Why does governance matter in an organisation?

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Organisations can realise the benefits of good governance through a well-defined organisational design. Key benefits include realising profitability and maintaining a competitive advantage in the market.

Governance is the biggest driver of the profitability number because it avoids duplication but puts coherence into your programme’, according to Didier Bonnet, Senior Vice President, Capgemini Invent. This quote highlights that organisational governance is an integral component for organisational efficiency and success. Without good governance, organisations have a higher risk of failure that can make stakeholders and potential investors particularly wary.

To put it simply, an organisation without governance is like a traveller without a destination – regardless of how much potential is demonstrated, it is unlikely that an organisation may find its success because there is nothing to direct it towards its ambitions.

In todays’ progressive and aggressive business environment, the importance of governance cannot be denied, and with the burgeoning importance placed on this practice it’s time to ask, what is Governance and why is it so central to the victories of many organisations?

What is Governance?

In general, governance is understood as the processes and policies that monitor and control the activity of a company but, this explanation doesn’t do a very good job in explaining how governance manifests into driving innovations and profits.

Historically, governance is a framework of rules and practices by which a board of directors ensure accountability, fairness, and transparency in a company’s relationship with all its internal and external stakeholders that allow an organisation to adapt and drive towards its ambitions.

So here we are talking about best practice principles, for example, an integrated business management system that allows top management to communicate with and influence what is happening on the ground in line with achieving overall business goals. Another example of best practice in governance is maintaining policies and procedures that set expectations, establish roles and responsibilities and communicate commitments to employees and its members.

Governance should provide a platform that enables a balance of requirements from several groups and when done well, it provides a transparent environment for the organisation to innovate and grow.

Why is Governance important?

While a good governance structure is central to preventing risk and providing the right level of information to a defined set of users, it is essential in facilitating accurate, timely and effective decision making.

It enables teams to rapidly understand roles & responsibilities, adopt and engage across the organisation and recognise their required contributions to the overall business mission. Not having such governance to inform management and its employees can lead an organisation away from an honest and open environment that governance sets out, which, can have severe impacts and in many cases, lead to bankruptcy.

Let’s take for example the downfall of large corporations such as Enron and Satyam. Enron’s CFO was allowed to serve in Special Purpose Entities (SPEs) which were neither questioned nor the SPE transactions examined by the auditors or the board of directors. Neither the CFO, the board nor the auditors paid attention to the governing rules of accounting. When this was discovered by an internal whistle-blower it resulted in a sharp decline in share price, a $40 billion lawsuit from its shareholders and a bankruptcy was soon to follow. It certainly makes you wonder, what else was going on?

* How does Corporate Governance failure impact your business? Comply Editorial
* How does Corporate Governance failure impact your business? Comply Editorial
Image Source : Corporate Governance failure impact your business

Evidence suggests that if good governance practices were in place, the demise of such companies may have been avoided.

How Effective Governance manifests success for your business

Organisations typically battle with clearly identifying or possessing the ability to easily pivot toward their strategic initiatives making it difficult to pinpoint where they are getting the most value or where the organisation is headed. This could be due to several reasons including: lack of leadership support; visibility; or, the right measurement of activity in the relevant areas of the business.

Your governance should be able to inform those internal mechanisms to drive your strategy but equally, governance should be able to tell you that you need to change your strategy if it isn’t working properly. So even if internal mechanisms like the operating model are working well, when the strategy changes, what we need to drive and focus on has changed and it means we need to revise how we operate.

We now live in a world where our external environment is continuously and rapidly evolving and organisations need to adapt to the fluctuations, however, outputs of governance tend to be overlooked in informing decisions to adjust operational endeavours. These appear to be basic concepts but surprisingly often even mature organisations fail to effectively use governance as a mechanism to inform the overall business strategy.

In more recent years, successful companies have learnt to revolutionise their Operating Models to enable appropriate communication levels that include organisational knowledge, skills and relationships to rapidly engage senior decision makers. The increasing need goes beyond the lifespan of operational initiatives to form a sustainable and continuous capability within the organisation that provides a continuous feedback loop and an opportunity, through good governance, to communicate effectively and enhance strategic decisions.

In this way, organisations can continue to realise the benefits of good governance through a well-defined organisational design, enabling transparency and rapid decision making whilst also realising profitability and maintaining a competitive advantage in the market.

Conclusion


Through implementing multiple governance transformations across different sectors, it is fair to conclude that if organisations want a transparent governance structure that offers them the visibility and focus they need to make well informed strategic decisions – in adopting a combination of a suitable governance model and expertise – they can quickly identify and create the ideal engine that drives the governance changes which contribute to the overall success of the organisations.

 

Author


Molly Anscombe

As a management Consultant in People & Organisation (Organisational Dexterity) for Capgemini Invent, Molly has accumulated notable experience in managing operations and governance activity, both in private and public sectors. She has developed valuable insights into governance and how this impacts organisational activity and its profitability. Molly is passionate about helping clients innovate and deliver outcome-driven capabilities for their governance endeavours.

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