Governance discussions should begin with a view of the ecosystem. Corporate governance is focused on the board of directors of a corporation and the surrounding ecosystem.
The ecosystem has seven sets of components:
- Laws, regulations, and standards;
- Shareholders (or members if a non-profit);
- Competitors, suppliers and partners;
- Trends (economy etc.);
- The public; and
The board should discuss and come to a common understanding of what is governance.
Corporate governance is based on the fact the organization exists as a corporation (i.e. not a trust).
Governance ecosystem components
Governance resides within an ecosystem, where all the components are interacting with each other. This is a more complex, and more accurate, perspective than merely viewing the components as “stakeholders” that only interact with the corporation.
There are seven components to the governance ecosystem.
#1 The laws, regulations and standards vary, depending upon the type of corporation
- A “for-profit” corporation exists to make money.
- A “not-for-profit” corporation exists for some purpose of benefit to society and is not intended to make a profit (and thus does not pay income tax). A subset of a not-for-profit is a “charity”, which is allowed to issue tax receipts.
- A “crown corporation” exists to carry out government policy
#2 The owners of a corporation depend upon the type of corporation.
- A “for-profit” has shareholders
- A “not-for-profit” has members
- A “crown” has the government as its shareholder
#3 The “customers” of a corporation can be viewed as those “who receive value” vs “those who pay for the value”.
- A “for-profit” may have customers who pay for what they receive. The “for-profit” may have “users” who pay nothing and others who pay, such as “advertisers”. Google is an example of the later “for-profit”
#4 Competitors, suppliers, and partners may exist, regardless of the type of corporation.
#5 Trends are affecting every component of the ecosystem. It is important to forecast or make assumptions about what the future trends will be, how they will impact the ecosystem and, finally, how the corporation will be impacted by the future ecosystem. Trends may include: technology, demographics, economy, politics, regulation, etc.
#6 The public is part of the ecosystem. The public is comprised of many sub-groups, such as the Indigenous Peoples. Many corporations are finding the “social license to operate” is mandatory for corporate success. How a corporation conducts (or does not conduct) two-way communications impacts long term success. The 2017 Edelman Trust Survey for Canada showed that only 36% of the public believed that companies listen to customers. Perhaps that is why only 26% of the public saw boards of directors as credible and only 25% saw CEOs as credible.
#7 Advisors such as consultants, lawyers etc. all have points-of-view as to what governance is and what corporations should do regarding governance.
Governance Components of the Corporation
The formal governance components of the corporation are based upon: legislation, regulations, third-party standards (e.g. securities regulators), corporation by-laws, corporation policies.
An informal, but crucial, part of governance that is often overlooked is the advisory board for the CEO. This board has no decision-making power. Successful corporations often have an advisory board for the CEO. This board can take many forms:
- An independent group of advisors.
- The corporations’ lawyers, accountants, etc.
- An informal network of people the CEO connects with to discuss issues
What should each board of directors discuss and agree upon?
Compliance with laws, regulations and standards is necessary. But compliance is not enough to drive value growth or enable success in competitive environments, especially for “for-profit” and “not-for-profit” corporations.
Each corporation exists within a unique ecosystem and for different reasons. Each board of directors should discuss and agree upon:
- What is the board responsible for? g. ultimate responsibility for long-term success of the corporation.
- What is the definition of governance? g. the OECD definition, which is basically decision-making.
- What is the purpose of governance? g. grow and preserve the value of the corporation?
- Which board of directors’ values, ethics, behaviours, actions and decisions will have the greatest impact on the purpose of governance? e.g. appoint or terminate the CEO.
The above four questions set out the foundational requirements for the board of directors. Based on these requirements, which people, processes, and technology are required for the board of directors?
One example illustrates the above: If the board agrees that appointing or terminating the CEO is the board decision with the greatest impact on long term value growth, then what values, ethics, skills, experience, and capabilities must each individual director have in order to make the appropriate vote.
Your next steps
To enable discussion with your board of directors, CEO, and advisory board, download the following one-page slide: