Why policies matter for businesses
Corporate Governance have become more complicated over time.
As the number of stakeholders changed, the move towards a more collaborative and demanding relationship also changed. As a result, challenges require new alignment and guidance for strategic implementation.
Since the guilds of the Middle Ages, corporations have represented a group of connected people. They have shaped society with their influence and reach, serving as primary hierarchical structures. In addition to possessing political power, corporations have promoted science, art, education, and entertainment and organized trade expeditions. Their overall goal is simple: to generate wealth for sponsors.
As times changed, corporations evolved into complex systems with multiple power structures, and today they consist of a mix of “influential personalities” with different interpretations of how to generate and distribute wealth. Unsurprisingly, companies do not always act consistently in such a reality. Without overarching principles or policies, the divergence in how and when to generate wealth can be destructive.
To avoid conflicts of interest, certain mechanisms and processes are necessary. This is where Corporate Governance and Corporate Management come into play. Corporate Governance defines “the processes, structures, and relationships through which the board of directors oversees what its executives do.”[i] Its primary aim is to “set a company's values.”[ii] Corporate Management, on the other hand, outlines the strategy and execution of the set objectives of the larger corporate body.
Corporate Governance is a relatively new field of research, and its origin is attributed to authors Adolf Berle and Gardiner Means in their 1932 book, The Modern Corporation and Private Property. However, the concept as we know it today only emerged in the 1970s.[iii] It suggests the function of Governance as providing control and alignment to reduce risk and accelerate value generation. Over time, this interpretation evolved into a paradigm of generating wealth for the present without considering long-term implications.[iv] But this line of thinking jeopardizes organizational sustainability.
Guhan Subramanian, the Joseph Flom Professor of Law and Business at Harvard Law School, believes that short-term thinking is unsuitable for the current reality. He argues that boards of directors should resist short-term performance pressure and focus on long-term goals, such as revenues from new markets, and calls for a return to the “bundled” approach.[v] This entails negotiation and collaboration among all relevant stakeholders, finding a common denominator to manage organizations efficiently. By aligning, they share their worldview, allowing the organization to explore new possibilities for value generation.
This is where policies come into play. They connect certain parts of the organization around a common objective and define changes in Strategic Capabilities to achieve their set goal. However, this is best not done through strict control and rigid structures. Instead, policies should take a more proactive advisory position to determine what decisions can be made within defined limits.
Policies increase the level of response and participation, enabling the mobilization of the right people at the right time. In addition, they align individual decision-making during stressful times without losing sight of the overall long-term organizational value strategy.
Avoiding a patching culture Policies aim to enhance alignment and focus on value generation. They define a guiding space, a course of action[vi] in uncertain environments. They are part of a strategic governance process supporting decision-making.
Yet, we are often unaware of their existence, perceiving a lack of strategic alignment throughout the organization. The consequence is a “patching culture,” where resources are misplaced, and agility is hindered.
When an urgent situation arises, executives respond the only way they know — by applying a patch… a quick and spontaneous fix. Each time a crisis occurs, they do the same. Over time, those patches accumulate, making organizations slow and distancing them from key clients — and their future vision.
As a result, synergies between departments are lost, and the present takes precedence over the future. The patch might be crucial for the organization’s survival, but so is an excellent strategic direction. It is not a matter of choosing one over the other — we must balance the present’s needs with the future’s vision.
Value Policies help resolve this dilemma by turning policies into “strategic commitments.”[vii] This decision establishes an alignment of different actors towards the same strategic intent in a dynamic environment of action.
While the “why” is established in the Future Value Proposition, the Value Policies explore the “how” to get there and “what” changes in Strategic Capabilities are necessary to generate new value. They define an internal tension, a dialectic opposition between knowledge and its defined goal,[viii] in our case, the Strategic Options, and the Future Value Generation.
Acting as a “dynamic system,” policies transform the future into reality and increase the likelihood of a profitable operation.[ix] They define what to change, what to leave as is, and what velocity is possible for the organization, with the overall goal being to balance the pace of change with the strategic capacity for implementation.
Question: How have corporations evolved, and what is their primary goal?
Answer: Corporations have evolved significantly from guilds in the Middle Ages to complex systems today. Their primary goal remains to generate wealth for sponsors, while their structure now consists of multiple "influential personalities" with different wealth generation and distribution interpretations.
Question: What roles do Corporate Governance and Corporate Management play in corporations?
Answer: Corporate Governance provides alignment and control mechanisms, primarily setting the company's values. Corporate Management outlines the execution of these objectives and the organization's overall strategy.
Question: How does short-term thinking impact organizational sustainability?
Answer: Short-term thinking can jeopardize organizational sustainability. Focusing solely on immediate results without considering long-term implications could undermine the organization's growth potential and relevance in future markets.
Question: What is the purpose of corporate policies in the context of strategic decision-making?
Answer: Policies align parts of the organization around common objectives and define changes in Strategic Capabilities to achieve set goals. Rather than enforcing strict control, policies should provide proactive advice on decisions within certain limits.
Question: How can Value Policies help avoid a "patching culture" in organizations?
Answer: Value Policies turn policies into "strategic commitments," creating alignment towards the same strategic intent in dynamic environments. They balance immediate needs with the future vision, preventing misplaced resources and loss of agility inherent in a "patching culture".
[i] Dayton, Kenneth. 1984
[ii] UK Corporate Governance Code
[iii] Adapted from Subramanian, Guhan. 2015
[iv] Adapted from Davis, John. 2000. p. 9
[v] Adapted from Subramanian, Guhan. 2015
[vi] New Oxford Dictionary of English
[vii] Raynor, Michael. 2013. Kindle Location 150
[viii] Adapted from Douglas, Torgerson. 1986. p. 52–53
[ix] Adapted from Roger, Martin. 2009. Kindle Location 829