COLD - Driving Organization Development (OD) Outcomes through the hybrid of Principles and Rules-based corporate governance approaches
The turbulent business environment coupled with the corporate failures that have been witnessed in the past decades has necessitated the need for renewed thinking on the approaches to building high performance organizations. Complexity Theory and Chaos Theory indicate that the modern corporation is a highly complex adaptive system that is disorganized and unordered. The business environment is becoming increasingly volatile, ambiguous and uncertain for organizations to rely on a single, predefined governance approach to driving organization development outcomes. The changes and challenges being faced by organizations have exhibited the weaknesses of relying on normative approaches to corporate management and corporate governance. There is need for continual and cyclical approaches that integrate humanistic values and are embedded in the concept of development, which concept demands systematic progression and growth that is not limited by time. Organizations can either adopt the principles approach or the rules-based approach to corporate governance.
However, the non-linearity and deterministic nature of organizations calls for the unified corporate governance framework that integrates the principles and rules-based approaches. Non-linearity in organizations demands calls for an effective feedback mechanism because the organizational variables behave in seemingly chaotic ways. Complexity on the other hand causes a global cascade which demands systems thinking and circular visioning in order to drive organization development outcomes.
There has been an increased attention to corporate governance, seemingly because of the profit maximization narrative and the complexity and non-linearity of organizations which brought about significant agency problems and costs. The reactive approach by most jurisdictions and shareholders as a result of business complexity and chaotic systems during the last three decades led to the increased exclusionary stance on pedantic rules to corporate governance. This led to the exponential rise in the development and enforcement of corporate governance codes and rules across organizations and countries.
Historically, laws and regulations in corporate governance, in the 19th century, was a political reaction to the effects of the flourishing democracy that created a free-market or capitalism system. The unrestrained form of capitalism that existed in the early years of the Industrial Revolution resulted in a small number of people amassing wealth. Laws and regulations were therefore introduced to limit the excesses and abuses of the free market. The 17th and 18th century organization relied on ‘trust systems’ and control was a product of “voice” rather than “exit”. As a result of the evolving corporation and the widening agency problems, the pedantic rules based approach focused on board composition, independence, diversity, succession planning, gender quotas and so on. The search for independent directors has, in most cases, focused on “independence” of the person whilst shirking independent thinking. It is extremely better to have real independent thinkers who are prepared to put their reputations and positions at stake to express an independent view in the boardroom; rather than having individuals who have no connection to management but lack independent thinking.
The adoption of pedantic rules has seemingly replaced the business judgment of directors, C-suites, and managers with a more mechanical direct democracy. This mechanistic approach is repugnant to the principles of building high performance organizations. The exclusive focus on being pristine about board diversity, independence and so on has necessitated zero expertise on most boards, hence slowing down organization development interventions across organizational units. It has been reported that most board candidates with the most industry experience are also the ones with the most baggage – the kinds of connections and ‘material relationship’ that runs parallel to pedantic corporate governance rules. There has been an exponential increase in the number of laws, regulations and guidelines directed at organizations. This has been necessitated by the general belief that legal reforms are the prime solution to corporate challenges. However, this has facilitated rigidity founded on the negative agency problem. There is an urgent need to incorporate OD theory and practice in corporate governance and ensure flexibility by adopting a hybrid governance framework that is supported by the third generation OD methodologies.
In line with OD principles, inquiry and dialogue should be at the centre of corporate governance practices and discussions. There is need to avoid the rigid criteria for independence, diversity, and other corporate governance mechanisms. The rigid focus on corporate governance structure has led many boards to lose sight of other important qualifications that sustain organizations. Exclusively focusing on external competencies of directors and instituting broad prescriptions for upgrading corporate governance have failed to produce high performance organizations. It has been evident that the ‘quack’ governance programs are undesirable and an overreaction, hence the need to embrace OD principles and practices in corporate governance.
Rather than disqualifying directors based on externally-imposed rules, there is need to refocus the corporate governance orientation towards developing and enhancing the positive virtues of managers, C-suites, and directors. The principled corporate governance approach demands the crystallization of essential corporate governance principles and practices in view of the extent of organizational complexity and chaos situations. This approach is complementary to the rules-based approach and is informed by the fundamental assumptions underlying corporate governance rather than mere reliance on broad prescriptions. The principles approach to corporate governance gives due attention to critical management elements of de-naturalization, reflexivity, and (non)-performative element. These elements are essential to corporate governance because of the need to ensure that critical management information reaches the board or executive team as sufficiently complete, accurate and timely to enable appropriate decision-making, and enhance the control mechanisms of complex and chaotic systems. This is in line with the third generation OD methodologies whose premise is to search out and amplify what is working in a system through genuine inquiry and conversations.
The principles approach prevents the development of mechanistic, ‘box-ticking’ approach to decision making and the use of legalistic loopholes to avoid compliance with guidance. This approach can easily cope with changes in the modern business environment unlike the pedantic rules-based approach which prescribe precise practices that are required or recommended to ensure sound corporate governance. The principles approach considers organizations as non-linear because systems involving people are not one directional. This is opposed to the linear way of thinking under the pedantic rules approach. Organizations should integrate these two approaches in developing corporate governance frameworks and implementing OD interventions in order to ensure the following outcomes:
In adopting the unified approach, the organization becomes highly sensitive to change while maintaining focus on the overall strategic intent of the organization. The OD values are essential in reinforcing value-driving principles and decisions and upholding to the fiduciary responsibilities across individual members.
Author: Justine Chinoperekweyi, Ph.D., Director & Academic Dean - Centre for Organization Leadership & Development (COLD)
The Centre for Organization Leadership & Development (COLD) is a Zimbabwe incorporated management consultancy and vocational education & training institution. We are a global learning organization that moves organizations, work teams and individuals up the ladder of growth continually. COLD is an organization leadership & development institution with a commitment to building effective organizations through training and education of individuals, teams, leaders and aspiring leaders; and restructuring or reengineering organizations for growth and sustainability. We are an organization that facilitates effective knowledge transfer to improve plans, processes, people and performance in organizations. We endeavor to offer academic courses that are relevant and transformational through our competency-based curriculum. For more information, contact us at email@example.com. Or visit our website at www.centreold.com.