Corporate governance: the word is trendy, but the reality is much less so

In a world and economic environment that is unstable to say the least, there is one word that comes up every time we talk about the causes of success or failure: governance.

It is a widely used word, often synonymous with a structuring framework and a guarantee of good management, but one that remains obscure to employees and the general public. For them, and even sometimes for managers and some small shareholders, it arouses mistrust, distance and, worse, irony.

I came up with the idea of dusting off this concept for two reasons.

The first is that I really don’t see how a business can navigate smoothly in today’s world without “good” governance. The second is that at a time when the adoption of AI is a challenge for almost all organizations and use cases are not that easy to find ([FR]The adoption of generative AI will not come through politics or or use cases), I see two fairly obvious areas for a first step: discovery by employees so that they can find answers to their own needs and, conversely, the use of AI for better governance.

But I didn’t want to write a post on “AI and governance” that would come out of nowhere, without any context on a subject that is not well understood, so I thought that a series of posts clarifying what we are talking about and the issues at stake before discussing the technology would be a good idea.

In short:

• Governance should be a living practice of arbitrating between divergent interests, not just a formal framework.
• It aims to manage tensions rather than eliminate them, by mobilizing collective intelligence.
• Current rigid structures are struggling to keep pace with the growing complexity of the world.
• There remains a gap between official governance and the way decisions are made.
• Governance is an art of discernment, based on listening and feedback from the field.

Governance is not just an organizational chart

Governance is too often reduced to the organization of power within a business: board of directors, executive committee, specialized committees, etc. It is a kind of mille-feuille whose purpose seems to be to eliminate all risk, provoke a self-defense reaction to any form of change, and ultimately reassure shareholders and regulators.

But for those who have practiced it, governance is, or rather should be, a living practice because it refers to the way decisions are made, responsibilities are allocated, and conflicting interests are arbitrated.

Indeed, and this is often why governance is seen as a political body that slows down or even prevents everything, corporate governance arbitrates between several conflicting interests.

First, there is management, which, whatever anyone says, wants to execute a vision. Then there are shareholders, who logically want a return on their investment but sometimes clash with management over the timeframe for achieving this.

Next come employees, who want meaning and stability, do not understand the vision, and are not interested in return on investment.

And finally, a major phenomenon of the last 30 years or so, we have the rise of external stakeholders (customers, civil society, regulators, etc.) who expect environmental, social, and ethical engagements.

Tension cannot be eliminated, it can only be managed

Contrary to what one might think, governance has never been about eliminating tension, which is impossible unless you eliminate the body or bodies that generate it. Its purpose is to organize the coexistence and even the balance between tensions, which is why it is perceived as eminently political.

Sometimes some people show more courage. At the end of the 2000s, Paul Polman, then CEO of Unilever, after surviving a hostile takeover bid, decided to refocus the business strategy on long-term responsible growth. He put in place an ambitious plan in this area and, in particular, stopped publishing quarterly results and providing short-term financial forecasts, an extremely rare decision for a listed company.

This upset many investors, something that few executives like, but it won him the support of ESG funds and so-called responsible investors, which was in line with his vision of social and environmental responsibility as a component of corporate strategy and not as a smokescreen.

But initiatives of this kind remain marginal: in most cases, governance remains a matter of financial management and regulatory compliance, with little room for discussion, innovation, contraction and therefore collective intelligence.

In the absence of a balance, the most powerful stakeholder is satisfied and the others are managed.

However, sound governance requires a form of broad collaboration. Not a permanent grand debate that creates more noise than it provides answers, but access to a diversity of opinions, perspectives, data, and weak signals.

In other words, governance that is incapable of mobilizing collective intelligence becomes blind.

Simplistic responses to growing complexity

Today’s businesses operate in a radically more unstable environment than 20 or 30 years ago. Geopolitical, environmental and social interdependencies make decisions increasingly risky, while governance structures have changed little in terms of their practices.

We are therefore witnessing a gradual disconnect between the complexity of the real world and the rigidity of governance mechanisms. Ad hoc committees are no longer sufficient to pick up weak signals and, worse still, the old reflex of creating a department or committee for each emerging issue only serves to complicate matters (How to Manage Complexity without Getting Complicated).

For their part, governing bodies are locked into long and political decision-making and validation cycles that distance them from the front line.

We often talk about the strategic nature of governance, but in practice most of the time is spent on budget approval, regulatory risk management, and even succession planning.

Formal governance vs. real governance

There is often a considerable gap between what corporate governance is and what it claims to be. Indeed, the most important decisions are not always made in boardrooms or committees, but in more informal circles, through power games and compromises where individual interests often take precedence.

This observation is not new. As early as the 1970s, Michel Crozier and Erhard Friedberg (The Actor and the System) showed that organizations are driven by invisible dynamics: power relations that are built around areas of uncertainty that everyone seeks to control.

Henry Mintzberg, for his part, has extensively documented the parallel channels of influence and internal coalitions that shape strategic directions, far beyond official structures.

Finally, Chris Argyris, with his distinction between “professed theories” and “theories in use” reminds us that what leaders claim as principles of governance is not always what they actually apply.

In other words, invisible, informal governance is often the one that produces the most lasting effects, for better or for worse.

We have therefore known for a very long time that governance is far from rational and informed, and the current context is not improving matters, especially since nothing is being done to improve them.

It is therefore not boards of directors that govern, but rather circles and dynamics of influence, internal power relations, or inherited managerial habits.

This gap between formal governance and real governance is nothing new, and it explains why well-intentioned measures fail to produce the best decisions.

A balance to be managed, not a model to be applied

This first article in the series shows us that governance is not a mechanism but rather an art of arbitration. It requires discernment, listening, and an ability to manage tensions rather than deny them.

It is not limited to rules and structures: it is based on human choices that are often subtle but rarely neutral or even objective.

Above all, it requires the ability to bring intelligence from the field to the top, to take disagreement into account without ignoring or dismissing it, and to structure forms of collective deliberation. This is not a question of diluting responsibilities, but of shedding more light on decisions.

In the next article, we will see why, despite all the good intentions, current governance often fails to do what it should, namely provide clarity and produce objective, informed decisions that are in the collective interest.

In this series :

Image credit: Image generated by artificial intelligence via ChatGPT (OpenAI)