A few years ago, I was blind to governance issues. I believed that the combination of strategy, product, and team was all you needed to succeed. I've taken a few hits since then. Which has made me look at my entire career with new eyes. Suddenly, the governance issues arise EVERYWHERE I look.
Many companies have a complicated relationship with governance. Small and medium sized companies usually try to stay as far away from it as possible, thinking that governance and structure will slow them down. Whilst large corporations love it. Just a bit too much. Resulting in slowing down, just like the SME fear.
There are a few things that set a good governance apart.
- It is clear
- It is fit for purpose
- It is aligned across the entire organization
Clarity is Queen. Ambiguity is the Killer of Good Companies.
I was once sat at a workshop where my group was handed a one liner to strategize around: *How do we use AI for the greater good of society?*
We got started with the discussion, but I noticed one person sitting quiet. I looked at her and asked what she was thinking about. She hesitated a bit, then pointed at the paper. "What does this sentence even mean? I mean… who are we? What do we mean by AI? How do we define good? And which society do we focus on?" We all fell silent. And I've never been hit as hard by the insight that clarity is a heck lot harder than most people realize.
This, my friends, is the perfect example of how difficult it can be to create clarity. Because if a single sentence can mean so many things, how many interpretations can there be of an entire strategy?
It All Starts with the Owner…
There are many types of owners out there. And I've worked with a variety of them, from PE to corporate down to founder. My experience is simple, yet harsh:
Most are good at setting expectations on their companies. But they're quite bad at understanding the part they play in making the company a success.
Even if you aim to be a flat organization, there's still hierarchy. And the owners are at the top. They need to act accordingly.
A shareholder directive is an essential part of an organization. Most companies have one, because owners are told they should. However, I've never witnessed it being used as the strategic foundation it should be. It is often stored somewhere deep in a folder no one ever reads and definitely never updates.
*Should the shareholder directive be updated all the time?*
No. It should be a long-term direction, vision, and guidance. Updating it after every board meeting risks creating unnecessary instability. But reviewing it continuously is different. Because organizations, boards, and owners are constantly learning and if the directive all of a sudden is no longer aligned with what the organization is doing and the board is deciding, you're heading for trouble. Especially if you're planning an exit anytime in the future.
One solution some owners take is to make the directive so vague that they never have to update it. Congrats, you've just created your own worst headache. A directive should never be about nitty gritty details. But it should be precise in nature. And it should be fit for purpose, i.e. created to support the organization to make sharper decisions.
My Personal Worst Case Scenario Story
As I said, I've seen a lot. The most challenging situation was a while back when I stepped in as a CEO in an organization that did not have any shareholder's directive (at least not to the team's or board's knowledge). First task: I had the board ask for one and then sent it back with feedback.
With it in hand, I thought we were clear to go and formulate a strategy on the basis of it. So we did. And made several key decisions that could leap frog us forward. Until the owner, via the chairman, let us know that those operational decisions weren't ours to make.
And that had never been made clear. Until we tried to implement our decisions.
Needless to say, that ambiguity pulled the rug from under us. And in hindsight I can vividly see how that had impacted the entire culture of the company. The uncertainty in people ("are we allowed to do this?"). The hesitancy ("should our owner implement this first before we do?"). All rooted in the same issue. The owner was painfully unclear in intentions, mandate, and expectations.
This lack of clarity and changing mandates creates instability faster than you can say: "yikes".
And unclear mandates rarely stay with the owner. They travel downward, picked up first by whoever sits closest to the top: the board.
… and it Continues with the Board
The board is the important bridge between the owner and the organization. Like many others, a board is the first picture I see when I hear the word governance.
There are different board systems in different countries and I won't go into detail here. But there are a few issues I see across. I want to highlight 3 of them.
- Lack of (the right) perspective. Great minds do not think alike. Most boards do, however. And the lack of perspective might lead to fast decisions, but it doesn't lead to great ones. A bad board lacks the diversity to look at different angles. A decent one is capable of doing so. A great board consists of the right perspectives at the right time, enabling better decisions but requiring continuous overview of its composition.
- Lack of trust. As Patrick Lencioni's book '5 dysfunctions of a team' beautifully showcase, trust and safety is the foundation to all functioning teams. And that includes the board. The chair is responsible to create an environment where it is encouraged to say: I don't understand. I don't agree. What information might we be missing?
- Lack of integrity. The danger of this is that it is often silent. It is the question that is never asked. The silent disagreement that is interpreted as agreement. The loyalty that skew people's agenda, decision making, and courage.
A board that lacks perspective, trust, or integrity rarely says so out loud. Instead, it shows up further down, in what the organization ends up rewarded for doing.
The Pitfall of Saying One Thing, but Rewarding Another
Let me start by stating that there are different types of rewards. There are the hard facts, where bonuses and appraisals are tied to set KPIs. Then there are the soft ones, where leadership consciously or sub-consciously impact behavior by what they acknowledge, let slide, and challenge.
Most leaders I know struggle with navigating this. Because all "hard" incentives are connected to trade-offs and most "soft" ones are created through habit and without much afterthought.
Problem is, that when there's misalignment between intentions, incentives, and actions the organization quickly starts to slide. People will interpret the intentions differently and act accordingly. Some will look at what they deem best for the business, others at what the managers acknowledge, and some at what actually shows in their pay slip.
Three groups of people. Three types of action. Neither aligned with each other. It's like a petri dish for disagreement and friction.
Here are a few common pitfalls:
- Your strategy focuses on long-term sustainability but you only measure short-term success
- Quality is one of your key values, yet the external pressure for speed results in shortcuts being overlooked (or even appraised)
- You are going through a major transformation across the entire business, yet the expectations on the results are the same, or higher, than last year
Unclear, or misaligned, incentives are rarely standalone issues. But the result is that they do not fit their purpose, as they do not drive the actions intended. This can often be traced to never having determined how decisions are made in the first place.
Few Look at How Decisions Are Made. Everyone Should.
One of the most overlooked parts of governance is how decisions are made. While most organizations have somewhat clear investment mandates, few have determined how decisions are actually to be made.
More precisely:
- Which decisions are put on the table? And which are not?
- Which table are they put on? I.e. which decisions belong in which levels of the organization?
- Who makes the final call? How is that made?
- Who owns the accountability? How is that followed-up?
Many organizations I encounter have an arbitrary approach to this. And harsh, but necessary truth: if you have not determined this, ambiguity is inevitable. And as I stated in a heading above, ambiguity is the killer of good companies. When the decision pathway lacks clarity, each decision will be treated differently. Which has a few implications:
- The person faced with the decision must re-invent the (decision) wheel every time.
- Similar decisions will be treated differently based on where they first emerged.
- Decisions will be treated in silos, instead of on a systemic level.
The outcome of all of these implications is a lack of speed and misalignment. Neither great for your business. But remember, clarity is not enough, the dimension of it must be right, too. What suits a 10 people organization is not the same as a what a company with 300 employees need.
Misalignment Rarely Happens on Purpose
But it travels quickly through an organization.
I frequently meet leaders struggling with organizations where people run in opposite direction of each other. And the fix that's tried is often a combination of the list items below:
- a strategic workshop is held where new action plans are created
- new goals and targets are introduced
- transformation projects are initiated
- a company meeting with inspirational speech from the CEO is held
- managers are told to go through the strategy with their team to ensure "everyone is aligned"
None of these actions fix the real problem. Looking at your governance and re-shaping it will. Start at the top and work your way down from there.