Corporate governance

Corporate governance needs to be seen through two filters. One is the legal form that the enterprise adopts and which in consequence varies according to whether it is in the private “for profit” sector as a privately owned company with few shareholders, in the private sector as a public company whose shares are widely held, in the public sector in one of a number of forms either at arms length from an electorate or directly accountable to an electorate or to elected politicians, or some form of “not for profit” (or at least for dividend) organisation. The second filter is the needs of the organisation and the implications for the de facto form that governance takes. In this second respect, there are themes that emerge from the Escondido Framework that cut across the legal forms.

Corporate governance becomes interesting because of the agency problem, the delegation from the notional owner to the agent who runs the enterprise day to day and takes decisions on behalf of the owners. As explained in the section on ownership, the Escondido Framework describes ownership as a continuum, essentially from the simple owner-manager enterprise where the agency problem does not exist, through the large, complex enterprise in which rights and obligations, and de fact ownership are dispersed and diffused. The question, which is common to all larger and/or more complex enterprises whether private, public or third sector, is how to provide suitable governance to address the agency problem that exists in the management of enterprises in all sectors.

The challenge within corporate governance is ensuring that the energies of the executive team are aligned both in the short and long term with the interests of the organisation, and by implication of the various parties with which the firm or organisation interacts through its external market interfaces. This includes setting strategy, monitoring performance and, importantly but often forgotten, demonstrating to the parties with which the firm interacts, that the organisation is well run and with respect for all their interests including treating them fairly and honouring obligations to them.

The consequence of this view of corporate governance is that boards overseeing enterprises need the skills, insights and perspectives to address the concerns of the different sets of stakeholders. This perspective argues for the inclusion on boards of executive directors who have responsibilities for the principle markets that firm interfaces with, so at a minimum people who are concerned that it meets the needs of its customers and its employees, as well as its suppliers of capital. It also argues for the recruitment of non-executive directors with sufficient expertise to provide support and challenge in relation to  what takes place across each of these markets. However, this does not imply the recruitment of worker or consumer representatives as such. Indeed, there may be compelling reasons for not including them since the interests of any individual may take a partial view rather than consider the wider employee or customer base.

The Escondido Framework also points towards the unitary board model rather than the US style board consisting almost entirely of non-executives plus a chief executive or executive chairman. There is merit in engaging the executives and non-executives as an integrated board, in a collective endeavour, rather than risking the alienation of one group from the other. Where the legal framework (eg for charities and in local government) mandates a non-executive structure in terms of formal process there is no reason why the conduct of the board for 95% of the time should not take a unitary form.

The Escondido Framework highlights the risk the executive team capture the economic rent available to the organisation as a result of the available options within the solution space available to the firm (click here for an explanation of this concept). This reinforces the need for a strong roster of non-executive members of a board, for a corporate value system that addresses the risk, and for external stakeholders (in the context of publicly quoted companies this means engaged fund managers, but also regulators) to make clear their expectations about the behaviour of all board members and their responsibilities for the wider enterprise.

For more on this subject, click here