Effective Business Governance

To be effective, a good governance program needs a clear definition as well as an efficient structure. Starting with a definition from the dictionary, governance equates very simply to “government” (Webster’s 1984, p. 529), and the root word, govern, means “to control.” Surprisingly, our federal government is supposed to shy away from controlling, conforming instead to direction in the U.S. Constitution, which repeatedly states that government should provide services rather than control the populace. However, the purpose of business governance is more aligned with the dictionary definition, “to control,” and with doing so independently and with full authority over the top managers of the business. This approach ensures that company executives behave ethically, with the best interests of the company placed ahead of their own (Irani et al. 2005). In addition, governance principles dictate that company objectives should be met and organizational processes should be executed effectively, not neglected, skirted, or altered for the benefit of individuals (Weill and Ross 2004). The members of the governance team must be able to act independently and authoritatively over the top executives of the business (Hemphill 2005) in order to have any chance of intervening in the types of behavior Enron, WorldCom, and Wall Street executives displayed just before their downfall.

To accomplish these functions, governance needs a structural configuration that controls from the very top of the business. The most important component of proper governance is the board of directors, a familiar term for many business managers, but not necessarily accompanied by a thorough understanding of what a board should actually do. A governance board is a body of highly experienced individuals called directors who absolutely must possess solid ethical character and extensive corporate business knowledge. They are the only ones who can exercise the oversight and control of the company’s executive managers (George 2004; Weill and Ross 2004). The board determines which of the executive managers make which decisions, and the board should hold the decision makers directly accountable for all decisions. The most effective boards are composed of professional directors who are immune to personal influence from company executives and are committed personally and professionally to the best interests of the shareholders and company stakeholders (George 2004). Independent directors are in a better position to resist any attempts at collusion and must be ready to dismiss company officers if necessary (Marnet 2005).

Another key component of governance is a framework within which the top managers operate, ensuring that they will be accountable for all decisions made on behalf of the company. Stanford (2004) recommended a decentralized management structure with minimal vertical layers, since excessive layers of executives and deputies tend to slow down the decision and review process and potentially cloak any wrongdoing. The top managers should ideally be one level below the board of directors and ready to meet with them upon notification. The board should also have an impartial nominating committee that is responsible for choosing the executives (Levitt 2004).

In addition to setting up a streamlined corporate management structure, the board of directors writes the specific rules for decision making. These rules should be published as company policies, issued by direction of the board. The board also establishes a series of formal reviews in which the company managers brief the board on all decisions, defending their actions in detail in front of the board, if requested (Levitt 2004). The board can scrutinize each action if desired. Certainly not all decisions and actions are reviewed, but the fact that all management actions are susceptible to review builds in accountability. Management makes the decisions but must be prepared to explain them to the board of directors (Weill and Ross 2004). This aspect is essential to maintaining corporate ethics yet, on occasion, is somehow glossed over by even the best of boards.

The last two components of good governance are the auditors and the shareholder organizations. Proper governance dictates that all financial actions, decisions, and outlays be audited routinely by a completely independent organization. The auditors should have minimal ties to corporate executives, yet possess full authority to examine company records under the direction of the board of directors (Marnet 2005; Weill and Ross 2004). The milestone legislation enacted by Congress in 2002 to reinvigorate corporate governance, the Sarbanes-Oxley Act, directs that auditors accept top responsibility and independent authority for finding discrepancies in corporate financial records (Hemphill 2005). Lastly, the shareholders themselves must be able to vote independently for various aspects of executive appointments, major financial decisions, and other critical aspects of the company’s future—and they must be given the opportunity to do this without undue influence from executives pulling for proxies and shortcuts to the shareholders. Shareholders must have their say in company objectives, and it is the managers who are responsible for ensuring a mechanism is in place to gather the votes, again with full oversight by the board of directors (Levitt 2004). Without shareholder input, there is no corporation. Without independent audits, there is the specter of collusion.

Essential to the effectiveness of an organization’s governance system are the ethics and attitudes of the directors chosen to serve on the board. Operating in an ethical manner does not mean that a business cannot strive for profits, because businesses must survive by making a profit, which is also a vital part of a business’s place in the community. Nor does it mean that laws are required to ensure that companies behave ethically. It does, however, mean that the directors themselves must have, and demonstrate, an unyielding set of ethical principles (Irani et al. 2005). There is no disadvantage to being ethical, even if competitors do not behave likewise. As shown by the huge scandals of recent times, dishonesty eventually catches the dishonest, and there is no recovery.

The mechanism by which ethics permeate down through the company from the board of directors is through edict. The board must demand that integrity be the number-one priority for the CEO and his or her officers, and this must be communicated consistently and effectively on a daily basis. William Donaldson (2004), chairman of the Securities and Exchange Commission (SEC), stated succinctly, “The tone at the top of an organization is perhaps more vital than anything else, and the chief executive will set that tone under the oversight of the board” (p. 237). If this occurs, organizational integrity naturally follows.

