Corporate governance is not simply, as the ASX Corporate Governance Principles of Good Governance and Best Practice Recommendations defines it, “the system by which companies are directed and managed”.
Corporate governance is the outcome or product of a living system called the board.
Post HIH, One.Tel and other recent corporate failures, you could be excused for thinking that the problem with governance in Australia was that there was simply not enough instruction on the subject. The solution lay in the stricter adherence to better-designed systems.
Ignored in the rush to write the new systems, guidelines and recommendations designed to overcome the limitations of self regulation is the possibility that the drivers of board performance may lie elsewhere. Beyond the systems designed to prevent failure or encourage success. Beyond simply functions and structures.
Boards are ultimately living systems that cannot be explained let alone changed by the level of thinking that underlies current governance strategies. After all, recent US studies show companies that performed well — and those that performed poorly — adopted similar practices in terms of board attendance, skill, age, independence and size.
A deeper level of thinking is required. One based on the assumption that the performance of boards has as much to do with the principles of living systems or complexity theory as the essential corporate governance principles.
What are the principles of a living board? What is the pathology of Australian boards and what strategies are available for creating a healthy living board?
A living or complex adaptive system is defined as a network of processes in which every process contributes to all other processes. The entire network is engaged together in producing itself. Living systems do this without the influence of lawyers, accountants or other experts. Examples of such systems include everything from the smallest organism to ecosystems to the organisation to the largest capital markets.
The way such systems sustain, grow and adapt by themselves in the absence of experts and administrators is underpinning the new sciences from physics to biology. Predictably, the new sciences are beginning to drive the science of management and commerce. In a recent book by Richard Pascal and others, the authors suggest four principles of living systems which are applicable to a business:
- Equilibrium is a precursor to death. A living system in a state of equilibrium is at maximum risk because it is less responsive to change.
- Faced with threat or opportunity, living things move to the edge of chaos — a state in which living systems evolve, develop and are revitalised.
- At the edge of chaos, the components or processes of living systems self-organise and new forms and processes emerge from the turmoil.
- Living systems cannot be directed along a linear path. Unforeseen or unintended consequences are inevitable. For Pascal, the challenge is to disturb the system, so as to bring the system out of equilibrium into the edge of chaos and desirable emergence.
These principles or insights into the way living systems behave provide an alternative to the dominant view that systems such as organisations and boards can be managed and directed through the tools of accountability, transparency and oversight.
The science of living systems provides both a new framework for exploring why some boards work and some do not and suggests new strategies for maximising board performance.
In her recent book The 21st Century Board, published by AICD, Ann-Maree Moodie concludes: "The world of directors portrayed by those interviewed for this book can be interpreted as an exclusive club that recruits from within ... In this world it is unnecessary to review performance of the board as a whole or its individual members, because the subjective judgments of peers will ensure that those who do not 'fit in' will be culled".
The consequence of this behaviour is intuitively recognised if you walk into a boardroom and are overcome by a sense of lifelessness. Meetings move with mechanical precision, business becomes a matter of toil and nothing unexpected or unintended occurs except failure.
From a living systems perspective, the behaviour of Australian boards consciously denies the principles, discussed above, which define the way successful living systems operate. In seeking to ensure the minimum level of disturbance, whether in recruiting like-minded men and women, or relentlessly following board protocols and rules, boards unwittingly expose themselves and their companies to the risks of equilibrium. Risks borne out in corporate failure. This is not to mention the stress and loneliness of working in a lifeless board environment.
Conversely, as argued by Jeffrey Sonnenfeld in his refreshing article "What Makes Great Boards Great" published in Harvard Business Review, it is the way people work together as a social system that is at the core of great boards. For Sonnenfeld the real need is not rules and regulation but "strong, high-functioning work groups whose members trust and challenge one another and engage directly with senior managers on critical issues facing corporations".
Again from a living system perspective, what Sonnenfeld suggests and what great boards have done since the creation of the limited liability company is embody the principles of living systems. Avoid the comfort of equilibrium and disturb the system of the board and of the company with healthy intention.
Sonnenfeld points to five characteristics as hallmarks of good governance: trust and candour; open dissent; fluid portfolio of roles, individual accountability and evaluation of board performance.
Our own work, based on the divergent fields of biology, ecology, systems theory and religious tradition, points to four strategic behaviours for building healthier living systems such as boards:
• Diversity: Engage with uncommon ideas, people and circumstances. Diversity brings systems to the "sweet spot for productive change".
• Connectivity: Seek uncommon connections. In living systems too few connections means stagnancy.
• Generosity: Practice generosity of spirit. Generosity combats the enemy of living social systems: overwhelming ego.
• Mindfulness: Practice awareness without judgement. Nothing in a living system can be understood by studying the various parts in isolation. The parts of a living system "only make sense within the context of their relatedness to the whole".
Both approaches are an uncommon way to look at governance.
Indeed if success in the marketplace is built upon product, brand and strategy differentiation why would we want to create commonality in Australia's boardrooms by homogenising governance arrangements? It would mark the death of value at board level.
From a practical perspective, the use of living systems to develop new models of governance requires debate about such an approach. This is a debate that seeks to see the forest of strategy for the trees of compliance. Indeed to explore the very heart of governance: Do boards matter? What is their role and purpose?
However, there is a more immediate application for the use of living systems by boards. Highly effective boards, confronted with the requirement to disclose the extent to which they have not followed the ASX best practice recommendation may look no further than the science of living systems to explain why they work so well without the latest systems of direction and management.