ASSESSMENTS AIMED AT CORPORATE GOVERNANCE IMPROVEMENT

Transcription

1 ASSESSMENTS AIMED AT CORPORATE GOVERNANCE IMPROVEMENT Tito Conti International Quality Conference Managing for Excellence Buenos Aires, 4 November

2 Summary Why quality in corporate governance? The Corporate Governance System The role of quality assessments: provide better visibility and better information to help reach high standards in corporate governance and pursue continuous improvement A plurality of internal self-assessments and mutual assessments are proposed......also to make external assessments easier 2

3 What has quality to do with corporate governance? Quality is a concept that applies to any relation where people (or organized groups of people) are involved - and deals with the perception of the value exchanged in such relations Corporate governance is made of (important) relations, the most important of all being that between the Board and the CEO Fitness for purpose is the main criterion for appreciating value in such relations 3

4 THE CEO Network of relations involved in corporate governance: cooperation in optimizing exchanged value is critical for excellence THE BOARD MAIN GOVERNANCE NETWORK THE COMPANY RELATIONS IMPLYING VALUE EXCHANGE SOCIETY EMPLOYEES BUSINESS PARTNERS SHARE- HOLDERS CUSTOMERS 4 ENLARGED NETWORK, WITH STAKEHOLDERS

5 An intricate network of relations But what makes it even more complicated is the fact that informal relations are usually more important than the formal ones, those potrayed by organizational charts and rules Probably the most important contribution that quality can give corporate governance is helping dissipate fogs in critical internal relations by elevating the level of information through a diffused self-assessment practice 5

6 Self-assessment Self-assessment, if properly made, is key to penetrate the complexity of relations and bring to the light the root causes of problems Self-assessment allows to complete the traditional Plan/Do business cycle with the Check/Act phase. Self-assessment gives specific corporate governance assessments better visibility on the performance and capabilities of the whole corporate system 6

7 Problems in corporate governance Common problems: Inadequate definition of rules, poor planning But, beyond rules and planning, lack of shared values, teamwork, cooperation Inadequate delivery of the agreed upon values: poor process control, lack of assessment culture Quality can help in all that, but we will only deal in the following with assessment: both selfassessment and mutual assessment, (given the reciprocity of relations). 7

8 Broadening the scope of corporate governance To get a clear view of the relationships that have to be explored in assessments, corporate governance should be sub-divided into its parts, for example: 1 overall strategic guidance of the company 2 oversight of the global company system 3 managing the company for excellence 4 monitoring the company for compliance with laws, ethical behavior, social responsibility 8

9 The extended corporate governance network Points 1 and 2 of the previous list are normally responsibility of the Board, 3 and 4 of the CEO However the corporate governance function is not limited to the Board and the CEO The way the CEO assigns responsibility and authority and creates synergy among stakeholders to achieve company goals (the organizational architecture ) is part of the corporate governance system. 9

10 REPRESENTATION OF THE COMPANY STAKEHOLDERS AS A TWO TIER SYSTEM, FOCUSED ON THE COMPANY AND SUPERVISED BY THE BOARD. THE BOARD as supervisor and guarantor 2nd tier The Shareholders The Board as responsible for strategic direction 1st tier The CEO THE COMPANY The management The employees The business partners The society 10

11 A framework for corporate governance related assessments Board and CEO self-assessments are necessary but not sufficient, if a mechanism of continuous improvement of the corporate governance system is pursued A complete set of assessments is needed, where the Board assessment and possible external assessments are reinforced by it. 11

12 A MAP OF CORPORATE ASSESSMENTS 2 CEO 3 BOARD CEO SELF-ASSESSMENT BOARD SELF-ASSESSMENT INVESTOR REPRESENTATIVE BODY 4 REVIEW OF COMPANY SELF-ASSESSMENT ASSESSMENT OF THE RELATIONS WITH THE BOARD ASSESSMENT OF THE RELATIONS WITH THE CEO, THE COMPANY AND THE STAKEHOLDERS EXTERNAL ASSESSMENT COMPANY SELF-ASSESSMENT REVIEW OF COMPANY PERFORMANCE 1 COMPANY 12

13 ) COMPANY SELF-ASSESSMENT 13

14 Company self-assessment Information about the company is essential for board directors to assess corporate performance Company self-assessment, if properly made in the context of an annual PDCA cycle, can be a unique source of information, spanning from business results to customer satisfaction and loyalty, to employee motivation and satisfaction, to levels of synergy in business partner relations. 14

15 An opportunity to assess the organizational architecture Organizational structures rarely result from systematic planning. Rather, they evolve over time, in fits and starts, shaped more by politics than by policies... (Goold et al, HBR, Jan-Feb 2002) Self-assessment can be an opportunity for a thorough and deep evaluation of the organization s fitness for purpose 15

