Why corporate governance fails despite good intentions

There is a lot of talk about corporate governance, which is presented as a guarantee of stability and controlled management, but when we look at the facts, the picture is quite different. Between strategic errors and inconsistent decisions, businesses have rarely been so well equipped with governance mechanisms, and yet rarely so vulnerable.

But having governance bodies, rules, and control mechanisms in place does not mean that governance works in practice, and that is what we will explore in this second post on corporate governance.

In brief:

• Governance mechanisms have proliferated in businesses, but this does not guarantee better anticipation or more effective decision-making. On the contrary, it can fragment the overall vision.
• Faced with uncertainty, businesses tend to make their governance more rigid rather than adaptable, which undermines their ability to cope with change.
• The abundance of information does not translate into better understanding, as weak signals are often filtered out or distorted, preventing a relevant collective interpretation.
• Governance lacks collective intelligence: it does not take divergent opinions into account and remains disconnected from the realities on the ground, making it blind to tensions and opportunities.
• The very purpose of governance is often forgotten: instead of being a space for steering meaning, it becomes a defensive mechanism, focused on compliance rather than shared decision-making.

Governance designed for control, not understanding

The initial reaction of businesses when faced with uncertainty, a new context or a problem is well known: they create committees, new roles, add director or “head of” positions, and add complication to complexity (How to Manage Complexity without Getting Complicated).

So, in the face of environmental, social, technological, and reputational risks, governance has gradually become bureaucratized. Auditing, compliance, CSR, ethics, cybersecurity: everything must be regulated, standardized, and traceable.

However, this proliferation of structures does not guarantee an ability to better anticipate or make decisions. On the contrary, it often leads to fragmented management, with each body working within its own scope with its own indicators and priorities. As a result, no one has an overview of the big picture.

And no one has an overview of the big picture, as we saw again recently with the Wirecard affair in 2020 (Wirecard scandal).

Governance was in place and could not have been better structured, with a supervisory board, auditors, specialized committees, etc., and yet the warning signs were ignored and stifled due to a lack of cross-functional vision and, above all, a system that encouraged discussion or even confrontation.

In many cases, governance is no longer used to steer but to defend in a complex world, paradoxically adding further complication.

An unstable environment and rigid governance: an explosive combination

It may seem paradoxical, but the more unstable the world becomes, the more businesses seek reassurance in rigid structures.

In an airplane, many people are surprised or even alarmed when they see the tips of the wings move and the wing bend during turbulence. But if the wing were not highly flexible, it would break. We could also discuss shock absorbers on a car or earthquake-resistant buildings, which follow the same logic.

But while these physical principles seem obvious and well understood, we do the opposite in business: we adopt rules, standards, and processes, and we create committees or departments with new managers, telling ourselves that this will create a protective and controlled framework.

But what is in fact only the illusion of control makes the organization more vulnerable because it prevents it from moving and adapting. What is true for processes is also true for governance (Show me a completely smooth process and I’ll show you someone who’s covering mistakes, real boats rock.)

On the contrary, governance should be able to adapt without disintegrating, to cope and resist without being immobilized, because it is not the framework that creates stability, but the ability to evolve the framework without losing oneself. Here again, common sense considerations regarding operations logically apply to governance (People Centric Operations: adapting work and operations to knowledge workers), although ultimately we are dealing with the same problem.

In short, rigid governance does not protect but exposes us to change rather than steering it.

But the necessary resilience, which could be described as dynamic stability, can only emerge from a solid collectivecapable of orienting and adjusting itself together despite uncertainty.

It’s not information that’s lacking, it’s shared intelligence

Managers have no shortage of data: dashboards, consolidated reports, performance indicators, risk alerts… everything they need is there, and sometimes even more than they need. Management cannot claim to be blind; sometimes they are even dazzled by too much light.

But the opposite is also true: while there is a plethora of raw information, it is often filtered, smoothed and presented in a way that meets the expectations of decision-makers. What comes up is what is validated, sanitized,”clean”, and, conversely, what is disturbing or questioning is often dismissed, stifled, or only circulates through informal channels.

This is hardly surprising: if people at the bottom of the ladder are already reluctant to give their manager bad news, imagine what happens when that news has to climb eight hierarchical levels, each more political than the one below.

In short, the problem is not the existence of information and its accessibility (to be distinguished from access), but the way in which we collectively construct meaning in order to make decisions.

Without the fluid and unfiltered flow of information and weak signals, without the possibility of confronting different interpretations in a reasoned manner, governance bodies become places of validation, not of reflection or decision-making.

Governance without collective intelligence is blind governance

Businesses like to talk about collaboration, but collective intelligence is often absent from governance.

There is little space to feed back the reality on the ground and, what’s more, the spaces that do exist are dominated by self-censorship, with no mechanisms for taking divergent opinions into account and consultation methods that are more about consultation than steering.

Governance is therefore based on flawed foundations that are rarely challenged, whereas the only way to stabilize an organization in a chaotic environment is to mobilize collective intelligence.

We are not talking about confused intelligence or a chaotic information space, but rather structured and organized intelligence around which we can discuss perspectives, identify tensions, and thus enrich decision-making.

Without this, governance is based on a truncated and rarely challenged body of information.

Governance has lost its purpose

By piling on more and more measures, many businesses have lost sight of a basic question: why do we govern? What is the purpose of governance?

To protect ourselves? To arbitrate? To be accountable? To transform? To be “compliant”?

The implicit answer is often “to limit risk, avoid trouble, and secure the decision-making framework.” But this is more of a reflex than a purpose.

Governance should be a space for steering by (common) sense, not a legal and financial bunker. It should be a place where visions are confronted, perspectives and opinions are made visible, and decisions and trade-offs are accepted, not mere registration office for so-called “compliant” decisions.

Conclusion

It is not a lack of resources that causes governance to fail, but rather an inability to make the connection between an unstable world, collective intelligence as a factor of resilience, and common sense in the collective interest beyond silos.

These abuses did not happen by chance. They are the product of a history of governance designed primarily to protect capital and ensure order, and ultimately ill-equipped to deal with complexity.

In the next article, we will trace the history to understand how we got here and where there is room for improvement.

In this series :

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