Why Corporate Governance Falls Short

Why Corporate Governance Falls Short

As long as humans have been around, telling us what the rules are has not changed our behavior as intended. It has just made us find more creative ways of exploiting or bending rules to better serve ourselves.

In particular, corporate governance rules are intended to balance power among shareholders, board, and management members while protecting the interests of all stakeholders. Yet stricter laws and more regulations have led to increased pressure, more lawsuits, and higher liability coverages.

Why do corporate conflicts, excesses, fraud and even scandals abound despite increased corporate governance? The challenge does not lie in the viability of the governance systems, but in the underlying drivers of conflict and power abuse at the highest levels of leadership.

An Overriding Irrationality

Corporate governance—the organizational guidelines, principles, rules, and procedures that define a stakeholder’s rights and responsibilities—forms the “what” of a given leadership role. It does not describe how the role should be performed. This leaves a gap of understanding that individuals will fill with their own assumptions about the role and the authority it contains, forming an unconscious “how” that often drives conflict.

Business culture attempts to deal with a clear right and wrong. Interpersonal dynamics are considered irrational, even “fluffy.” Corporate governance, by contrast, seems rational and reliable.

The clearly documented parameters of corporate governance fall short where people’s subconscious comes into play. But understanding those patterns—and where they come from—holds hope for real change.

Corporate Governance Must Be “Lived”

Laws can be interpreted and applied in ways to support an agenda. The irrational is always present, but it is not really examined, leading to decades of conflicts and scandals that even corporate governance has fallen short to avoid and deal with.

In the rational context of corporate governance, there’s an embedded sense that trust doesn’t play a factor. Duties and responsibilities are laid out in a black-and-white agreement. If you do what you are supposed to do, you stay or get promoted; if you do not, you get reprimanded or fired.

But trust works beyond those transactional relationships. Despite the reliance on corporate governance within the workplace setting, personal reflection led top-level leadership to openly acknowledge trust as the most powerful factor in their co-leader relationship.

An 80 percent majority of leaders I interviewed stressed the importance of corporate governance’s impact on these relationships. They were conscious of the importance of having clear roles. However, they also said that corporate governance needed to be “lived” to be truly understood. In saying this, they were unwittingly referring to the “how” of their roles and the trust factor.

Some leaders stated that corporate governance had no influence on their co-leader relationships because they had a clear understanding of the role’s rules. They believed those rules to be aligned with both their own and their counterparts’ understanding of the roles.

Two leaders can be in conflict, point to the same corporate governance, and be talking about completely different things because the “how” isn’t addressed. Both parties believe they are interpreting the roles and the relationship under rational, conscious drivers when in fact, their behavior is being driven by each person’s irrational, unconscious interpretation.

For example, a CEO named Joseph attributed his conflict-ridden relationship with his chairman, Matt, to a penchant for playing politics. He said that both their roles were clearly laid out and that they were both familiar with the guidelines, such as the functional rules and organizational regulations; Matt just didn’t seem willing to trust Joseph or let him do his job. However, when asked if they had actually discussed these guidelines in detail, Joseph said they never had.

Compare that situation with Hayden and Sascha, chairperson and CEO respectively, who also claimed to have a clear understanding of their individual roles and the guidelines around them. Unlike Joseph’s and Matt’s, their relationship worked very well. When asked if they had discussed their roles, they said, “Oh, yes, in detail and at length. It was hard in the beginning, but it was worth it. It’s the only way to build trust and reduce misunderstandings.”

If corporate governance is not “lived,” it serves as a justifier of the conflict. It provides an excuse not to further analyze details or uncomfortable matters if things do not go well.

On the opposite end, if roles are discussed in depth and mutually understood, there is a chance for a healthy psychological contract. It sounds simple, but it makes a major difference in the strength of a co-leader relationship.

One way of facilitating such relationships is to discuss a relational contract, such as the ‘Leaders' Oral Collaboration Contract’ (LOCC*). This is a type of relational contract. It is not written. Key discussion points are:

·       Roles (how they shall be assumed and executed)

·       Trust (its definition and meaning)

·       Power (what the division of power shall be like)

In brief: How should the relationship be lived and nurtured, so that trust can be built and the relationship can flourish? The LOCC can be applied to any business relationship. It is recommended that an independent moderator trusted by both parties facilitate the process.

At the organization level, refusing to acknowledge relational issues only leaves defensive mechanisms in place to deal with them. But while it is much easier for an organization to rely on company law and corporate governance, these rational elements continually fall short in preventing and resolving conflict, excesses, fraud and scandal.

Then, how can corporate governance take into account and dictate the human being’s ability or desire to walk and live in the spirit of responsible leadership? It must be understood, 'lived' and - if needed - pro-actively adjusted.

*The LOCC can be obtained free of charge: isabelle@leverage-your-self.com

Two-time Amazon bestselling author, Isabelle Nüssli, is an international senior executive specializing in business strategy, crisis management, and corporate innovation. As the chief energizing officer of Leverage YourSelf AG and the co-founder/chairperson of Responsible Leadership AG, she coaches and consults business leaders and startups in capitalizing on their full potential. Isabelle’s focus areas include navigating change and developing strong organizational dynamics at the individual level. She is the former chairperson of the NUSSLI Group. Isabelle holds master’s degrees from Kellogg School of Management at Northwestern University, INSEAD, and the University of St.Gallen.

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