bringing in better information, offering new perspectives and reducing false consensus
and insularity. With shareholders and boards involved in decision making, the corporation is ‘governed’ rather than ‘managed’
because the three critical constituencies all have a voice.
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GOVERNANCE STEMS FROM THE TOP
To create the governed corporation, companies must start by rethinking the institutional arrangements of the board and the
role of directors.
Institutions matter. Institutions affect human choice by influencing the availability of information and resources, by shaping
incentives, and by establishing the basic rules of transactions. Institutional innovation contributes to development by providing
more efficient ways of organizing economic activity. Institutional arrangements inform decision makers about their standing
and about the consequences of their behavior.
It is institutions that assign authority in relation to the endowments. All economic agents carry on their activities under the
terms and conditions set by law or equivalent rules in the form of enforceable customs. A basic challenge, then, is to
understand the nature and constitution of order for governed organization.
WHAT LESSONS HAVE WE LEARNT FROM THE HUBRIS AROUND?
The lessons are many. The important ones are:
Poor strategic decisions
Dominant CEO or ‘one‐man’ band
Greed & lust for power of star performers
Weak Internal controls, particularly with finance
Manipulation of accounts leading to fraudulent accounting
Ineffective boards and their audit committees
Gene pool small
• Internalism
• Tiered executive blood ; and
• Apprehension to innovation
Cronyism evident
Lack of in‐depth industry specific knowledge
The public is concerned not just about the executive who
commits a criminal violation. They are concerned whether or
not there is a sense of integrity or morality in the way they
do business. And that means it extends beyond whether they
are doing the minimum in meeting the law. It extends to
whether they are behaving as a corporation with the highest
standards.
Leon Panetta
Chairman of the Public Policy Committee at the New York stock Exchange
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CRAFTING THE BOARD
The board needs to be proactive‐and effective‐in the policy‐making process. That goal requires a different set of board changes
than the usual corporate governance reforms. Independent directors and CEO audits, for example, are always not the key
because neither helps board members participate effectively in decision making.
Five broad areas of change are needed at the minimum. First, board members must be experts. Directors must be well versed
in the complexities of the company and its industry, of finance and financial structures and of relevant laws and regulations.
Many boards have little aggregate expertise in the core industry or finance; such a board simply cannot be an effective partner
in decision making.
Second, board‐meeting procedures should focus on debating new decisions, strategies and policies, not just on reviewing past
performance. That means running meetings differently. The bulk of agenda time should focus on new strategies and
organizational change. New boardroom procedures should be instituted to encourage debate. For example, instead of a lead
director, boards should consider appointing a designated critic for each major policy decision. That ensures that new policy
proposals are evaluated effectively and makes criticism expected and acceptable.
Third, directors need better access to information – on products, customers’ viewpoints, market conditions, and critical
strategic and organizational issues. Typically, directors receive information packets shortly before meetings. If they are to be
partners in decision making, directors must be empowered to seek out their own information from those in the corporation,
and they should be required to get firsthand knowledge of the business.
Fourth, directors should be required to devote a substantial portion of their professional time to the corporation. At many
corporations, four to six board meetings per year is the norm – hardly enough for meaningful involvement in decision making.
Fifth, board members must have the right incentives. They cannot be expected to undertake the difficult task of formulating
and challenging corporate policies unless real gains are associated with successful service.
Ultimately, the goal of the institutional re‐think is to make the board function not as a distant referee but as part of a team of
decision makers to ensure:
Transparent disclosure, effective communication, and systems that ensure effective measurement of performance
drivers, KPIs & accountability
Relevant code of ethical behavior and protection of company image
Effective management of Operational risk
Sound internal control framework
An objective, well resourced internal audit function
Independent, effective external audit
Shareholders should not want boards to be independent and distant, concerned only with their downside liability if the
corporation plunges into disrepair. Instead, shareholders should want board members to feel dependent – not on the CEO, but
on the company – for their own incomes and reputations. Directors should feel that their own personal fortunes hinge on their
ability to create value through their service. Then they will be proactive in evaluating opportunities and correcting flawed
policies. There needs to be a balance between performance and conformance.
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GOVERNED CORPORATIONS AND CORPORATE RENEWAL
The power and promise of the governed corporation are clear. Governed corporations have more robust, pluralistic, and
adaptable decision‐making processes. There are more new ideas.
The oversight process is less personalized: it focuses not on the competence of the CEO alone, but on the effectiveness of the
organization. There is less risk that insularity, stasis, and false consensus will blind the organization and tie it to mistaken
policies. The policies of the governed corporation make the organization accountable to its markets.
The major cause of corporate failure is the result of errors that arise not from incompetence but from failures of judgment. As a
result, the existing and archaic model of corporate governance fosters an unstable cycle of silence and crisis.
Differentiating between good and bad decisions may mean delving into company politics. In hierarchical organizations, junior
managers often do not feel comfortable challenging decisions because doing so might stymie their advancement. As
information travels upward, bad news is filtered out. The challenge then falls on the directors. But board members also tend to
be biased in favor of collegiality and consensus. After all, it is easier than provoking a conflict. Also, while they may suspect that
a particular decision is wrong directors in most cases have little evidence on which to base a debate. Without evidence, they are
reluctant to speak up, as they run the risk of being wrong and damaging their reputations.
The reticence of the board member is further exacerbated by the political complexity of decision making at the top levels of a
corporation. Personalities intrude. Points of view differ. What’s more, the individuals under scrutiny may discourage such
attention.
EMPOWERING THE BOARD
The empowered board is here to stay. If CEOs recognize that empowered directors can help them and their companies, board
empowerment can be achieved with minimal fuss. This means that outside directors and the CEO must redefine their
relationship.
