Good Governance, Canadian Style: Principles Rule!

At a conference hosted in Toronto on November 26-28, 2002 by the International Quality and Productivity Center (IQPC), several Canadian corporate leaders were invited to present solutions to problems that have, until recently, largely remained behind the boardroom door. If the themes emerging from this conference are any indication, corporate Canada is wisely striving to learn from -- rather than react to -- the enormous governance failures of U.S.-based companies. In fact, this more measured, considered thinking could see Canadian business productivity levels rise against those of their U.S. counterparts once the Enron / WorldCom dust has completely settled across the corporate landscape.

The key point of departure between the U.S. reaction and the apparent Canadian direction is the sometimes subtle but important distinction between principles and rules. The U.S. Sarbanes-Oxley Act is clearly a rules-based response that attempts to impose certain practices on companies through regulation.

Specific, legislated rules do have an important function in our society. We use them in an attempt to prevent undesirable actions from occurring, and to protect people from being cheated or hurt in some way. While useful in preventing the negative, rules do not, in themselves, create the positive. Quite the opposite, it would seem. Look no further than a classroom, courtroom, or sitting of the House of Commons to witness creative approaches to by-passing rules and the "rules are made to be broken" doctrine in action.

Whereas rules beget exceptions, principles, by definition, imply widespread or universal applicability. This universality is no accident since principles are directly derived from concepts and beliefs so fundamental, they encounter little, if any, argument. Understanding what is truly fundamental also facilitates flexibility when principles are applied, in contrast to rules, which, if they are to be enforced, must be very specific.

Principles also have the power to prevent the undesirable and to create the desirable. The need for focus on the compliance with, breaking or avoidance of rules, is replaced with general understanding and agreement around broad, simple principles, which can be quickly applied, leaving more time and energy for the pursuit of progress, profit, and productivity.

Canada already has rules, regulations and laws offering protection to investors, and it is reasonable to ask whether or not, in light of the recent fiascos, this protection is adequate and in balance with the rights and freedoms we want and expect. Beyond this fine-tuning exercise, however, the real opportunities for Canada lie in building general understanding and agreement around what really, truly are the principles of good governance, and then applying them with care and commitment.

The challenge, however, is to reach beyond creating a list of best practices or guidelines on which we generally agree. This type of exercise has already taken place, and lives in the findings of the Joint Committee on Corporate Governance, TSE guidelines, and elsewhere. The next step is to weave our principles of good governance together into a cohesive, coherent whole, a generic model, as it were, that is practical to use for corporations of all types and sizes.

We can try to design something like this from scratch, or, we can capitalize on the homework that has already been completed by others. The most obvious example is the Policy Governance® model, designed by Dr. John Carver about twenty-five years ago. Originally created for use by non-profit corporations, Policy Governance is being used by virtually every type of board in existence around the world now, and is certainly the most publicized governance model to be found. Sir Adrian Cadbury calls it "as near a universal theory of governance as we at present have," and a recently published book, Corporate Boards That Create Value, describes in detail how the framework maximizes board accountability and productivity at the same time. While their U.S. counterparts struggle with Sarbanes-Oxley Act compliance, Canadian corporations could explore and seize upon the advantages that this holistic, principle-based approach provides.

The other theme that emerged from this conference was the point that board Chair and company CEO roles should be fulfilled by separate individuals, since the splitting of these functions greatly increases clarity, accountability and focus on purpose. Here again, Canadian corporations, who are much more likely to split these roles already, are well-positioned to seize an advantage. Teamwork, cooperation, and the processes within which these skills and methods flourish, seem to prosper in the Canadian historical and cultural context of "peace, order, and good government."

Hyman George Rickover said, "It is necessary for us to learn from others' mistakes. You will not live long enough to make them all yourself." Luckily, Canadians do well at carefully observing and learning from the mistakes of others. Good corporate governance should be no exception.

Board Re-Engineering Cited as #1 Cure for Ailing Companies

In its May 27, 2002 issue, Fortune magazine features an article on "Why Companies Fail," and cites board re-engineering as the number one "quick fix" for corporations in danger of collapse. While we would question whether "quick fix" is an accurate label for the process of board re-engineering, the idea that corporate governance is the key to company performance is right on the mark. Poised at the top of the company totem pole and vested with more power and accountability than any other group or individual in the organization, boards' ability to govern well is the number one lever for attaining any company's success or failure.

Unfortunately, the Fortune article does not proceed to recommend Policy Governance® as the best, most coherent and comprehensive governance model for corporate boards to adopt and to apply. Instead, the article recommends a number of piecemeal mini-solutions that might have some degree of effect but that fail to grasp the big picture of good governance. The article rightly points out that "Boards can be full of very capable people yet be totally ineffective as a group," but then identifies the main problem as "directors are too nice."

Determined to counteract the problem of nice directors, the article recommends measures such as holding the first 10 minutes of each board meeting without the presence of the CEO, and scheduling an annual retreat where the board "can assess its own performance as well as the CEO's." While well-intended, these recommendations have very limited merit when compared with the fully integrated, logical and intelligent system that Policy Governance comprises. Furthermore, no matter how "quick" an individual measure might be to implement, it will not survive as a "fix" if it addresses only a fraction of the problem.

The task of re-engineering corporate boards extends far beyond tinkering with meeting agendas, trying to empower employees, encouraging directors to talk amongst themselves or introducing the concept of board performance evaluation. Any meaningful attempt at re-engineering must look at the whole picture of the purpose of boards, the fundamental principles of good governance, and the nature of human relationships. Luckily, such a well-designed system already exists in Policy Governance, the closest thing to a real "quick fix" that we can suggest.