When does good governance lead to better performance | Two key factors

Tuesday, August 11, 2015

 

A recent report prepared by Dr Robert Kay and Dr Chris Goldspink on behalf of the Australian Institute of Company Directors (AICD), illuminated two very important facts.

 

First is that ‘good’ governance is a team activity. Made up of the board and CEO, the team’s primary function is collective sense-making. The ability of the board to read the external and internal environment is fundamental to effective governance. Therefore, governance can only be as good as the team’s collective thinking and decision-making process.

 

Second, while diversity, independence of mind and openness to alternatives all contributed to effective governance, the most important factor is trust.

 

This is another reason why Group Board Training in Good Governance is necessary in conjunction with any individual’s private study. Learning how to work together with trust, the individual director and CEO’s diversity, independence of mind and openness to alternatives will lead to better performance.

 

Team Work

The quality of the team, typically viewed as the board and executive, were found to be fundamental to the governance process and the quality of decision-making.

 

Kay and Goldspink state that three critical factors are crucial to the ability of the board and executive team to deliver a superior outcome; perspective of decision-making, scale of decisions on differing levels of business, and predictive powers including short and long-term impacts.

 

The limitations of human psychology, in the form of personal bias, hubris and the simple fact that one cannot be good at everything, requires a team to overcome these difficulties. This makes the quality of the team a critical factor in supporting good governance and fundamental to the quality of decision-making.

 

The flipside is that a poor-quality team cannot make good decisions and are often responsible for poor performance.

 

Trust

Contrary to principal- agency theory on which much corporate governance literature is researched, Kay and Goldspink talked of the need for a high level of trust and collaboration between the board and the executive.

 

As one Chair in the study stated:

 

“A really important aspect is actually the right relationship between the board and the senior management. At its simplest it has two aspects. The first is supervision, under the old teacher/pupil role… that’s probably only 5% of it. Because the buck stops with the board, there has to be that supervision aspect. Then there’s the other 95%, which is actually the mentoring, the guiding.”

 

The roles of the CEO and their direct reports often limit the ability for critical self-reflection, simply because of the volume of decisions and the pressure to make them within a limited timeframe. Without the time for deeper reflection on the assumptions being made, the potential for blind spots and unwanted bias increases.

 

The report found that intra-group trust could be useful in information sharing and interpretation. The ability to openly challenge others’ perspectives without fear of ridicule or retribution goes to the heart of this process.

 

In the absence of trust, teams are reluctant to flag their concerns and keep their own council.

 

Therefore, no amount of expertise, information and independent mindset will be enough if low levels of trust exist between members of the team. Collective sense-making is very difficult to achieve.

 

Where trust could not be relied upon, this was seen as a signal of the need to change management or to deal with board behaviour. The monitoring and oversight role, which is at the forefront of many approaches thinking about the role of the board, ran a poor second to the need for a collaborative and supportive relationship.

 

 

Strategic Evolution - Where Trust is Most Needed

Kay and Goldspink sought to understand under what circumstances good governance led to better performance. They used the Holling Cycle as a metaphor for the ecology of governance. The four stages of the Holling Cycle are:

 

  • Conservation – Stability, known

  • Release - Chaotic

  • Reorganisation - Complex

  • Exploitation - Complicated

 

The report showed that good governance is most effective during transition stages, for example from stability to release, as good governance provides the environment for making better decisions in times of uncertainty or change.

 

The report also showed that poor governance was often prevalent on teams during periods of Conservation. The stability of the Conservation phase can often lead to the faulty perception that all is well, while in the background, key elements of the environment are changing, bringing the inevitable Release (chaos and change) ever closer.

 

The assumption of stability leads many organisations to pursue ever greater efficiencies from their current business models at the expense of exploring new ones that will help it survive the Release, and prosper into a new cycle.

 

 

Summary

For good governance to have a chance to lead to improved organisational performance, the board and CEO must work as a team.

 

Any team member not contributing to team play whether through a lack of engagement, a lack of the individual’s skills and experience working in decision-making teams, or a lack of trust will decrease the team effect by a measurable factor.

 

Relationships within a group are calculated by the equation [(n x (n – 1)) / 2]. While more team members introduces more complex relationships that need to be to managed or governed through systems and processes, particularly through periods of change and chaos, the ability to pierce the veil of the future is also increased.

 

Group Size | N x (N-1) / 2

1 | 0

2 | 1

3 | 3

4 | 6

5 | 10

6 | 15

7 | 21

8 | 28

9  |36

10 | 45

11 | 55

 

Therefore, Group Board Training in Good Governance is necessary in conjunction with any individual’s private study. Learning how to work together with trust, the individual director and CEO’s diversity, independence of mind and openness to alternatives will lead to better performance.

 

 

References (including image)

 

 

About Integrated Governance

Shayne Leslie brings fresh interpretations to organisations that are stuck or want to stay ahead of the curve. She is a prolific idea generator guiding others into uncharted territories. Shayne has achieved breakthrough for many clients and peak bodies through her boutique approach to governance, marketing and recruitment.

 

Shayne has over 18 years’ experience in registered clubs, not-for-profits, membership-based and arts organisations. In that time, her diverse career has included marketing, entertainment and events, membership, professional development and learning and, more recently, governance and strategy - experience backed by university qualifications. 

 

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