Every week I see signs that our social institutions and organizations have lost their ability to accomplish key tasks, even as the urgency to do so rises. In fact, the intensity of feelings among different stakeholder groups seems to be a factor contributing to breakdown.
We depend on large organizations, government, and community groups to accomplish large and complex tasks. But they cannot do that if they are paralyzed about the nature of their task and how to gather the resources they need and accomplish it. It is not clear who should decide, how that should be done, and how to keep their focus and get things done without having to face the demands to change course.
This foundation of agreement is called governance, as distinguished from operations and management. We are facing a major crisis as governance structures face challenges to their legitimacy and the governors themselves find it hard to reach agreement. Finding the right thing to do is becoming increasingly difficult as we lack the ability to forecast even the immediate outcomes of our actions. We have to solve the problems of how to govern our institutions and entities if we are to survive as a civilization.
As I view the global questions of legitimacy of nations and super-national entities, I work as a consultant in governance to family businesses and educational institutions. I see similar challenges in defining and carrying out effective governance. If an entity cannot decide what it wants to do, craft a workable design for getting there, and stick to it while prudently changing course when challenges arise, then the best machines and organizations cannot function. How can they organize human energy to get things done, and balance the different interests of different stakeholder groups who want something from the organization?
To begin the conversation, I want to define seven key considerations that effective governance, whether of a company, a nation or a supra-national alliance, must take into account when they craft their governance process.
1. Balance Care and Caution in Human Nature
Social science for eons has dealt with a hard and soft view of human nature, summarized in management literature as “Theory X” and “Theory Y.” While we would like to believe that people are naturally cooperative, want to make a difference and basically care about each other, we know that in larger and more impersonal relationships, people also can be exploitive and selfish. So governance must harness people’s desire to cooperate and become involved with oversight that protects people from the actions of other.
The insight of the Prisoner’s Dilemma Game is that the most effective strategy is cooperation unless the other does not reciprocate, at which point you shift to the tit-for-tat strategy of protecting yourself. In the workplace this translates into creating a culture where people are trusted and allowed to make choices, with the overall direction of guiding principles. But, there is accountability and circumstances where the mission or challenges dictate a more directive stance by leadership.
2. With Voice Comes Responsibility
People love to have opinions and our concept of freedom includes that we have the right to any opinion without any constraint on reasonability or thoughtfulness. But in an organization the expression of ideas must be tempered by preparation so that your opinion is informed. Your voice on product design may not be equal to that of an engineer or of someone who has been close enough to an issue to see its myriad dimensions.
Those who are most informed may not be the people most affected. The more passionate voices may not be the ones who can make a different.
Defining whose voice means most on an issue and separating the responsible voices from the impassioned ones is a major governance task. Passionate voices often fade and the people with voice are not necessarily around to make the policy or action real. And, of course, everyone can’t have an equal voice in every issue even if every person’s voice matters. Governance must define clearly who has voice on what matters, how it is exercised, and how decisions are made.
3. Mediating the Split Between Operations and Governance
Every institution operates on two levels.
One of the fundamental innovations that allowed the development of large organizations was the split of operating responsibility from ownership and control. In a corporation there is a group of owners delegate operating responsibility to managers; in a non-profit a board acts as owners; and in government there are elected leaders and staff executives.
The challenge of governance is to manage what are called “agency costs” that stem from the reality that the operators have their own interests as well as those of the owners and that there is a cost to the oversight and balancing of these sets of interests.
Operators—whether in the company or government—want to continue to do what they are doing and get paid well, while the owners or community expect focus on the mission of the enterprise. So the owners have to watch the operators. On the other hand, the operators who are around all the time and closer to the field face the reality of getting results and often have technical expertise on how to do a task. Sometimes the owners can want results or ask them for unrealistic outcomes.
The challenge of governance is not only to find ways to listen to the operators and balance the needs of owners as well as other concerned groups, but also remain open to new ways that may not be in the immediate interest of the operators. Governance is a huge balancing act. Governors can’t just show up and make decisions. They need to listen, learn, and exercise great ability to manage many competing pressures.
4. Information is the Jet Fuel of Institutions
The Italian philosopher Niccolò Machiavelli taught us that the key to power is to hoard information. The best way to take advantage of people is for them not to know what is happening.
For example, compensation is not considered public. Yet, for people in an organization to align their actions, they need access to information on resources, costs, and outcomes. Open Book Management allows everyone in an organization to have access to all information; and this concept should also apply—with specified limits—to communities and government.
New technology makes information available to everyone, but people in power too often feel that things should not be shared. Governors can’t govern if they are not informed of what is happening, and this goes against some tendencies in human nature. Creating appropriate transparency and defining areas for confidentiality, is a key element of governance. The governors and the operators, for different reasons, need access to all information.
5. Majority Rules are Tyranny for the Minority
Our country is pretty evenly divided on most policies, potentially allowing a very tiny group to be the swing vote. What does an institution owe to the 49.9 percent of its people or what does a company owe to those who own that proportion of shares?
Governance has to guarantee rights and create policies that allow the controlling majority to act, and at the same time limit them to protect the significant minorities. Control is not an invitation to tyranny and governance must allocate a clear process for those not in control to have impact. A governance process needs to offer values about respect for minorities and their role in decisions.
6. Long-term Commitments and Prior Investments Limits Innovation
The design process would like to start with a “blank sheet” of paper to create an ideal system. However, the world has few empty pages. Mostly there are already investments, buildings, technology, policies, employees and business units doing things they believe in. When can governors decide to move in a different direction and how can they let go of the prior investment and allocate resources for new ways?
Many deep changes require long-term investment. The situation of high-speed rail travel is an example—today’s majority deciding to invest constrains the majorities of the future with costs and a policy.
Consider the prior guarantee of pensions and health care. When can it be questioned or change? How do we decide to make long-term investments in the future? This is a challenge for all sorts of governance and creates a time when a choice of one point in time limits the future.
We can’t sweep away the every past generation, yet with the development of new possibilities and crises, we sometimes need to. Governance must figure out when to invest in a course change and how that can be done. Then they must deal with the rights of those who invested themselves in the prior direction—those who feel aggrieved.
7. Amortizing the Cost of the Commons
All regulation of commerce must face the challenge of the commons—those resources that are held in common that we all share the need to preserve. The problem of governance is that while we all share a desire to maintain them, individual self-interest allows us to use resources that we can and pass costs along to the commons.
For example, a resource like water, power, or waste disposal has been subsidized at low cost and, as we reach limits, we find that the cost of such resources will rise. The profitability of many companies rests on the limitation or avoidance of costs of the commons.
The role of governance is to fairly administer the commons so that everyone actually does their job to take care of it. So we regulate individual impulses to dump or pass on costs and companies don’t like it. This era is showing that we need to focus more and more on shared commons costs and that many of our economic entities may not be as profitable as they have been. If a company relies on society to pay health costs and, therefore, pays low wages, they are subsidized by the commons who pay health costs.
My contention here is that every enterprise—from small start-up, to nation, to community development group—faces the above challenges. In the past, we could assume that a common culture and set of values about how to govern was in place. Now we are in a time of flux where the challenge to legitimacy leads us to have to rethink how we govern entities in general.