GOVERNANCE: GOING ALL THE WAY
Jesus P. Estanislao, Ph.D., FICD
Chairman: Institute of Corporate Directors; Institute for Solidarity in Asia
1.We have now been engaged in the advocacy for better governance for a decade and a half. This is as good a time as any to look at the pathway we have travelled on, and at the road up ahead leading to the “end” of the governance pathway.
2.We have made some progress, despite the difficulties posed by the terrain in which we have been working. From whatever progress we have made, we can now draw the more definitive lessons we need to put into practice so as to make governance really work for us. We also have to point to the milestones we still need to reach in order to get us to the “end” of the governance pathway.
3.The first milestone we have been aiming to reach is that of conformance with OECD or globally accepted principles and best practices. This first milestone is marked out by conformance with the expectations and preferences of global markets; it is the one milestone that publicly listed corporations (PLCs) as well as financial institutions (in particular banks, insurance companies and other institutions that take in “other people’s money”) are called upon to reach.
4.Taking into account the constituency of global markets, the standards (drawn from globally adopted principles and best practices) that need to be observed revolve around the following:
a)Fairness in dealing with all shareholders, including minority shareholders;
b)Fairness in dealing with all the other stakeholders (other than shareholders);
c)Transparency in disclosure and accountability to all shareholders, stakeholders, and public regulators (including the general public).
d)The duties and responsibilities of the Board of Directors in helping to ensure that the three major concerns above are properly and effectively addressed.
5.There has been significant progress towards convergence in the principles behind the best practices that global markets have expressed a preference for. While there has been initial debate on the imperative of cultural adaptation and respect for specific unique “local ways of doing things”, the evidence to date is for centripetal tendencies (rather than centrifugal ones) to dominate. Even China is pro-active in adapting its corporate governance practices to the global OECD principles. The ASEAN corporate governance scorecard is also fully in line with the centripetal tendencies towards the same global principles.
6.Adherence to common, globally accepted principles (and the derived best practices stemming from those principles) is costly. But it has returns as well. The cost-return ratio is particularly favourable in economies (and financial markets) where risks are naturally higher (e.g. in emerging or developing markets). Many studies, including those for economies in East Asia where corporate governance scores of publicly listed corporations have been made available for a number of years, show that the premium from adherence to globally accepted principles and best practices is high and significant for those corporations with high corporate governance scores. While there are still sceptics asking for more proof that conformance matters (and makes a positive difference), the increasing weight of available econometric studies is tilted towards such a positive difference. Conformance does pay!
7.Conformance, however, is mainly box-ticking. What are the best practices with respect to a globally accepted governance principle? Is the corporation in conformance? If so, boxes are positively checked; if not, boxes are negatively crossed. The whole process of checking is mainly mechanical; it is also highly dependent on whether the relevant information is disclosed in a manner that is easy to verify. It is this box-ticking, mechanical, pro-forma checking that has led many more serious advocates of good governance to ask for more substantive “proofs” that indeed good governance actually delivers high-level performance. In their view, there has to be more to good governance than simply getting a positive check on a hundred or so boxes in a given questionnaire (such as those in the ASEAN corporate governance scorecard).
Shared Vision: a First “Indication” of a Performance Governance System
8.This first “proof” of a governance system that aims to deliver high-level performance is a natural offshoot of one of the key duties and responsibilities of a Board of Directors. The Board is asked to take final responsibility for shaping, formulating, and formally adopting a “vision” of what the corporation aims to become within a reasonably long but properly specified time period (the vision period).
a)Such a “vision” sets a clear direction that the corporation is taking as it builds itself towards a dreamed-of future, one that realizes a few strategic, “stretch” (“bold, hairy, audacious”) goals.
b)Such a “vision” is fully consistent with the corporate mission and the core values the corporation has decided to adopt.
9.Moreover, once formally adopted, the corporate “vision” needs to be shared (and effectively sold) to everyone closely associated with the corporation. The responsibility for sharing the enterprise “vision” ultimately rests with the Board, which delegates all the duties of execution associated with sharing the “vision” to the CEO and through the CEO to top management.
