What Is Governance? | Leis Network

Governance and Ethics

We govern ourselves as we hope organizations govern; from the heart. We develop rules and processes that buttress our beliefs and although we encourage our psychology and empathy to become quite complex, we find it behooves us to keep our morality simple. The larger the gray area, the larger the clouds overhead.

Thomas Jefferson: the Constitution as the preservation of a self-organizing complex system

Governance is a fundamental concept. It defines organizations and their cultures, which either nurture gray areas, or dissuades them. But like Human Resources and IT departments, Governance can easily forfeit its potential as a marginalized department, maintained by semi-removed Board members and lawyers preoccupied with regulation, rather than permeating the spiritual lifeblood of an organization. Strangely, for such an important topic, there are not many business ethics websites. I’m surprised we don’t see more ethics discussions in general. We tend to take a highly regulatory approach to governance, and by now I’m sure that is not effective.

Organizations are People Too

The Judiciary has over the years found that corporations should be treated as individuals within the Constitution through the First, Fourth, Fifth, and Fourteenth Amendments. It also ruled in this regard in the Commerce and Contracts Clauses.

Section 1 of the Fourteenth Amendment reads:

All persons born or naturalized in the United States, and subject to the jurisdiction thereof, are citizens of the United States and of the State wherein they reside. No State shall make or enforce any law which shall abridge the privileges or immunities of citizens of the United States; nor shall any State deprive any person of life, liberty, or property, without due process of law; nor deny to any person within its jurisdiction the equal protection of the laws[1].

There are significant benefits to this reading of the Constitution by the Judiciary; it has nurtured arms length investment, provided an understandable platform for corporate law, and allowed the organization to evolve from partnership (that once defined business) into the modern corporation.

But there are concerns. Unlike in the cases of small business and individuals, what happens to shareholder and management liability and fiduciary duty when organizations now stand between plaintiffs and desired outcomes? To many onlookers, judicial proceedings in these instances seem contrived; how can a CEO making tens of millions of dollars not be in some way liable when organizations run afoul of the law?

As of this writing Congress is considering even more legislation to further govern actions and salaries of management and shareholders in light of the events of the Financial Crisis in 2008. Rules and regulations are already fierce and involved. There are whole websites dedicated to the regulation of corporate governance.

Many free marketers suggest that the original interpretation of the law was flawed with externalities that distorted capitalism in the first place. That fiduciary duty loophole could now be closed, rather than attempting to so explicitly shape behavior with even more regulation. Any law which again tied Management’s personal risk to that of the organization would surely go a longer way to shape behavior than regulation like Sarbanes-Oxley.

Lastly, large organizations can marshal huge resources, and armed with the Fourteen Amendment and the Bill of Rights they make formidable opponents. But regardless of the law, and especially since few people seem to understand markets, or in many cases believe in them, we wish to be effective actors and stewards in the arenas we play. Governance begins at the top of an organization.

The Priority of Governance

Current events are also very likely to drive closer scrutiny of Boards of Directors as shareholders strive to increase expertise and independent guidance. As with individuals, organizational governance performs best when it focuses on the spirit and emotional well being that becomes a foundational core of decision making and culture.

Jurisprudence and ethics are defined more in a culture than in its regulation, just as actions speak louder than words. Rules can only produce so much, and if we’re not careful we produce a legalistic atmosphere that loses the richness of camaraderie so essential to nurturing stewardship and actualization. Besides, government regulation carries any number of negative externalities along with it.

Best Practices of Boards

As a beginning point, there are certain characteristics of effective governance boards. They are in no particular order:

Expertise.
Independence.
Management Evaluations and Measurable Goals.
Mentorship.
Risk Assessment.

When it comes to discrete daily behavior, this integrated governance approach seems an interesting approach. Cross functional teams with leading and lagging indicators are inherently attractive, especially when they involve members from every level of the organization which review all existing and new prerogatives from an ethical prism. The reason is simple. It is how a complex system operates.

As with all fruitful and worthy endeavors in life, profit can never be the only priority. It is much more likely that it is the result of a race well run. If we concentrate only on the prize, it is more often that it will elude our grasp. Rather, we fulfill our mission, adapting according to measured feedback of a changing landscape, our survival defined by profitability.

And there have been too many stories of Boards of Directors who are ineffective. Perhaps we all have seen examples of Boards filled with corporate cronies, or Audit Committee members who don’t understand ethical yet efficient accounting practice. These boards may be acceptable for some mission statements, but in today’s environment and given many organizational charters, they are inherently unable to effectively provide the foundation for organism survival. Not every organization so thoroughly integrates governance as Nexen (Refer to their integrity guides and governance groups). But that is where shareholders and employees and even journalists come in.

[1]“The U.S. Constitution Online,” sec. 14th Amendment