THE ART AND SCIENCE OF GOVERNANCE: 6 RULES APPLICABLE TO ANY BUSINESS ORGANIZATION
“If I was unsure about the timing, I would rather be wrong because of doing something too early than doing something too late.”
I like how Joe Paul, our visionary leader in the family business field, had articulated this while discussing the development of a strong and functional board of directors with a chairman of a company. The question pertained to deciding on the appropriate governance structure for his individual businesses at different stages of development.
This is a very legitimate and valid question. In fact, legally binding governance principles for public companies have produced inefficient results in many jurisdictions when they are regarded as a goal rather than a means to an end. This end is the desired outcome of a fair, transparent, accountable and responsible management system.
The art of leadership is to develop the principles that would lead the company successfully under different circumstances. Yet, luckily enough, there is a set of rules that we can rely on. Here, I would like to set forth these rules that are applicable to any business organization regardless of its stage of development.
Rule #1: Rewards of inclusiveness outweigh perceived risks.
Not all lights in a house are as “important” and as “fancy” as the expensive luminaire in your living room. But a short circuit in one of the ordinary bulbs in the small storeroom will black the entire house out, including the living room. Just like wiring, the family business system consists of different elements, some more central than others, but the “right to be heard” goes for all of them. Participation in the communication process and decision-making are different roles that must be distinguished in the governance mechanisms.
Rule #2: Each ship has only one captain.
It is quite fair for shareholders to have different strategic preferences, risk appetites, or management styles. But these are all discussions at the ownership level and must be melted into a single voice that will set the direction for the business. Keeping this plurality at the executive level will turn into incompatible managerial actions that could potentially lead to a business disaster. The board of directors is where different alternatives are evaluated and the direction is set. The head of execution holds the steer as the captain to lead the business in the manner designated by the board. Depending on the complexity of the business, the appropriate mechanism may change, but the need is same: You need to develop a process for evaluation of different alternatives in a way that all shareholders feel legitimized and heard, with a single voice to guide the entire organization, accordingly.
Rule #3: No ship owner holds the steer of their own ship if they are not qualified for it.
This principle emphasizes that ownership and management are different roles associated with different rights and responsibilities. A business will produce excellent results under qualified leadership. Therefore, a sound governance system must be able to differentiate between what is expected from an owner and what is expected from a manager, including facilitating the appointment of a qualified manager. Of course, ownership and management roles can be combined under an owner/manager, but not when the person is qualified to be one and not the other.
Rule #4: If both questions and answers come from the same person, you cannot be sure about the accuracy of either one.
This rule relates to the principle of accountability. Referring to the analogy in rule #2 and #3, it is the ship owner’s responsibility to ask the right questions and the captain’s responsibility to provide the right answers. The depth of separation will depend on the complexity of the business, but any business requires some sort of borders between execution and control.
Rule #5: Trust is good. Informed trust is better.
According to Lenin, “Trust is good, but control is better.” In a family business environment, on the other hand, things are slightly different. Power, hierarchy, and social relationships are much more interlaced than a bureaucratic organization. Many family members refrain from controlling their relatives in business due to fear of creating the perception that they do not trust them. In a social setting of interlaced relationships, trust is more productive than any contract or mechanism to maintain a healthy relationship. Adequately informed about the state of the business, non-active owners will feel more comfortable with their relationships in the family business. Thus, carefully designed communication will support the level of trust, while helping the family to grow responsible business owners.
Rule #6: If there is no goal to achieve, there is no progress to be secured.
When the company is not operating in line with the pre-defined and approved goals, the performance of executive managers may be questionable. In a family business, the cost of this suspicion is usually higher. It is good practice to have a system in place that allows for setting goals objectively and agreeing upon them. Some families commit to the principle of reporting to a non-family manager or an executive from the other branch of the family to mitigate challenges of the performance management process.
The art of governance
In my view, the aforementioned six rules represent a fair summary of what a business organization needs to endure regardless of its development stage. These rules represent the “science” aspect of the process. The “art” is to decide its level of sophistication.