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Effective governance for complex organisations

Posted on from London Business School Human Capital Network

Maja Stone presents some general principles of how governance enforces complex organisational structures, keeps them together and enables decision-making across organisational borders.

Organisational effectiveness

In our previous Changeboard article Whirlwind tour to higher organisational effectiveness, we discussed the difficulty of creating and maintaining learning environments and knowledge-exchange structures that span the silos of organisations. From our substantial experience of establishing cross-silo structures for our clients, we have concluded that right-sized governance is the critical element that holds effective organisations together.

Data management discussed in detail in our previous article would be one example where governance is critical to ensure that multiple stakeholders and data owners, from a variety of business units and functions, effectively manage and control their data, while deriving the maximum value from their data asset.

In the next article of our Organisational Effectivenes series, we will more explicitly link the topics of effective governance and organisational learning.

Effective governance is ‘in’ again!

Let’s start with the definition of governance. We define it as the formalized participative decision-making process which considers and prioritizes business issues in a clearly defined area of scope - in terms of accountabilities and responsibilities – undertaken by a selected group of people with appropriately balanced representation from all relevant stakeholder groups, spanning organisational, authority and deep domain experience / expertise levels.

As organisational complexity increases, governance – whether corporate, departmental, programme or project – is a way for enabling effective decision-making, accountability and strategy execution in a complex web of local, regional, and global solid and dotted reporting lines, budget allocation processes and centres of excellence.

With the increased pace of change that organisations are subject to, the days of annual planning cycles and periodic progress reports are gone; today, managers must constantly ensure that the decisions they made 6 months ago are still valid, and the business case for a multi-year programme is still sound. With personal liability on the increase, they increasingly feel they must constantly look 'under the hood' of their organisations to make sure that they are on track.

With the average tenure of CEOs reducing to just 6-7 years (Business Week and Forbes, 2009), the personal litigation of executives on the rise with Eliot Spitzer leading charge, and leaders being held accountable for mistakes made far down the line, as the recent story of the BP Gulf of Mexico disaster shows, we predict that governance – from corporate governance at board level, all the way down to IT project governance – is going to increase in prominence in the minds of business leaders. In the public sector, too, where, according to some sources, 70% of IT programmes fail and large programme fiascos, such as the disastrous implementation of a £12.7bn IT system in the NHS are subject to public scrutiny and outcry, politicians and senior civil servants are looking to experts to guide them, as the consequences can be dire.

Governance link to organisational maturity

We see organisational governance as following the same model as maturing organisational structures. In a start-up environment, or in a new business unit, organisational structures tend to be flat, communications lines open, and decision-making rapid and informal. The same applies to governance: with little need for it where all staff members are co-located and know each other, governance is the responsibility of the CEO at the corporate level.

As the organisation grows and formalizes its structure, introducing more levels, formal budgets and project plans, leaders are looking for ways to ensure control and alignment with their strategy where increasingly they don’t have direct line accountability over the people who execute it, or who might not even be employed in their organisations, as they increasingly deal with a network of suppliers, partners, and other service providers.

On the other extreme, a complex, global organisation, where multiple departmental strategies are set both globally and locally, projects and programmes compete for the same resources across organisational boundaries, and the organisation performs multiple shifts during the year in response to internal and external events, from cost-cutting to mergers and acquisitions, needs a corresponding structure of governance.

Interestingly, we observed that the levels of maturity of governance can vary within the same organisation; for example, the large, well-established headquarters and business units of a multinational might have a mature organisational structure, complemented by a fairly rigid governance process, whilst their newly-formed, remote business units, with their start-up mentality and few staff, fail to see the benefit of introducing governance. 

Right-sizing governance

Much has been written about corporate governance, and codifying governance of IT, through frameworks such as COBIT. However, little is written about the organisational impact of governance models, and how to judge whether an organisation’s governance is effective. From our experience, 'governance boards' can be viewed as the 'police', or, worse yet, as a necessary evil. We prefer to look at governance as a tool for increasing organisational effectiveness. We don’t have a magic formula that calculates an appropriate governance solution based on, say, how many budget/staff/regions/programmes you have. However, we believe that there is a simple diagnostic to decide if the current level is effective.

To illustrate this, consider two extremes: an organisation with too much, and another with too little, governance. We have come across both types in our consulting work. Because most of our clients, and readers, are senior managers/departmental leaders often tasked with leading governance in their departments, this is the level we’ll focus at. In the case of either under-governance or over-governance, the key issue is that appropriate structures for effective decision-making are not in place. In the case of over-governance, people attend governance forums where no decisions are being made, and, worse yet, decision-makers stop attending meeting that do not add value. An equally dangerous situation develops in the case of under-governance: there is no appropriate decision-making visibility, budgets are often not allocated or spent optimally, the teams are not focused, and projects end up benefiting individual agendas, rather than delivering on strategic goals.


