Governance is, in a sense, the fabric of organizations. It's what makes the difference between a bunch of uncoordinated groups and a cohesive enterprise.

Definition of "Governance"

Like most hot buzzwords, "governance" means different things to different people....

At the corporate level, especially with the Sarbanes-Oxley Act, it's come to mean ethics and truthful financial reporting.

In internal service providers (like IT), it more commonly means resource management, especially project approval and priority-setting processes.

Some think of governance as the mechanisms of accountability to ensure that staff deliver on their promises.

Still others define governance as controls to make sure that a support organization does what it's supposed to. This often takes the form of committees that "help" leaders make their management decisions, especially popular in two situations:

1. When an internal support organization's executive is unpopular, governance is used by business-unit leaders as an excuse to meddle in the management of the function in ways that arm's-length customers would never do to their suppliers in the real world.

2. Where a function is decentralized, the term is used to justify some form of corporate control over the various business-unit groups which were originally established to circumvent corporate controls. This generally results in political battles, stress, wasted time, damaged relations, and little in the way of benefits to anybody.

In all these definitions, the word "governance" invokes images of committees and oversight.

"Governance" means all the processes by which we coordinate and control our resources and actions.

So what's the real meaning of the term?

All of the above!

"Governance" means all the processes that coordinate and control an organization's resources and actions.

Its scope includes ethics, resource-management processes, accountability, and management controls.

Two Ends of the Spectrum:
Oversight versus Systemic Governance

How is governance implemented?

Mechanisms of governance fall on a spectrum:

On one end of the spectrum is human oversight. That may take the form of a committee or another group checking up on you, perhaps exercising approval power over some of your decisions, and maybe even making some decisions for you.

On the other end of the spectrum is systemic governance -- controls built into an organizational operating model, including the nature of jobs (structure), resource-governance processes (the internal economy), behaviors (culture), and metrics.

Systemic governance is when you design those organizational systems so that everybody wants to do the right things, rather than to spend resources catching them when they make a mistake. Individuals' best interests are aligned with the best interests of the enterprise. So, people do the right things because that's what they have to do to succeed.

Set up the organizational operating model so that everybody wants to do the right things, rather than spend resources catching them when they make a mistake.

Systemic governance is the opposite of altruism. Altruism means expecting people to act against their own best interests for the good of the whole. That's unreliable (and of questionable ethics). And it certainly creates the need for oversight.

With systemic governance, the way to get what you desire -- promotions, relevance, recognition, etc. -- is to do what's best for your business-within-a-business and for your internal customers, which in turn aligns you with enterprise goals. With that, there's no need for groups or committees to "oversee" and disempower you.

Oversight

Some oversight is always necessary. The most important one is performance management, handled by one's supervisor. And there's generally a need for Board-level Internal Audit.

But beyond that, oversight is the governance mechanism of last resort, because it's the most expensive and least effective form of governance.

It's expensive because it takes people's time to oversee others, and to cooperate with those who oversee you. This type of governance generally imposes convoluted approval processes on already-burdened organizations. Bureaucratic obstacles and disempowerment squelch entrepreneurship, bog organizations down, and drive administrative costs up.

And oversight generally reduces an organization's agility. It takes time, energy, and commitment to get things through all those hurdles. Admit it, the last thing we need is more bureaucracy!

Oversight is less effective because there's never enough time to review every decision; so, oversight can't catch every mistake. If you try to -- for example, by requiring approval over a certain class of decisions -- you pay the price of inefficiencies, lost agility, and demotivational disempowerment.

There's another aspect of oversight that makes it more expensive and risky. Since control is somebody else's job, people have no incentive to comply. Of course, they do have incentives to deliver their projects. So, they'll get away with whatever they can in order to expedite their accountabilities. It's a never-ending battle to catch their mis-deeds and enforce compliance.

"We know that in healthy living systems, ...control is distributed. But we are so habituated to the 'someone must be in control' mindset... that we fail to imagine real alternatives."

Peter M. Senge

Systemic Governance

Fortunately, oversight is not the only mechanism of governance.

Oversight prevents people from doing the wrong thing. But why is oversight needed? Why do people do the wrong things and hence need to be controlled?