Organizational integrity is a nice-sounding phrase and seems to be an easy concept for an organization to adopt, but it still eludes many businesses and is outwardly, albeit inadvertently, discouraged by many others (Pinchot and Pinchot 1997). Organizational integrity is much more than employees being honest—it is a pervasive and persistent way of life accepted and practiced by every employee within a company, from the top manager to the lowest-level worker. Some qualities that are certain indicators of organizational integrity are people working cooperatively, workers speaking their mind without fear of reprisal, healthy and positive attitudes prevalent in every meeting, people accepting accountability for mistakes, and managers freely praising instead of condemning employees (Byrd 1992). Organizational integrity involves self-regulation by all parties involved, backed up by always performing due diligence. Whenever programs and business procedures are executed, by conducting due diligence an organization makes a sincere effort to ensure that it conducts itself with good conscience and responsibility (Laufer 1996). Successful unit integrity is not born of a fear of legal retribution; it comes from within, and within each member of the organization.

If an organization lacks institutional integrity, business issues that would normally self-correct can escalate out of control. One of the first indications is a general malaise within employee ranks reflected in missed deadlines, poor workmanship, specifications not met, customer complaints, workers and managers breaking promises to customers and coworkers alike, controversies becoming formal complaints and arguments, and a general decline in profitability (Byrd 1992). Job security becomes doubtful, and employees tend to lack any loyalty to or identity with the firm—turnover increases sharply in some instances; in others, it is gradual but equally damaging to the retention of skill and experience (Pinchot and Pinchot 1997). Openness and truthful behavior become rare, and businesses considered to be trusted members of the surrounding community suddenly find themselves subject to lawsuits, fines, and general discontent within the populace. As the failing of integrity takes hold, mistakes are covered up and managers become defensive; initiative becomes rare. Those who have weaker value systems are tempted more often to cheat in their business dealings (Kanter 2004). All these issues can be insurmountable if left unchecked, but there is much that can be done to alleviate them, starting again at the top.

One of the most effective ways to retain organizational integrity is through active leadership. When leaders neglect to promote an atmosphere of integrity and honesty, the result is a regression to a stifling and intimidating business environment rather than an open and honest cultural climate (Kanter 2004). Restoring an open business culture means restoring confidence within the members of an organization so that free and open discussions ensue. Coupled with improved work conditions and product quality, eventually quality of life gradually improves as well. Simply stated, leaders must lead. They must be centered on values and make it known that ethics are critical to the business function. Behr (1998) stated, “Today’s leaders must rely on core values to keep the organization centered and balanced” (p. 52). Behr emphasized value-centered leadership and made it clear that all leaders require that focus, all the way to the top. Again, the ethical governance imposed on an organization by the directors must filter all the way down through an organization for it to retain its integrity. There are several ways to accomplish this transformation.

The best leaders are the ones who can cultivate organizational integrity through a combination of personal action and company programs. The most successful approaches in today’s business environment engage the innovation, talents, and intelligence of people at all levels within the organization (Pinchot and Pinchot 1997). Pinchot and Pinchot (1997) noted the fact that people have increasingly more to offer as educational levels, self-directing skills, and initiative become more sophisticated. They offered three steps in creating an organization with integrity, none of which are unusual business practices. First, leadership must create a strong community feeling within the organization by encouraging an open culture based on simple company visions and purposes. Next, competition and reward must be promoted within the organization, opening up opportunities for growth among employees. Lastly, employees must feel secure, through benefit programs, freedom of speech, and an internal tradition of keeping promises and honoring commitments (Pinchot and Pinchot 1997). Simple ideas can produce significant results.

The positive aspects of business leadership can alleviate some of the more common impediments to building business integrity and in some cases can prevent them altogether. Individual dominance born of bureaucratic tenure stifles cooperation and creativity, but fostering healthy competition makes everyone aware that they must earn their positions. Giving employees freedom to speak and express their ideas gives them the comfortable sense that top managers can trust them, and trust earns trust. Byrd (1992) claimed that a well-planned quality program was the easiest way to fight a decline in organizational integrity because invariably a lowering of quality accompanies the loss in integrity. Byrd suggested that a full commitment to quality, a focus on the customer, work system improvements, an innovative work climate, and the encouragement of pride in work contribute to quality and, in turn, business integrity.

Byrd (1992) further suggested a detailed method for ensuring that organizational integrity becomes a way of life for businesses. He identified seven strategies as important in the fight against eroding integrity: (1) stop upper managers from manipulating subordinates, (2) replace key people who become cynical, (3) replace systems of poor design, (4) emphasize cross-functional teams, (5) create a middle-management study team, (6) establish team building, and (7) focus on living up to commitments. These strategies can be most effective against two of the most damaging impediments to integrity building: a company’s predisposition to assume that the way it has always done things is right, and an institutionalized resistance to major change. If a business can overcome these obstacles, it is well on its way to erecting and keeping a solid framework of integrity. In addressing the duties involved in leadership’s responsibility to the creation of an ethical culture, Covey (1998) summarized all the previous techniques by stating, “When everybody accepts personal responsibility to behave in ethical ways, you then hardly even have to think about it, because ethical behavior is your name, not some artificial department” (p. 108).