Shared Responsibility: Second “Indication” of a Performance Governance System
10.The basic mantra of governance is that it is a shared responsibility. In executing strategy, by which the corporate “vision” is to be realized, the Board delegates and empowers the CEO and top management so that every unit and individual working within the corporation would contribute positively and substantively towards the realization of the “vision”. This would require at least the following:
a)For the corporation, a few strategic priorities need to be clearly identified and spelled out such that their close inter-connection with each other is properly laid out. There has to be proper balance and coordination between the priorities; moreover, they need to be comprehensive (i.e. they cover all the key facets of corporate operations). When laid out together, these strategic priorities would constitute a balanced, comprehensive strategy map that leads to the eventual transformation of the corporation into what it dreams of becoming, as articulated in its “vision”.
b)For each of the strategic priorities included in the strategy map (or transformation road map), the following need to be spelled out and clearly put forward: a few strategic initiatives; measures and targets of performance for different time periods moving forward, towards the end of the vision period; and parties (units or individuals) accountable for meeting performance targets. These are formalized in a performance scorecard for the corporation or enterprise.
c)Through a systematic process of cascading down the corporate ladder, every unit and individual within the corporation formally commits to a level and target of performance, by which they contribute meaningfully towards the attainment of targets in the corporate performance scorecard. Each unit and individual would have their own performance scorecard in line with the enterprise performance scorecard.
11.Every corporation should determine for itself how to make the mantra, “governance is a shared responsibility” operative and functional for itself. In particular, the process of cascading and of getting performance commitments through a system of performance scorecards, which help pull the performance of everyone in the corporation into a coherent whole needs to be systematic; it has to be undertaken on a sustained, professional basis. It has to be designed to deliver high-level performance in line with the corporate “vision”. Governance advocacies---such as ICD and ISA---may provide assistance, when asked; they certify to the effectiveness of the cascading process and the performance scorecard system. Over the years, we have found that setting up an Office for Strategy Management in this regard is essential for giving flesh to the governance mantra.
Shared Value: Third “Indication” of a Performance Governance System
12. Governance as a system that delivers high-level performance on a sustained basis until the corporate “vision” is realized demands continuing commitment and focused attention. Moreover, it needs to get embedded into all aspects and facets of day-to-day operations over a period of time, such that the performance it delivers becomes transformational (as the corporate “vision” demands). It is in this light that the performance the corporation seeks to deliver is driven by a governance culture based on the following:
a)Ethics, which draws the line between what the corporation considers moral, acceptable, proper, and reflective of its core values (and what it does not). It is by those core values that it sculpts the desirable features of its corporate identity.
b)The “whole of the value chain” approach, by which the corporation seeks to work in close tandem with those other entities belonging to the same value chain. Together with them, it helps fill in gaps; iron kinks; make connections smoother, more efficient, and more cost-effective for everyone, thereby strengthening the value chain further.
c)Social responsibility, which enables the corporation to take “the whole community approach”. It looks at the broader environment within which it operates, and it seeks to contribute in at least two or three areas, where community welfare faces special challenges. It makes a strategic choice on which “challenge areas” to work with others so as to make the most effective and positive difference.
13. The specific elements---of the governance culture a corporation decides to adopt and give due importance to---are genuinely proprietary. They help sharpen its distinctive brand (indeed, its competitive edge). They also blow the winds behind the corporate sails as it keeps moving forward on its governance journey.
Final Proof of Performance under a Governance System
14.The three “indications” of a performance governance system--- shared vision; shared responsibility; and shared value---are essential for such a governance system to deliver performance. However, lest we forget, any governance system is supposed to deliver transformational performance. This entails continuing commitment to embed and institutionalize its proper governance culture into all facets and levels of corporate operations. It seeks sustainability of governance through the following:
a)Focus on and support for individuals. Every individual makes a commitment to governance through the personal performance scorecard. This becomes the basis for individual performance assessment, grant of performance bonuses, and advancement on a career path. Moreover, every individual is expected to make good on the corporate integrity pledge, thereby bringing down to the individual level and “personalizing” the corporate “code of ethical conduct”.
b)Focus on and support for teams. At every unit of the corporate organization, teams are empowered to keep harvesting the low-lying fruits of the corporate transformation road map. These “early harvests” are recognized and rewarded. In every major department or division, cross-unit teams are empowered to keep delivering “initial game-changers”, which iron out kinks in the value chain and raise the over-all effectiveness of internal value chains: these too are recognized and rewarded.
c)Through the high-level professional work of the corporate Office for Strategy Management, focus is trained on the corporation reaching a few “transformation milestones” every 2 or 3 years, even as the corporation is still on its way towards realizing its corporate “vision”. These milestones may only be very few, e.g. only one or two every 2 or 3 years. Nonetheless, they represent a real and genuine “turn-around” from where the corporation was to where it wishes to be as it makes progress towards its vision.