16 Assessment of the stakeholder system In the pursuit of excellence, the stakeholder system can play an important role. On one side, releasing the stakeholders potential is a responsibility of the CEO. On the other side, guaranteeing a correct balance of power and benefits among them should be a Board s duty Excellent companies are characterized by high quality stakeholder relations Unbalance of power between stakeholders can lead to very dangerous corporate diseases 16

17 ) CEO ASSESSMENTS 17

18 CEO s review of company self-assessment The CEO should lead the corporate PDCA cycle - therefore also the company selfassessment process (phase C) Validation of the outcome of the selfassessment process is a CEO s responsibility Assessing the organizational architecture and the stakeholder system should be a personal responsibility of the CEO s 18

19 CEO s own self-assessment 1 Compensation related self-assessment: Normally requested by the Compensation Committee. A list of questions related to the major performance goals set by the Board 2 Improvement related self-assessment: A broad-spectrum assessment taking as reference first the improvement goals stemming from the previous company selfassessment, second the specific goals set by the Board at the beginning of the fiscal year 19

20 CEO s evaluation of the relationship with the Board A fair relationship between the CEO and the Board requires that both parties periodically evaluate the quality of such relation. Since quality is about value exchange in relations, both parties perception of given and received value with respect to expectations is the basic quality measure Such assessment becomes reliable only if values, rules and goals have been defined in advance by the two parties. 20

21 ) BOARD ASSESSMENTS 21

22 Assessments should take into account the two main roles of the Board Board related assessments should adequately take into account the two distinct roles of the board: as supervisor and guarantor on behalf of the company stakeholders (the ownership representation role) as responsible for strategic direction (the entrepreneurial role) 22

23 Board s review of company performance in its role of supervisor and guarantor The aim is to assess the whole corporate system to get a picture of the present state, strength and weaknesses in relation to stakeholder expectations and related strategic goals; to adjust strategic directions; to make recommendations to the CEO A global fitness for purpose evaluation of the whole governance system is a fundamental part of this assessment 23

24 Board self-assessment The only board assessment practiced today (necessary but not sufficient) Board self-assessment should make reference to questionnaires inspired by good governance rules and recognized best practice Examples: The NACD (National Association of Corporate Directors) Questionnaire The UNOCAL Questionnaire The American Red Cross Board of Governors Q. 24

25 A self assessment model and a diagnostic approach are needed Using questionnaires derived by best practice is good but the risk is lack of a systemic view Better making reference to organizational improvement models - like the Malcolm Baldrdige or the EFQM - adapted to incorporate board evaluation specific needs In relation to the self-assessment process, a diagnostic right-left approach (from effects to causes) is advisable 25

26 Reference documents for board self-assessment Corporate governance written rules The annual board objectives, defined at the beginning of the fiscal year Collection of all measurable outcomes in relation to such objectives Problems emerging from previous company and CEO assessments, traceable to possible governance criticality (business/stakeholder/ customer related problems) 26

27 The assessment committee The Board should appoint an assessment committee, chaired by an external director, to manage the whole self-assessment process In addition to collecting the information mentioned before, the assessment committee should collect the directors evaluations both through questionnaires and interviews The committee should analyze the data and prepare a report to be discussed within the Board. Finally it should prepare the governance improvement plan and the board improvement plan. 27

28 Effectiveness of governance assessments The recent history of corporate failures proves that having good governance rules and ruledriven assessments is not sufficient to guarantee ethical behaviors and stakeholder protection The big companies that resoundingly failed in the recent past would all pass the test aimed at ascertaining whether the board of directors was likely to do a good job (Sonnenfeld, HBR, Sept. 2002) Compliance to rules can reduce the risks of unethical behaviors, but it is not, by any means, a recipe for excellence. 28

29 Values and behaviors, the central issue Excellent performance can be achieved only by people who are committed to the company and share the company s values and vision. That holds particularly true for the corporate governance system. Not pre-dominance of some stakeholder to the detriment of others, but commonality of purpose (being a real team ) Self-assessment aimed at improving corporate governance while caring about rules, should give great importance to value sharing, behaviors, cooperation at the top. 29

30 ) EXTERNAL ASSESSMENTS 30

31 External assessments Companies adopting a reliable and transparent set of corporate assessments (in the context of a PDCA cycle) should welcome external assessments, conducted by acknowledged investor representative bodies On the other hand, such bodies would certainly appreciate such internal assessments, that make their evaluation easier and more reliable External assessments are mostly important for shareholders, while internal assessment are very useful for all company stakeholders 31

32 CONCLUSIONS Corporate governance related selfassessments, if properly conceived as part of a corporate PDCA cycle, are crucial for improving company performance, while providing the basis for corporate transparency towards the investors. Let us convert the problems that have emerged in the recent past into an opportunity to move from a fix it to a prevent it mentality, also in corporate governance! 32

33 Thank you for your attention! 33