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The Governance v Management Paradox

Corporate Governance and Management. Is there a difference and does it really matter?Whether you’re running your own company or you work for one, you’ve probably been hearing the term “Corporate Governance” quite often over recent years, but what exactly is it? Another form of management? Just another term that the “people in charge” use? In this article, let’s explore the fundamentals of governance to demonstrate its distinction from management.


There is no one agreed definition for corporate governance and various governance experts have defined it a variety of ways. In 1992, the Cadbury Committee defined it as “the system by which companies are directed and controlled.” However, such a broad definition may very well include the role and responsibilities of a management team. The famous Bob Tricker, who is to date considered the Father of Corporate Governance, explained it more eloquently. He posited that in his experience, he noted a distinct separation between governance and management and explained that while management runs the organization, the governing body, i.e. those charged with governing the organization, ensures that it is being run properly. It follows therefore that governance is the responsibility of the Board of Directors while the CEO and management team are responsible for the day to day running of the organization, pursuant to the governance framework that the Board has established. While both are like two hands coming together in an applause for the long-term success of the company, the role of the left hand is fundamentally different from that of the right hand.




 

In order for a management team to be effective, it needs a strong governance framework, put in place by an effective Board of Directors. The elements of a governance framework give great insight into what governance is really about. One element of an effective governance framework is the organisation's legal environment. This contains the laws, regulations and codes of best practice that exist within the macro-environment of the company. These must be taken into account by every Board of Directors when it is seeking to embed and perform best governance practices. While adherence to laws are mandatory and no Board of Directors should be operating contrary to the law, codes of best practice are principles-based and voluntary. Notwithstanding, adopting the recommendations of these codes, as far as is practicable, will lead to effective corporate governance and long term organisational success. Various jurisdictions around the globe have been busy developing and reviewing their own Corporate Governance Codes that set out recommendations and principles of best practice by which companies of various sizes, sectors and complexities should be guided. In January 2024, the Financial Reporting Council of the United Kingdom released a limited revision to the UK Corporate Governance Code 2018; here in the Caribbean, the Private Sector Organization of Jamaica released a revised Code in 2021 and in Trinidad and Tobago, a review of the Trinidad and Tobago Corporate Governance Code 2013 is currently underway through a collaborative effort of the Caribbean Corporate Governance Institute, the Trinidad and Tobago Chamber of Industry and Commerce and the Trinidad and Tobago Stock Exchange Limited. Regulators are also jumping on board the Governance train as they develop and release corporate governance guidelines to those under their ambit of control.

 

Building an effective governance framework also involves establishing appropriate structures that facilitate long term success. Establishing an effective organizational structure is important but the governance framework will focus on the structure of the Board. Careful and thorough consideration should be given to the roles of the various governance players such as the Chairman, the non-executive and executive directors, the Corporate Secretary, the auditor, the Chief Risk Officer, and Sub-Committees of the Board. Further, thought should be put into what is the most appropriate structure for the company based on its individual size, complexity and sector to ensure that a ‘one size fits all’ approach is not adopted. If a small to micro entity attempts to put in place a structure that is suited to large multinational. for example, its prospects for success will become stifled.


During the process of determining the most appropriate structures, questions about the powers and authorities to be delegated to management will be considered. Such considerations may include:


1) Should management have the power to hire staff at certain levels?

2) Should management have the power to approve the purchase of goods and services and if so at what value?

3) Should management have the power to dispose of assets and if so at what value?

4) What are management's responsibilities in managing the risks to the organization?


These considerations, which are typically captured in the organization's policies should be considered even at the point of building out Board structures to allow for effective oversight.





Corporate governance also includes the organizational constitution. One of the first orders of business for a Board should be the setting of its constitution. A part of it is addressed during incorporation in the form of the company’s Articles. The laws of various jurisdictions may provide for different information in the Articles, however by and large, the articles will generally contain the size of the Board, the number of shares the company is authorized to issue, the liability of the owners or members (whether limited by shares, guarantee or unlimited) and the business the company is authorised to conduct. After incorporation, the Board should also develop the company’s first bye-laws and place it before the members for final adoption. These high-level elements are, often times, put in place long before a CEO or management team is even engaged and they do not fall under the ambit of management. Management, however, needs the constitution to be in place as it provides critical rules which must be followed when running the organization.





Another fundamental element of corporate governance are organizational strategic plans and policies. Management must ensure that the policies and strategic direction put in place by the Board are implemented. While management may provide much needed guidance and expertise in developing organizational policies and strategic plans, these are ultimately the responsibility of the Board and are a critical element of corporate governance. Policies should align with the desired culture and purpose of the organization, should facilitate the successful implementation of the strategic plan and should be universally applicable throughout the organization. The very directors who approve the policies should lead by example in following them. In his book entitled “Stop the rot: Reframing Governance for Directors and Politicians”, Professor Bob Garratt very eloquently explains the importance of leading by example and the catastrophic consequences of failing to do so. It is also important for Boards to remember that Policies and Strategic plans are not cast in stone and should be periodically reviewed to ensure maximum effectiveness. The dynamic nature of the company's environment should inform the review period.


Both Governance and Management involve leadership, but the governing body, i.e. those responsible for governance, is ultimately responsible and accountable for an organization’s successes and its failures. In many scandals, we see CEO’s and managers, particularly those that do not sit on the Board point fingers at the Board stating that the Board told me to do such and such, or even worse, that the Board was in fact running the organisation while ignoring the role of management. The Chairman and the Board do not have the luxury of excuse. So whether you run a micro enterprise or a large multinational conglomerate, it is very important that you understand the fundamental principles of governance and your role as a director, provide the governance framework that is most appropriate for effective management and when you’ve hired a CEO, General Manager or Managing Director as the case may be, ensure effective oversight.

 

Ceronne Bayley LLB MBA is the Lead Corporate Governance Consultant of her own consulting firm, Ceronne Bayley’s Consulting Services. She is a Corporate Secretary by profession and has over fifteen years’ experience working with and advising Boards of Directors of State Enterprises as well as profit and non-profit companies in the private sector.


The information provided in this article does not, and is not intended to, constitute legal advice; instead, all information contained herein are for general informational purposes only. Readers should contact their attorney to obtain advice with respect to any particular legal matter.  No reader should act or refrain from acting on the basis of information in this article without first seeking legal advice from counsel in the relevant jurisdiction.  Only your individual attorney can provide assurances that the information contained herein – and your interpretation of it – is applicable or appropriate to your particular situation.  Use of, and access to this article do not create any professional relationship between the reader and Ceronne Bayley’s Consulting Services.

 

 

 

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