15.If sustainability of governance is secured by the continuous delivery of breakthrough performance---the early harvests by small teams; the initial game-changers by bigger departments; and the few transformation milestones by the entire enterprise every 2 or 3 years---it is finally guaranteed by the governance outreach the corporation itself undertakes. Whereas through breakthrough performance, the corporation secures its base, through its governance outreach the corporation guarantees the vital support of the external environment, which nurtures it. That external environment becomes more effectively supportive by the following:
a)Outreach for family advancement. The family is the basic cell of any society; the stronger it is, the stronger the support it gives to the economy and society. Not only the families of the individuals who work within the corporation, but also the families in the wider community need to be advanced and promoted.
b)Outreach for enterprise development. Schools are the basic units for the development of enterprising individuals, with the proper skills, training, motivation, and creativity to start up enterprises and nurture them for financial and economic sustainability and growth. Support for and close collaboration with schools that can provide the talent for economic enterprises is vital for long-term, all-inclusive development of the community.
c)Outreach for community progress. Barangays are the basic units of our polity; and local government units are the most vital central units of our political society. In addition, civil society organizations are the critical partners of barangays and local government units in public-private partnerships for community progress. Outreach to all these agents for community progress is essential for constantly increasing the common wealth and advancing the common welfare in the communities where the corporation operates.
16. Having to undertake a governance outreach helps keep the “spirit” behind the corporate governance culture always fresh and vigorous. The saying that what we give away through governance outreach we get back always with a considerable return is proven true in one case after another. Governance outreach does provide a new dimension, and an added incentive, for sustaining a corporate governance performance system. It also stimulates wider and bigger forces in the external environment, which will provide further support to the performance breakthroughs the corporation is expected to keep delivering over time.
Concluding Points for our Governance Advocacy
17.Over the past 15 years, through ICD and ISA, we have been working on conformance and on the initial “indications” of a performance governance system, whose essential elements fall under shared vision, shared responsibility, and shared value. We have been blessed with many partners, with whom we have been able to work under these operative principles: as much freedom as possible; as much sharing as necessary. Our partners are free to do whatever they want; they come to us whatever we can share with them (and we can then certify that what they are doing is aligned with good governance practices and global standards).
18.We have now reached a point where we can---and should---provide assistance, through the sharing of best governance practices, in the sustainability of governance programs. In particular:
a)Focus on and support for individuals with their personal performance scorecards, by which they aim to strike a proper and healthy work-life balance. We argue that personal governance---as much as corporate or enterprise governance---has to be comprehensive and balanced.
b)Outreach for family advancement. We wish to adapt to the local environment the tools for checking whether a corporation is family friendly. With our network, we can then share best practices in promoting and securing happy, cheerful homes, which are the oases for rest and for the “refresh” needed by productive and efficient performance in the workplace.
c)Outreach for enterprise development. We wish to offer meaningful and mutually beneficial relationships with schools dedicated to the cultivation of entrepreneurship and the inculcation of skills and attitudes for the start up and nurturing of family enterprises in rural and urban settings.
d)Outreach for community progress. We wish to open up connections with local government units that are empowering their component barangays through community-oriented transformation programs. We will also share best practices in the governance of schools and civil society organizations, with a strong commitment to become a positive factor in enhancing the quality of life and economic progress of the local communities they serve.
19, In order to complete the “structure” for our governance advocacy, and to better assist corporations and other enterprises get to the very end of their governance pathway, we shall build side by side with ICD and ISA the following additional governance institutes:
a)The Institute for Family Advancement, to provide support and sharing of best practices in the governance outreach program for strengthening the family;
b)The Institute for School Governance, to provide support and sharing of best practices in the two governance outreach programs of enterprise development and community progress.
c)The Center for Excellence in Governance shall be the umbrella organization of all these governance advocacy institutes---ICD; ISA; IFA; ISG---and shall take responsibility for the sharing of best practices for personal governance, a concern that is common to all four institutes.
19.Governance is a journey. It demands the delivery of performance that leads to transformation. It requires many fellow travellers, who are willing to swap stories and share experiences. Our governance institutes facilitate the swapping of stories and sharing of best practices. They also encourage sustainability and perseverance until governance culture is institutionalized, and until a governance outreach guarantees continued agility and ability to move from one performance breakthrough to another.
January 2, 2015