When personal agendas determine organisational choices

What does too little governance look like? When an organisation/unit/department/programme has too little governance, we observed several of the following:

  • Governance is seen as something that is the responsibility of the CEO/business unit leader, and no governance or steering boards exist. Each department sets its own strategy, and consultation and alignment of strategy takes place formally only at senior leader level.
  • Most decisions are made by a small number of leaders/managers. Resources across departments are assigned to cross-division projects informally. Changes to plans mid-year can only be resolved by escalation to senior leadership.
  • Overall budget and spend is only set and reported at department level. There is lack of clarity about the process of budget setting and reporting.
  • Projects/programmes are started with no business case. Business cases, where they exist, are not reviewed throughout the duration of the programme for their validity. It is not clear as to who is accountable for making decisions, signing off deliverables, and approving programme stage gates.
  • Decisions are made through one-on-one meetings with several stakeholders, and often not recorded. Informal networks and individual agendas play a big role.


Too little gets through and gets done

Even with governance, there is such a thing as 'too much of a good thing'. Some symptoms of excessive governance are:

  • There is a multitude of governance boards and structures across all levels of the organisation and division lines. Everyone attends several governance boards, some of them in close succession and with similar membership.
  • Among many attendees of governance boards few are decision makers, while most people feel they need to be invited because 'they need to know'. No work is done without the authorization of a governance board. Each governance board micro-manages its projects and budgets, including thoroughly reviewing the work already approved by the level of governance below.
  • There is a whole industry behind preparing reports, financials, statistics and attending governance boards. Each budget setting and amendment goes through several levels of governance boards and approvals, without clarity as to which level can actually make the decision. Many governance boards conduct sessions that appear to be status report meetings, with no decisions made.
  • The start of projects/programmes is typically delayed by several months while the business case, however straightforward, must make its way through a multitude of governance boards and approval structures. With a micromanagement of projects and budgets, senior management fails to review 'big item' programmes and the alignment of delivery to strategy.
  • Decision-making is purely by committee in already established governance structures, even if its membership has little relevance to the decision at hand. Straightforward decisions which can be made within one’s line accountability must still make their way through the governance structures.

How to set up effective governance

In an area where there is no governance, we give guidelines on how to set up an effective governance structure. As the organisation matures, structures are reorganized, and individuals join and leave organisations, there is a need to periodically review governance to ensure it continues to deliver the Benefits to the organisation: namely, ensuring that the organisation is working together to deliver the strategic goals, while ensuring compliance with internal and external controls and requirements. We give guidance for both. We recommend using good-practice principles for setting up governance structures and ways of working, which we have successfully tested in numerous client engagements.

Effective governance principles: structure

  • Use the organisation’s value chain, rather than organisational structure, to set up the governance structure. In our experience, this governs for outcomes and requires the fewest governance boards/groups, while helping to break the organisational silos.
  • Where possible, define the outcomes of each governance body by linking it to the organisation’s strategy. Consequently, there will be a clear senior owner for that governance structure.
  • If dealing with a large organisation, create appropriate governance 'tiers': where Tier 0 would be the board of directors, Tier 1 senior executive, through to line management, and project/programme level boards at perhaps Tier 4 or 5. Be clear about the authorities and delegations of each level.
  • Set up minimum membership of each board. A manager and their line reports should not all be attending the same governance boards as standing members: the need for a greater level of detail can be handled via extended invitations to individual board sessions focusing on specific topics.
  • Make sure that the decision-makers for a governance board are the right ones for the topic discussed. For example, who should decide on how to best address technical obsolescence? Most business leaders would prefer the CIO to give them the high-level options, outlining the risks and Benefits, rather than reviewing the detail of various technical architectures.