Organizations generate signals that guide everybody's behavior. Metrics are a widely recognized example. People try to optimize the factors on which they're measured, especially if that's part of their performance appraisals.

Signals also come from an organization's structure, resource-management processes, culture, and methods.

When these signals are poorly designed, then people do the wrong things and oversight is needed to catch them.

As an alternative to oversight, leaders can adjust the signals within an organization. Then, people naturally do what's right because the "rules of the game" are set up that way.

This systemic approach creates an environment where staff are empowered and entrepreneurial, yet behaviors and resources are coordinated and controlled.

Look at the way the real world works. In a market-based economy, entrepreneurs naturally please customers and manage suppliers because that's what it takes to succeed. The need for oversight is minimal, and certainly does not extend to daily management decisions.

When governance is systemic, it's virtually free; it's ubiquitous; it's in real time; it's consistent with the Golden Rule of empowerment; and it's agile.

Ethics and Integrity

Let's consider some examples of systemic governance....

One governance challenge is ethics and integrity. This can be treated through culture.

Contrary to popular beliefs, culture is one of the easiest things for a leader to change. The key is focusing on behaviors rather than values. To change culture quickly, leaders document all the desired behaviors (practices), then roll them out with education, modelling, and metrics.

When the right behaviors are well defined and widely practiced, then even when one person slips, others around them are there to catch the organization before it falls into dangerous practices.

And once culture is codified, compliance is part of everybody's performance metrics.

Resource Alignment through Cascading Initiatives

Another governance challenge is aligning everybody's efforts with the strategies and priorities of the enterprise.

One common approach is to plan enterprise strategies at the top. Then, managers set their own priorities (which is where the rubber meets the road on alignment) based on their own understanding of where they can contribute to those enterprise strategies. Since people's interpretations of strategies and their roles vary, this is a haphazard mechanism of governance.

Sometimes there's some loose form of coordination process, like engaging more layers in strategic planning, or perhaps strategic alignment is left to executives talking to one another in committee meetings. That's like a high-level alignment overlay on top of anarchy.

In other cases, it's more explicit. Based on enterprise strategies, senior leaders set their objectives (strategic goals) and define key results (initiatives to achieve those goals -- together refered to as "OKRs." These are essentially initiatives to pursue enterprise-level strategic goals (as distinct from initiatives to keep the enterprise running, think beyond current strategies, or improve your business within a business).

Then, they cascade objectives down through successive levels of management.

The problem with using objectives to align everybody with enterprise strategies is that it's crude. It doesn't have the capacity (from a systems design point of view) to handle the dynamic, complex nature of strategy. It inevitably falls into one of two traps:

• Sometimes they're written at too high a level and don't drive project priorities.

• When they're granular enough to list projects, they're cumbersome. Strategies continually change. And they're reflected in dozens (or even hundreds) of projects, many of which pop up mid-year, and each of which may involve a cross-boundary team. So, you'd have to revise a very long list of cascaded strategic initiatives dynamically to keep up. Few do. This is a pernicious obstacle to enterprise agility.

Systemic Resource Alignment: The Internal Economy

Consider the alternative, how systemic governance aligns everybody with enterprise strategies....

In a Market Organization, it's clear who's accountable for each enterprise strategic initiative. That "prime contractor" subcontracts for projects and services from other groups; and they in turn may "buy" services from others (walk-throughs). This way, everybody's deliverables are aligned with enterprise strategies.

Note: The word "buy" is used here to emphasize the concept of internal value chains, whether or not money changes hands. Transfer prices and accounting chargebacks are not needed to make this concept work.

Then, when strategies change, the list of strategic initiatives is adjusted. A new set of prime contractors buy what they need from groups throughout the enterprise. Again, alignment ripples through the organization automatically, quickly, and at the project level of granularity.

The process isn't dependent on everybody interpreting enterprise strategies in the same way. All people have to do is fulfill their contracts with their internal customers. Through internal value chains, their contributions are automatically aligned with enterprise strategies.

Mechanically, this teamwork process is usually installed as part of implementing a principle-based organizational structure, since specialization (a goal of a high-performance the organization chart) depends on cross-boundary teamwork.

Cross-boundary teamwork also depends on aligning everybody's priorities, so that subcontractors have time to help prime contractors. This is done through the "internal economy."

