What is the purpose of this article?
Help shareholders, investors, founders, the board of directors and C-Suite discuss and improve corporate governance.
You may download a PDF of this article from: Traditional corporate governance dooms companies to failure
What are the critical learnings in this article?
Many definitions of governance:
- Focus on legal requirements and processes rather than the outcomes of governance.
- Are not clear on what the purpose of governance is and its relationship to the purpose of your company.
- Are of limited value to successfully growing companies with controlling shareholder(s) or with a unanimous shareholders agreement.
What are some definitions of corporate governance?
#1 “Corporate governance is the system of rules, practices, and processes by which a firm is directed and controlled. Corporate governance essentially involves balancing the interests of a company’s many stakeholders, such as shareholders, senior management executives, customers, suppliers, financiers, the government, and the community.
Since corporate governance provides the framework for attaining a company’s objectives, it encompasses practically every sphere of management, from action plans and internal controls to performance measurement and corporate disclosure”1
#2 The Globe and Mail Board Games survey of corporate governance produces a score of a company’s governance based on 38 sets of criteria in 4 areas: 2
- Board Composition
- Shareholding and compensation
- Shareholder rights
#3 OSFI (Office of the Superintendent of Financial Institutions), the Canadian Federal Government Regulator of Financial Institutions, has published it’s guidelines. There are 4 major areas:3
- The Board of Directors
- Risk Governance
- The role of the Audit Committee
- Risk Appetite Framework
#4 Law firms often discuss corporate governance in terms of government laws, regulations, and court rulings.
What are the fatal flaws with many approaches to corporate governance?
- The focus is on the processes and the degree to which processes are carried out. The impact on profitability and value creation for members of the company’s ecosystem has little or no consideration. Two examples; a) a company could score very highly on the Globe and Mail Board Games, while at the same time losing market share and shrinking profits. b) Facebook has transformed the world and generated enormous profits, while not being a great example of corporate governance.
- Talent requirements often have little or no consideration in corporate governance. Competitively differentiated talent is the key to the company’s value creation for ecosystem members and for the company’s very survival. The talent criteria and talent assessment of board directors and the C-Suite often have a limited role in corporate governance.
- Following all the laws, regulations, and court filings do not result in large numbers of cash paying customers. Many rapidly growing companies are in areas with limited laws etc. Innovation often is far ahead of government regulation.
- Corporate governance objectives and practices in a public company with no controlling shareholders are very different from those with a controlling shareholder or in private companies, especially those with unanimous shareholder agreement.
What are your next steps?
- Define what your company’s current and future success looks likes to the key members of your company’s ecosystem.
- Outline the urgent problems and needs of your company’s cash paying customers and users.
- Agree upon the purpose of your company.
- Agree upon your company’s definition of governance and the purpose of governance.
- Assess your company components (talent, knowledge, processes, technology) relative to your definition of governance and the purpose of governance. This includes the board of directors and C-Suite.
- Prepare your plan to improve governance.
1 Investopedia 2022 August 22
2 Globe and Mail Board Games – 2022 August 222
3 Office of the Superintendent of Financial Institutions – Corporate Governance – Sound Business and Financial Practices – September 2018
What further reading should you do?
- What is the purpose of your company?
- What is corporate governance?
- What are the decision making challenges faced by directors?
- How can the board of directors create value?