Effective governance principles

  • Define and agree what the purpose, accountabilities, decision-making powers, and parameters for escalation are for each tier of governance board. This helps guide what decisions each board can make, and what it needs to escalate to the tier above. This should empower managers while putting appropriate safeguards in place for extraordinary events.
  • Define the responsibilities of the chair, the secretariat, the members, and the advisors and appoint them for each board. Ensure the individuals are familiar with them before they sign up to them.
  • Documet and set out individual accountabilities of each member. For every person attending from a given area, document what they are individually accountable for, typically for representing the views of their department and making decisions on behalf of it. Don’t forget to specify what their accountabilities are outside of the governance board, such as communicating the outcomes of that governance board in their department.
  • Define appropriate frequency for each governance board. Check what decisions and updates must be made and how frequently they need to be made by the governance board. Don’t use the boards as a replacement for status update or line management meetings. Opt for minimum required frequency, but use escalation criteria as a mechanism to call extraordinary meetings where required.
  • Standardise and simplify formats for governance board reporting. Consider the audience: does a senior leader really need to know the nitty-gritty of a technical system update? Use pre-read materials to communicate the detail if necessary, but make sure it is issued in advance and the agenda, and board presentations, are suitably high-level.
  • Where possible, define standard agenda areas ahead of time. For example, for IT governance, the topics of the COBIT framework of strategic alignment, value delivery, performance measurement, resource management, and risk management provide guidance on how the governance topics might be structured.
  • Document all of these in a “Terms of Reference” (ToR) document for each governance board. Ensure it is standard and contains the same items for each board.

Critical success factors of effective governance

Effective governance is not just about the structure, it is about how it comes to life. Don’t underestimate the change management element of implementing or revising a governance model: it will require the usual tools of change management.

Some the tips from our experience are below:

  • Ensure the buy-in of senior leaders and decision-makers. Too often they enthusiastically attend the first meeting, only to subsequently delegate to one of their line reports, more or less permanently.
  • Define the governance structure and ways of working collaboratively. Allow individuals to have input into the design, ideally through workshops, to come up with the optimum design for that organisation.
  • Ensure that one person, suitably senior, is accountable for the entire governance framework, rather than each board operating autonomously; this will ensure consistency and alignment across boards, and sharing of best practice.
  • Notwithstanding the point above, allow each board to find the most effective way of working for them within the defined parameters.
  • Link the governance with individual performance objectives, whether by governance boards explicitly carrying out an individual’s performance objective which is a strategy item, or, conversely, by writing governance-related objectives into the personal development plan for an individual.

Maintaining governance structures

Whether your organisation is suffering from under-governance or over-governance, or a unique mixture of the two, you must ensure that the governance structure and framework, after it is set out, responds to the changes in the wider organisation, whether a change in strategic objectives, the initiation of a new programme, a reorganisation, or even new leadership. Even if none of those events take place, we recommend reviewing your governance framework and structure at least annually. To diagnose the effectiveness of an organisation’s governance framework, we would suggest some of the following:

  • Focus interviews at all levels of governance participants, soliciting their views on the effectiveness of the structure. A useful metric is to find out how much time each of them is spending attending, and preparing for, governance boards.
  • Gathering any evidence of failed governance, from programmes that didn’t deliver Benefits to significant budget overruns that only surfaced at year-end.
  • An examination of the boards’ terms of reference, and whether they contain the necessary parameters described above. Are individuals clear on their responsibilities? Are the authorities of the board clear? Are all the critical roles appointed?
  • A comparison between the Terms of Reference and the board inputs and outputs, such as pre-read materials, presentations, attendance records, and minutes. Is the board really fulfilling the objectives it set out to do?
  • A review of participants against the decision-making power of the board: this will indicate any deficiencies or surpluses in attendance.
  • A benchmarking of the organisation against its peers.

Not every organisation will want to review its entire governance structure annually, but we suggest some 'kicking of the tyres' in those intervals, and more thorough reviews when the organisation has gone through a significant change. 

About the Human Capital Network
The Human Capital Network was established by the London Business School Alumni Human Capital Club as a discussion forum that promotes open debate on the cutting-edge issues in strategic organisational change and talent management. We publish the cutting-edge research on organisational development and change in our Organisational Effectiveness series on Changeboard, provide an online discussion platform on our blog and run the Organisational Development Speaker Series at London Business School.

Our distinguished speakers provide perspectives from industry, management consultancy, academia, and trade bodies. Through the presentation of best practice case studies, new research and group discussion, our three interactive panels will help you identify and tackle the key Challenges of organisational change. 

The past events of the Organisational Development Speaker Series covered such topics as the future of work, employee engagement strategies for the downturn and beyond and building change-ready organisational cultures. The next event of the series will be held in October 2010.

The Human Capital Network’s events are designed for senior OD and change practitioners and attract LBS alumni and external guests alike. Attendees of our past events represent a varied mix of industries and organisations, ranging from small entrepreneurial innovators to FTSE 250 blue chips, greatly contributing to the quality of panel interaction and the after-panel networking.

About Oxana Popkova

Oxana is a principal with Molten Group in London and a chair of the LBS Human Capital Network. Oxana advises companies on best practices in organisational effectiveness, change management, talent management and learning & development. Oxana has worked for a variety of blue-chip clients.

Oxana Popkova:

London Business School Human Capital Network

London Business School Human Capital Network

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