Enterprise Governance: The Big Picture
But there is more to EG; researchers see it as consisting of two parts: conformance and…
What is Enterprise Governance (EG), and what can it do for an organisation? At first glance, EG looks a lot like Corporate Governance, but there are differences. It comes under the purview of the Board, and is primarily concerned with managing the organisation’s risks and resources. A study by the International Federation of Accountants (IFAC) described it as the responsibilities and practices exercised by the board and management to provide strategic direction to ensure that the organisation’s objectives are achieved, that its risks are appropriately managed, and its resources are responsibly used.
But there is more to EG; researchers see it as consisting of two parts: conformance and performance. The conformance part can be equated with corporate governance but the performance part has more to do with strategy and value creation. Conformance and performance need to be balanced if an organisation is to have effective enterprise governance. What it aims to do is ensure the alignment of strategic goals so that they are better managed. Whereas conformance, i.e., corporate governance tends more towards box-ticking and adherence to rules and regulations, performance is the actualisation of strategies. EG, in that sense, is the “whole picture” alignment.
It also gives a more accurate picture of how accurate strategies are, and of the efficiency and effectiveness of the organisation’s board. Through its focus on the board’s performance, EG is capable of measuring whether or not a company is increasing in strength and value through its oversight processes, plans and strategies. Increased value means better shareholder returns, sustainable over a longer period. Research shows that although there is acknowledgement of the importance of EG, companies tend to pay more attention to its conformance, rather than its performance portion – due perhaps to more established mechanisms available for board use, and the focus on corporate governance.
The performance part may garner less attention because of its emphasis on strategy and value creation, both of which are not as easily measured. With performance, the board needs to understand the organisation’s risk appetite, and that implies a deeper than usual understanding of what makes it tick, and the environment it operates in, so that the right decisions can be made. Performance is infinitely more complicated than conformance, where EG is concerned. It is not measured merely in revenue or profits but in the value creation mechanisms which underpin the generation of shareholder wealth and keep the organisation sustainable.
With the performance part, the board must consider what makes the company stronger, and how to maintain this in the long term. It involves identifying and developing the firm’s underlying strengths and scouting new opportunities which may involve new, unprecedented risks but have the potential to generate healthy returns. Boards have to ask themselves, “Do we have what it takes to do this?” and “Is it worth the risk?” Decisions like these cannot be taken lightly because of their long-term implications; the right decisions can only be made after careful consideration – although the board may not have the luxury of time due to environmental and resource constraints.
Time, in fact, is a major constraint when it comes to EG. Business is hardly done at a leisurely pace; time is of the essence, and organisations cannot afford to fall behind. They have to keep up with the competition or drop out of the race altogether. Time also plays a pivotal role in how fast a firm identifies, anticipates and mitigates threats, which is part of EG strategy. In fact, time often dictates a firm’s agility. The faster it can make a decision and implement it, the faster it realises its objective. Similarly, the faster the decision is made, the faster the results can be seen, and if they fall short, the faster the decision can be reversed if mitigation is needed.
Boards are often preoccupied with providing oversight of various areas of the business, but who scrutinises boards? They are rarely scrutinised with the same level of intensity. Some firms hardly scrutinise at all. In many instances, the decisions made by the board are operationalised without question. The reason for the decision and the reasoning behind it are not known, and nobody asks why. This can be dangerous because boards are human with human weaknesses. Members of the board may not be able to see beyond their immediate concerns because their tasks are onerous and the time allocated to company matters is always limited.
There is always a gap between what they are able to do, and what must be done. Recognising this shortfall is imperative if they want to strategise effectively for the organisation, but they must be aware of the extent of the shortfall, and have the competency to address it. This is a precarious position; it is not always a situation that can be mitigated, and is a challenge to even identify. Ideally, there should be a committee within the board that concentrates on reviewing strategy in preparation for a full presentation to the whole board of what works and what doesn’t but this is not always possible, and may even slow down further the work of the board.
Ultimately, it will have to be the board itself which determines what route it wants to take: deal with the issues currently on its plate with the resources at its disposal, or make long-term projections about the organisation’s future, and use the resources at its disposal to strategise for the achievement of the firm’s long-term growth and sustainability. Strong and effective EG is what the board and top management must strive for, through providing strategic direction to appropriately manage risks while ensuring the organisation’s resources are used responsibly, to balance conformance and performance.