Why Governance Is the Foundation for Organizational Success

  • July 13, 2021
  • Quantivate

When we consider governance in modern business, an old parable comes to mind: He who builds a house upon the rock will weather the storm, but he who builds a house on sand — on weak foundations — is destined for structural failure.

Often organizations focus on maximizing shareholder value but forget that ethics and responsibility cannot be an afterthought — governance needs to be ingrained in the DNA of your business model from the start. The importance of environmental stewardship, social responsibility, and accountability are quickly becoming codified into law in the wake of governance failures of bad actors.

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Avoiding Governance Failures

General Electric’s Jack Welch was lauded as one of the greatest operators in modern business history, and the shareholders of GE saw their interests increase in value 10-fold under his tenure, but at what cost? Rather than tackling the more difficult task of fixing its failing business units and remaining focused on manufacturing, GE tapped into its cash pile and became largely a hedge fund. Leading up to the financial crisis, its equity value soared while investing in high-yielding derivatives. However, at the end of Welch’s tenure, the company spiraled, even facing a damaging accounting scandal that resulted in an SEC probe and a $200 million penalty.

Managers need to demonstrate to shareholders that the foundation of good governance can enable an institution to withstand the test of time, whereas short-termism is an unstable bedrock that can be costly and even destroy a business or inflict severe damage.

Another recent example of governance failure is Boeing’s lack of safety and poor risk management in developing the defective 737 MAX. There was no governance structure in place that raised the safety issues as a board-level or even a committee-level priority. The cost was human life, billions of dollars, and possibly irreversible reputational damage.

5 Pillars of Effective Governance

Organizations need to prioritize the foundational principles of good governance:

  • Placing the long-term best interests of the organization above short-termism
  • Placing objective thought leadership in organizational decision-making
  • Prioritizing accountability and safeguarding against unethical behavior
  • Making governance priorities relevant and specific to the nature of the business
  • Defining the scope of governance

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Governance cannot be viewed as a burden; it is foundational for investing in the long-term success of your organization. At the core of risk management, strong governance supports the entire business through proactive risk mitigation that prevents an organization from pursuing faulty business models and protects against potential costly liabilities.

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