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Governance: the Critical Factor Most Business Owners Get Wrong

At your company, is it crystal clear who makes what decisions, on what basis, and with what goal? Are you sure?

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Success or failure, the creation of value or the lack of it all come down to one thing: good decision-making. The make-or-break decisions at your company tend to fall into three inter-connected areas: strategy (where and how will your business compete), leadership (finding the right people to make it happen), and governance (setting the framework for who decides what).

In our experience, leaders pay far too little attention to governance. And too often, we have seen it tear their company apart.

The Crucial Role of Governance

Governance aims to make it clear who in your company can make which kind of choices, with what ends in mind, and on what basis. Who should get the right to irrevocably allocate scarce resources? How do you design the system to make sure the most qualified people are making smart decisions to create the most value for your company? Wrestling with these questions is not as glamorous, perhaps, as issuing mission statements and recruiting leaders. And true, good governance can’t compensate for ineptitude in the other two areas. But if you don’t get the governance part right, it could doom your company.

Governance problems come in many sizes and shapes. A typical problem in many owner-led companies is the transition from the founder to the next generation. This issue is usually fraught with emotion, power struggles, hidden family agendas, and considerable anxiety among non-family employees. In one case we consulted on, the founder/CEO/chairman had three sons with very different abilities, but he was unable to distinguish among them in terms of roles and shareholdings. He could not separate running a family business, where he might take from the strong to give to the weak, from running a commercial enterprise, where the weak need to be let go at some point.

Why It's So Tempting to Ignore It

In many owner-driven companies, the owner serves as both CEO and chairman while being the majority shareholder. This is a problem if the primary role of the chairman is to fire the CEO when needed. As long as your company is completely private, you can pretty much govern yourself as you please, (with some exceptions). But you shouldn’t: Any company, at its root, is a voluntary collaboration in a spirit of cooperation, mutual fairness, and respect, and you should always consider the needs and wishes of other key players.

In one of our own companies, we took great care to lay out the decision rights of the CEO by specifying which choices the CEO could make alone, which needed board notification and which required board approval. These understandings covered such key decisions as setting senior compensation, developing talent, making new investments, licensing IP, raising capital, and entering strategic partnerships.

 This meant that the CEO had to give up some power and privilege, but the return--in efficiency and employee engagement--was well worth it. Without sound governance, decisions stall, cash drains away in redundancy and inefficiency, key employees lose commitment and leave, and internal conflicts lead to poor decisions. All these varied symptoms eventually metastasize and can cripple your company.

To assure that you get the governance model right, make sure it aligns with your leadership team as well as current strategy. This way, you will get high quality decisions throughout your company, on a reliable, consistent basis, to the benefit of many.

Co-authored with Rob Arnold, Chairman of SLC, a consulting firm based in Singapore focused on strategy, leadership and governance.

IMAGE: Thomas Barwick/Getty
Last updated: May 28, 2013

PAUL J. H. SCHOEMAKER is the founder of Decision Strategies International. A speaker, professor, and entrepreneur, Schoemaker is research director at the Mack Institute for Innovation Management at Wharton, where he teaches strategic decision making. His latest book is Brilliant Mistakes: Finding Success on the Far Side of Failure.




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