Why do we have bad corporate governance? We have bad governance because the conventional methods we use allow us to have bad governance. We do not have one fundamentally correct way to organize and describe our enterprises that everyone accepts and follows. Instead, we have a myriad of different methods that are used for management and a myriad of different ways any enterprise can be presented.
Our conventional methods do nothing to protect the interest of investors. They don’t even allow the best intentioned corporation to plan and manage the return on their own investments.
Basically, our corporations are forced to either spend or speculate with investment funds.
Accounts can be defined and redefined in different ways. Rules can be bent to fully disclose distorted information. It is
very difficult to understand what is presented in statutory reports beyond taking what is shown at face value.
We know the book assets are not the true assets of the corporation. We spend enormous sums on the easy accounting and
reporting from the point we receive money until the point we spend or invest the money. But, the important information
for corporate governance must come from the dark side of accounting from the time we spend or invest money until the
point we have created something of value to receive money.
Internal audit, generally, has settled into a mechanical routine of seeing that certain rules are being followed, without
understanding anything of deeper significance. Recent cases have demonstrated the reliability of external auditors to
ensure good corporate governance.
Now that the Enron trial is underway, more attention is focused on the need to close the barn door. Experts write and talk
on television about the measures that are being taken to strengthen accounting and audit practices and solve the problem
once and for all. Here we go again. Every time there is a disclosure of corporate malpractices, the experts strengthen the
methods that produce the malpractices. And then, sure enough, we have bigger and stronger malpractices.
We can tweak the methods we use all we want. All we can do is address the symptoms of problems. We can never solve the problems.
Corporate governance is one of the issues we are discussing at the Business Change Forum, in order to define problems
with conventional methods and to discover breakthroughs in the management of the enterprise.
What produces good corporate governance? Basically it is ensuring that the enterprise maintains a viable strategy to create substantiated future value and that the enterprise capital is developed and utilized over time to create the actual
value.
So, what is the problem with conventional methods?
First, we have no way to understand and plan how we create strategic value. Secondly, we don’t manage our capital; we
don’t even understand what much our capital is. So, we have no hope of developing and utilizing capital to produce value.
The real problems lie in the way we structure our corporations. Conventional organization methods provide many ways to structure corporate functions and performance. If we are going to gain good corporate governance, we need to restructure our corporations in a standard way that is easy to understand.
We need to set up corporations as true value-chains with ways to manage all the links in the chain to create strategic value.
> Organize corporations based on value created across the corporation in a complete value chain – - not today’s contrived “value-chains” for products or sales
> Set a clear strategy for improving existing links in the chain and adding new links to create stakeholder value
> Establish management responsibility and goals for creating value
> Organize capital, including financial supply, utilized to create value into categories so that it can be managed properly
> Manage the day-to-day utilization of capital to create value
> Manage capital development to add value to the chain to provide the benefits and return
> Manage the cost of capital consumed, including executive compensation and external contracts, against the capital created in the chain
> Manage the relationships among links in the chain to reach the final values in products, services, revenues, profits, etc.
> Set up stakeholder value as a managed objective with day-to-day tracking against goals and estimates
> Evaluate progress in achieving stakeholder value and the stated strategy
> Establish the worth of the corporation as the capability to create value over future years
We can never ensure good corporate governance until we structure our corporations to be governed. We need a true strategy to create real value. We need a complete value chain across the enterprise to understand all the value we create, all the costs we incur, and the value added at each link in the chain. We can then track the progress in creating value to achieve strategic value goals and provide value over the years for all stakeholders.
We can only achieve good corporate governance by establishing a new foundation that enables good governance.
Harry Greene is American, with over 40 years’ experience in business change. He developed Result-performance Management (R-pM), a new breakthrough in managing the enterprise that is described in the book “R-pM Foundation and Advantage”.
Harry is the President of Result-performance Management Ltd., a firm dedicated to the development of R-pM. Harry also edits Business Change Forum (http://businesschangeforum.com/) a weblog that discusses problems with conventional change and management methods. E-mail: harry@businesschangeforum.com