Adopting Service Governance: Governing Portfolio Value for Sound Corporate Citzenship

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Governance – what’s at stake?

1    Governance – what’s at stake?

Good governance has always been important to business. It occupies a central role between providing sound leadership and ensuring that strategy is executed. Governance is concerned with how the governing body of an organization determines policy and monitors implementation, enabling all areas of the business to contribute to its viability.

The worldwide move to the ‘comply or explain’ model, now the basis for company law on governance in Australia, Canada, Germany, the Netherlands, South Africa, the UK and other countries, puts the onus on companies to devise an integrated method to demonstrate that they are under good governance. EU Statutory Audit Directive 2006 now requires all member states to adopt the ‘comply or explain’ approach for its listed companies.

This removes the ‘tick box’ approach to governance, requiring attention by the organization in the context of its environment, stakeholders and performance as a good corporate citizen. It also means that, rather than simply reporting to regulators, companies are accountable to their shareholders for governance.

As The UK Corporate Governance Code (Financial Reporting Council, 2012) points out, this is not an easy matter and requires deep engagement by all members of the board:

To follow the spirit of the Code to good effect, boards must think deeply, thoroughly and on a continuing basis about their overall tasks and the implications of these for the roles of their individual members. Absolutely key in this endeavour are the leadership of the chairman of a board, the support given to and by the CEO, and the frankness and openness of mind with which issues are discussed and tackled by all directors.

The challenge should not be underrated. To run a corporate board successfully is extremely demanding. Constraints on time and knowledge combine with the need to maintain mutual respect and openness between a cast of strong, able and busy directors dealing with each other across the different demands of executive and non-executive roles. To achieve good governance requires continuing and high-quality effort.

In recent years the focus on good governance, its importance and how to achieve it has grown sharper. Governing bodies need help in this task; in particular, they need to be aware of how the organization should operate, to understand how it is operating, and to have confidence that they have control over how it will operate in the future.

Governing bodies have a duty to lead and oversee management. This should not involve technical micro-management of everything that happens operationally. However, they must be in touch with business effectiveness – financially, operationally and ethically. To achieve this, a good model of the business is required. The model should:

Reflect business activities accurately

Enable control by the governing body

Enable effective monitoring and reporting of business operations to the governing body

Achieve this in a way that is clear and unambiguous to directors

Enable directors to be aware of the financial implications of decisions

Inform directors of the effect of their decisions on the business and on stakeholders

Enable management to incorporate policy and decisions into all operational activities.

This is a tall order and many existing frameworks for monitoring, reporting and controlling business are not effective in achieving all of these requirements. Many are overly complicated, require deep financial knowledge in order to understand them, are not effective at applying non-financial controls and often take time to produce accurate reports – making timely decisions difficult.

In this publication, we describe a framework – an extension of the ITIL® framework, which can deliver on all these requirements. ITIL is the name of a set of best-practice publications originally published by the UK Cabinet Office and now available through AXELOS (www.axelos.com/itil): a UK government/private collaborative organization devoted to the development of best practice. This is a complex area, so in this guide we cover what governing bodies need to know in order to adopt the framework and to ensure that it is adapted effectively to their needs. Where more operational detail is required, references are made to other publications that will assist management and technical staff to adapt this framework. Thus, the purpose of this publication is to encourage governing bodies to incorporate the ITIL framework of best practice into business governance and leadership.

For those with the fiduciary duty (the duty of faithfulness to the owners of the company) to run organizations, ensuring that business execution is properly governed is not easy because of the levels of technical complexity involved today. Therefore, adopting principled service governance is very important because it is often difficult for boards to understand exactly what value various parts of the organization contribute, or why they so often fail to do so.

The use of services as a metaphor allows the board to govern operational activities with precision. It provides a consistent method that ensures fiduciary conformance to policy and the proper deployment of corporate resources, thus making sure that each service delivers a value commensurate with the costs involved.

1.1 INTRODUCTION TO GOVERNANCE

The essentials of governance are the same around the world, but different perspectives and legislation apply in different regions. Many countries have moved to the ‘comply or explain’ model, and this is likely to become the universal governance model.

The governing body is entrusted with the governance of the organization, which entails managing the funds and other assets belonging to the organization. As the governing body is controlling assets belonging to another, it and each member of the governing body individually is in a relationship of trust (fiduciary relationship) towards the organization. In accordance with its fiduciary duties, the governing body is expected to act in the best interest of the organization.

Further to their fiduciary duties, members of the governing body also have the duty to exercise due care, skill and diligence (The Institute of Directors in Southern Africa, 2013).

Thus, governance is the job of steering an organization, just as a captain steers a ship to its destination. Ship captains use many things to enable them to make the journey safely, in good time and with the cargo intact. They have navigation tools such as a compass and radar to plot the course, a crew with assigned roles, a helmsman who steers the ship and an engineer who can make sure that the engines provide the required power and are in good trim. The captain is aware that the crew must be on their guard for changes in the weather, sailing conditions and hazards. It is also important that the captain is able to communicate with all crew members in a common language.

Definition: Governance

Governance ensures that policies and strategy are actually implemented, and that required processes are correctly followed. Governance includes defining roles and responsibilities, measuring and reporting, and taking actions to resolve any issues identified.

1.1.1 Governance vs management

Governance is often confused with management, but it is not management. In a small organization, the governors may also double as operational managers, but it is important to understand what the different roles cover, even if they are played by the same people. Some organizations are governed better than others, just as some are managed better than others. The two are separate issues, even though they are closely connected.

To achieve good governance, it is imperative to be clear about what its role is, and how that differs from the role of management. In short, the job of governance is to turn the vision of the organization into reality. You can go further and say that it is in fact the vision, mission, charter and objectives that must be used to govern an organization.

Governance is concerned with deploying resources and making sure that they are used in an efficient and effective manner in order to achieve the required outcomes and direction. Management is concerned with the actual running of the organization: ‘The role of management is to run the enterprise and that of the board is to see that it is being run well, and in the right direction.’ (Tricker, 1998).

Reflect

What activities distinguish governance from management?

Does the following breakdown make sense?

Governance Evaluate, direct and monitor.

Management Plan, build, run and measure.

Is governance the ‘management of management’, or is it more than that?

1.1.2 Service governance in action

Service governance is an approach that is intended to help organizations achieve good governance effectively. It provides the tools and common language to allow effective communication with the board, and to enable management to understand what is to be done, recognize how to achieve it, and gauge how this is