The governance ecosystem is comprised of: the board, management, shareholders, other stake holders, third parties, and society.  All components of the ecosystem interact with all other components. The board and management must understand and plan to manage the ecosystem as it exists today and the future. The assumptions regarding the future governance ecosystem are key inputs to determining board and management talent requirements.

 Overview

• Why do you need to understand the corporate governance ecosystem?
• What is the company’s ecosystem?
• What is corporate governance?
• The corporate governance ecosystem is the same as the company’s ecosystem.
• What do you do if you are a SME?

The purpose of this article (supported by a one-page slide) is to provide a framework, process, and facts to enable discussion and action planning among owners/shareholders, boards of directors, CEOs, and advisory boards. There is no one-size-fits-all answer.  The approach and action plan will be unique to the specific situation of each corporation.

Why do you need to understand the corporate governance ecosystem?

• Governance requires management of the conflict of interest among the board, shareholders, management, other stakeholders, third parties, and society – in other words, the governance ecosystem.¹ You cannot manage what you don’t understand.
• Understanding of the governance ecosystem can be a competitive advantage, or disadvantage. A global McKinsey survey showed that less than 20% of executives had frequent success in influencing government policy and the outcome of regulatory decisions.²
• McKinsey has written “..each company must earn the ‘social license’ to be in business..”³
• The challenges and opportunities arising from the vision of the future governance ecosystem are a key input regarding the required board of directors talent.

Merely understanding and complying with external laws and regulations is not sufficient to achieve long-term value creation.

 What is the company’s ecosystem?

A corporation’s ecosystem is the network of people and organizations, including stakeholders and third parties directly and indirectly in the operation of the business through both competition and cooperation. The idea is that each entity in the ecosystem will affect and is affected by the others, creating a constantly evolving set and nature of relationships in which each entity must be flexible and adaptable in order to survive, as in a biological ecosystem.     The actions and behaviours of the ecosystem vary, depending upon what attribute of the corporation is considered. For example, the ecosystem has different behaviours when regarding the second to second corporate delivery of products or services versus when the corporation is dealing the event of personal information of hundreds of millions of users being hacked.⁴

The implication is that you need to understand the dynamics and interactions within the ecosystem, and not just how each component interacts with your company.

What is corporate governance?

“Corporate governance involves a set of relationships between a company’s management, its board, its shareholders and other stakeholders.  Corporate governance also provides the structure through which the objectives of the company are set, and the means of attaining those objectives and monitoring performance are determined”.⁵ This definition of governance demands and understanding of the ecosystem

The corporate governance ecosystem is the same as the company’s ecosystem.

The involvement of the ecosystem members, their role, expectations, and behaviour will be specific to governance.  Further understanding of the governance ecosystem is based on the above definition of corporate governance.

• Relationships: What is the nature of the relationship, if any, with the members of the governance ecosystem?
• Setting objectives: What role do the ecosystem members have in setting objectives?
• Determining how to meet objectives. What role do ecosystem members have in the preparation and execution of plan to meet objectives?
• Monitoring performance. How does each ecosystem member assess the performance of the company?

What do you do if you are a SME?⁶

Everything written here applies to you.  You may have a smaller ecosystem, which is easier to understand and manage.

 Conclusion

The governance ecosystem is comprised of: the board, management, shareholders, other stake holders, third parties, and society.  All components of the ecosystem interact with all other components. The board and management must understand and plan to manage the ecosystem as it exists today and the future. The assumptions regarding the future governance ecosystem are key inputs to determining board and management talent requirements.

 Your next steps

To enable discussion with your board of directors, CEO, and advisory board, download the following one-page slide:

What is the corporate governance ecosystem?

Questions for your board and CEO/management to consider

Ask the following questions and document the agreed upon answers, as well as points of disagreement.  Remember, the Supreme Court does not always have a unanimous point of view.

• Who are the key members of the governance ecosystem? Which members assess the performance of the company?  Which members believe they should have some sort of involvement in the objective settings and planning to meet the objectives?
• Who is managing the relationship with each ecosystem member? Board?  CEO, C-Suite?  Employees?  Contractors? What is the nature of the relationship? (observing, communicating, meetings, working together or working against)
• Which members, if any, have you decided not to have relationships with?
• What is your definition of corporate governance?
• What is your process for setting objectives for the board and management? How do the relationships impact setting the company’s objectives? What are the various interests of the ecosystem members?  How does the board and management deal with the many conflicts of interests and expectations?
• What is your process for determining how the board and management meet their objectives?
• How do you assess the performance of the board and management, in creating long term value and in meeting their respective objectives?
• How are the members of the ecosystem involved in the setting of objectives, plan preparation, and performance assessment?
• How do you communicate the objectives, plans, and performance to the members of the ecosystem?
• What are the different perspectives among ecosystem members as to how to monitor and assess the company’s performance? How is the board’s, and CEO’s performance measured by different components of the ecosystem?
• Based on the answers to the above questions, what is the action plan, if any, for the board and for management?

Footnotes

¹ Professor Didier Cossin and Abraham Hongze Lu, “The four tiers of conflict of interest”, IMD, Global Board Center, https://www.imd.org/research-knowledge/articles/the-four-tiers-of-conflict-of-interest-faced-by-board-directors/

² John Browne and Robin Nuttall, “Beyond corporate social responsibility: Integrated external management”, McKinsey Quarterly, March 2013, https://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/beyond-corporate-social-responsibility-integrated-external-engagement

³ Jim Brennan, Greg Kelly, and Anne Martinez “Tough choices for consumer goods companies” McKinsey Dec 2013, https://www.mckinsey.com/industries/consumer-packaged-goods/our-insights/tough-choices-for-consumer-goods-companies

⁴ Adapted from Investopedia 2018 May 11

⁵ Based on “G20/OECD Principles of Corporate Governance”, 2015  I added the concept of third parties, https://www.oecd.org/daf/ca/Corporate-Governance-Principles-ENG.pdf

⁶ Industry Canada definitions (2018 May 9): Small business: < $5 million in revenue, < 100 employees; Medium business: between $5 million and $20 million in revenue, 100 to 499 employees.

Further reading

What does society thinks of institutions and corporations “56% companies that only think of themselves will fail”, “60% CEOs are driven more by greed than by a desire to make a positive difference in the world”,2018  Edelman Trust Barometer Global Report, https://cms.edelman.com/sites/default/files/2018-01/2018%20Edelman%2Trust%20Barometer%20Global%20Report.pdf

Jeffrey Sonnenfeld, Melanie Kusin, and Elise Walton “What CEOs really think of their boards”, Harvard Business Review 2013 April, https://hbr.org/2013/04/what-ceos-really-think-of-their-boards

Professor Didier Cossin and Estrelle Metayer “Does your board really add value to strategy?”, IMD Global Board Center, https://www.imd.org/research-knowledge/articles/board-strategy/