In a Market Organization, every group is a business within a business, serving customers throughout the company (its market) with a range of products and services. Budgets are treated as "pre-paid revenues" -- checkbooks that belong to clients, put on deposit at the beginning of each year in order to buy the support organization's products and services throughout the year.

Customers decide the What. Suppliers decide the How.

When internal customers manage these checkbooks, they naturally buy what they need most. This aligns each group's resources with the priorities of its customers, and ultimately, through the internal value chain, with the strategies of the enterprise.

Meanwhile, support groups are empowered (like any entrepreneur) to manage their businesses without internal customers meddling. They can decide their cost structure, including setting aside time and money for sustenance activities like training and product research, as long as their prices remain competitive. And they can invest in their infrastructure (with funding approved by their chain of command, not by customers) to provide reliable services now and in the future.

As to the micro-strategies of a business within a business, remember that they too have competitors, markets, evolving technologies, and a volatile business environment. Like the business as a whole, internal entrepreneurs need to develop their own strategies. In a Market Organization, these are based on their understanding of enterprise strategies and the needs of their internal "markets," as well as other factors like emerging technologies in their fields, competition (outsourcing and decentralization), economic/legal/regulatory/policy trends, etc.).

The micro-strategies of a business within a business may (should) lead to proposals for innovation initiatives. These are explicitly funded in an investment-based budget. Executives align everybody's innovation initiatives with enterprise strategies in the course of deciding which of these proposals to fund.

And thanks to walk-throughs and investment-based budgeting, when one group's innovation initiative is funded, that group (the prime contractor) and all the other groups on the project team are funded.

Meanwhile, the day-to-day innovation work that goes on within groups (e.g., training, updating tools, improving processes) is built into everybody's budget, and priorities are left to individual entrepreneurs. Of course, their innovation investments in their businesses are based on what they believe their customers will "buy" in the future. So even there, there's a systemic force for alignment without top-down controls.

In short, to execute enterprise strategies, projects and priorities need to be aligned with enterprise strategic initiatives. But micro-strategies within each business within a business do not need to be aligned, other than through the market forces that get everybody to focus on what it takes to please their customers and stay in business.

Accountability

Another aspect of governance is accountability.

Structuring around internal lines of business, and then defining projects as "sales" of products and services to internal customers, establishes individuals' accountabilities for results.

Additionally, entrepreneurial metrics establish accountability for the long-term viability of businesses within a business.

Personal accountability can be reinforced through culture. For example, an organization's culture can define the behaviors of empowerment which match authority and accountability, and which manage people by results rather than telling them what to do.

And all these systemic "feedback loops" both guide staff's behaviors day by day, and contribute metrics that feed into performance appraisals.

Compliance

Finally, compliance with policies, standards, regulations, and laws requires governance. Again, systemic governance is more effective than oversight.

The key is to make compliance part of everybody's metrics. Then, everybody has an incentive to comply. Compliance experts are there to help, not police, them.

And annually, supervisors appraise compliance as part of their staff's performance appraisal. If supervisors need better data on their staff's compliance, compliance experts can offer assessments. This is a service to supervisors, not an oversight mechanism that disempowers staff and takes over a piece of the supervisor's job.

Conclusion

"If you create an environment where the people truly participate, you don't need control. They know what needs to be done and they do it."

Herb Kelleher, Founder, Southwest Airlines

Some executives have a knee-jerk reaction that anything which requires controls, requires human oversight. This is what leads to all those committees, bureaucracy, and support functions trying to control business-unit leaders.

The alternative -- the systemic approach -- results in an organization that empowers (and holds accountable) managers to run their internal businesses; staff to deliver their products and services the best way they know how; internal customers to choose what they'll buy from support groups; and supervisors (at every level) with sole authority over their staff.

Systemic governance reinforces accountability, customer focus, entrepreneurship, and teamwork.

It doesn't need committees to oversee staff, complex approval processes to make sure internal customers aren't wastefully asking for things they don't really need, or inflammatory attempts to disempower corporate or decentralized support staff.

Systemic governance requires some thought on how to align personal best interests with those of the enterprise. But it's well worth the pause and the effort. As much as possible, oversight should be replaced by systemic governance.

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