Neither monarchy nor democracy: the right form of governance for every decision
The latest familyandtrends, Del Vecchio: the cracks in rigid governance, has, as was perhaps to be expected, prompted a great deal of commentary. These can be grouped into two categories: why it is a bad thing for board members to vote along opposing lines, and why rigid governance is a bad thing. At the risk of sounding tedious and ‘professorial’, some preliminary clarification is necessary.
What is ‘governance’? Wouldn’t it be simpler to say ‘company government’? It would be, if it were an entity, institution or body that directs and administers the company. However, when Dale Hanson, CEO of CalPERS, the California public sector pension fund, coined the term in the late 1980s, he used ‘governance’ to refer not to an entity, but to a process. Maurizio Sella used to say that governance is the system of rules and processes needed to make better decisions: and familyandtrends could not offer a better definition.
A board of directors that splits down the lines during a vote is a sign of an inability to reach a consensus; it means that the directors have failed, through debate, in-depth discussion, and the sharing of data and viewpoints, using logic and common sense, to reach a decision that everyone considers the ‘best possible’ for the company for which they are responsible. It can happen once: perhaps, on a specific decision, differing views and principles fail to converge, but if resorting to a vote becomes systematic or occurs over a key decision, it means that the group chosen by the owners to steer the company is not cohesive or is incapable of finding a common direction. Worse still is the case where board members do not even make a genuine effort to understand their colleagues’ points of view with the aim of refining the decision through everyone’s input and reaching a ‘better’ decision, but instead confine themselves to a rigid and intransigent stance, perhaps dictated by personal interests or those of a section of the shareholders, rather than by the good of the company. The other problem afflicting the board of directors is indecision, caused by constant procrastination or an inability to respect and understand the timeframes of the company and its competitors.
Rigid governance is a bad thing because, as a set of rules and processes designed to lead to better decision-making, it requires different approaches in different parts of a company: at the ownership level (shareholders’ meeting), at the governance level (board of directors), at the management level (CEO and senior management), at the operational level (all employees), and within the wider community (all stakeholders).
In a company, the shareholders’ meeting requires democracy: this is where a proposal is put before the shareholders, who must decide on it by a majority vote. In this context, participants are not asked to improve a decision through their input, but simply to vote. In family-run businesses, the partners have been brought up according to the same principles and follow them; consequently, it is common for decisions to be taken unanimously. Unanimity is achieved through the involvement of several owners, rather than by a single controlling shareholder who systematically imposes their own decisions without any real consultation with the other shareholders: in this case, we have autocracy. When, on the other hand, a minority manages to block or unduly influence decisions, acquiring power disproportionate to its shareholding, this constitutes a ‘Minority Dictatorship’ (or the ‘right of veto’).