The CEO must understand the power and the responsibility of the board and outside directors must recognize and respect the
boundary between monetary management and actually managing the company. The CEO will retain the power to lead the
company, while obtaining the guidance of informed and active directors as long as corporate performance is satisfactory.
WHAT MAKES AN EMPOWERED SUPERVISORY BOARD?
1. Most of the directors come from outside the company and have no other relationship with it.
2. The supervisory board is small enough to be a cohesive group. They recognize that their primary obligation is to
monitor the company’s management and performance and not to manage the company.
3. Members represent a range of business and leadership experiences, which are pertinent to understanding the issues
the company faces.
4. Members communicate freely with one another in both committee meetings and board meetings and outside such
meetings – with and without management.
5. Committees are made up entirely of outside directors. While management is consulted on matters discussed within
the committees, they also meet regularly without management.
6. Members receive information about the company’s financial and product‐market performance in a format that is
intelligible and enables them to understand their company’s performance relative to the competitions’.
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DIRECTOR’S KNOWLEDGE
The challenge for directors is to turn a broad array of information into useful knowledge quickly. This presumes that the
directors are receiving appropriate information in a timely manner. The only way to find is to ask the directors periodically for
their assessment of the information they receive. This practice encourages directors to provide one another and the
management with explicit review of information. Also, it encourages the company to organize the data efficiently and provide a
concise but comprehensive overview of the company’s strategic progress.
Data should be sent to the directors in advance so they can study them, formulate questions, and identify issues they would like
to discuss at board meetings. Directors should have the option of meeting alone to develop their collective understanding of
the company’s situation and to decide which questions and issues they want to discuss with the management. Such steps
would enable the directors to keep up with events in a rapidly changing world and help make informed approvals of specific
strategic issues and in
THE BOARD’S UNIQUE PERSPECTIVE
Management and the board have unique and distinct perspectives on strategy. Managers are charged with turning strategic
vision into operational reality. Of necessity, they must focus on one strategic path at a time and pursue it relentlessly to
maximize its potential for corporate profitability.
The board’s mandate in strategic oversight is distinctly different. Its responsibility is to represent the perspective of investors
and question the strategic path itself. The board’s evaluation of the validity of the existing strategy must not be based simply on
the performance of the company relative to itself, its industry, or its past performance, but rather on comparisons between
returns derived from the current strategy and those possible from other strategies. The strategic audit then must be directed by
independent board members rather than by management insiders. And the board – not management – should select the key
criteria to monitor strategic results.
GOVERNANCE COMMITTEE AND THE ROLE OF CEO / COO
Generally there is no existing mechanism in most governance processes for formal strategic oversight. A sustainable, effective
process means assigning specific responsibility and leadership to particular member of the organization. The CEO or COO will be
the natural choice for the position of chairman of this governance committee. The Governance committee’s charter should
cover:
1. Selecting the criteria for review of strategic performance
2. Oversee the design of the database of KPI/ KRI and operational dashboard
3. Establish a review process
4. Ensure integrity and continuity of ongoing data collection and reporting efforts
5. Identify issues for discussion with the CEO
6. Keep full board abreast of the evidence
7. Schedule both regular and special meetings
The board must understand that every time it gives its approval to an investment proposal that enlarges the scope or extends
the term of an existing business strategy, it is openly signaling to the entire management team that it supports that strategy.
Because investment or funding proposals, large and small, come in a steady stream, the board cannot be constantly attaching
reservations or qualifications to its approvals. Such concerns should be reserved for the periodic review meetings between
outside board members and the CEO – meetings triggered by the Governance committee.
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VALUE CHAIN PERSPECTIVE
Successful initiatives such as those relating to new geographies in Europe would involve (in one way or the other) the effective
cooperation of several distinct constituencies of stakeholders – employees, unions, customers, value chain partners, suppliers,
host communities, and shareholders – and they all have legitimate needs. Board oversight requires a broad perspective, and
any strategic consequence that affects the ability of the organization to reach and sustain its full, long term competitive
potential will demand board attention.
However, in the end, a given strategy must deliver a competitive return on shareholder investment. Ultimately the Chief
executives and the board of directors need a formal and visible review process to demonstrate to shareholders their shared
commitment to orderly and effective governance. Even here, the governance committee can help the board.
REDRAWING THE LINE BETWEEN THE SUPERVISORY AND EXECUTIVE BOARD
This issue needs to be succinctly addressed by the governed organization and be followed in letter and spirit. It is critical when
drawing strategies to enter new markets in Europe, under Freedom of Service rules.
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About Haselfrë
Haselfrë is a niche strategy consulting organization that focuses on the problem space of Governance, Compliance and Risk.
Drawing heavily on Sustainable Balanced Scorecard and making it operational through lean six sigma methodologies.
Haselfrë assists management make important decisions on the use of its governance frameworks for balance between
performance and conformance.
Haselfrë is proud to grow from its roots of government to the business of governance. Globalization has forced private
enterprises to address the needs of various stakeholders. Delivering the needs of the end customer has become more
challenging in the wake of a myriad of options and choices. In this chaotic environment, top management and boards at
various public and private enterprises must create more accountability and transparency of their actions. It is becoming
more challenging to identify the relevant stakeholders and address their needs while gaining trust.
Haselfrë addresses the need of transparency, accountability, performance, effectiveness and efficiency through integrated
governance. We use the best practices learned from our experience with various public enterprises to enable private
enterprises navigate through the changing landscapes through sound governance, compliance and risk mechanisms. It this
approach that we call Government to Governance.
Copyright © 2008 Haselfrë Solutions Private Limited. All rights reserved.
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