The History of Governance – Part 2: How the 20th Century changed Governance

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In our last blog, we discussed the origins of the world Governance, the difference between Governance, Leadership and Management and where Governance finds itself today – on the cusp of transformation. 

In part 2, we are going to delve deeper into 20th Century history when it comes to Governance.  

The Impact of the Industrial Revolution on Governance  

Up until the turn of the century, businesses were largely operated on a non-structured basis by individuals or groups of partners with little hands-on operational input. In the US especially, the advent of the railways meant it was no longer possible to run businesses in this way due to the distances and complexity involved. Expertise and authority were needed along the whole length of the railway to deal with local issues promptly.   

At the same time, industrial process innovation and mechanisation led to Henry Ford developing the concept of the production line. The production line was about breaking down a complex process of building cars into individual parts and then organising resources (people) to specialise and deliver each individual process. This new system created greater efficiency across the whole. The system was built on command and control – with a clear separation between managers who commanded and controlled, and the workers who did the manual work. 

Weber’s Bureaucratic Approach  

The concept of the bureaucratic organisation was developed by Max Weber. This was based on the breakdown of tasks and allocation of labour, hierarchical authority, strict rules and requirements, removing personal interactions from the work-place and the concept of long tenure for workers (no need to retrain/reskill) and deep specialisation. The Bureaucratic approach was all about creating the most efficient businesses.  This also fitted with the social structures of the time – stricter class barriers and respect driven by hierarchy.  

So, bureaucracy became the way businesses’ were structured. And at the same time, the concept of the governance of businesses was born.  

How Corporate Governance Came About  

It wasn’t until nearly 90 years later, when a series of corporate failures rocked the world, that the concept of corporate governance as a distinct form of governance, was created.  

The Cadbury Report – Chaired by Sir Adrian Cadbury and set up by the Financial Reporting Council, London Stock Exchange and the accountancy profession – aimed to restore investor (ie owner) confidence in the UK corporate governance system.   

The Code was voluntary and aimed to establish best practice. But the report also emphasised that one size does not fit all and that companies have to choose the optimal governance structures based on their own circumstances. 

However, the bureaucratic organisation was still the predominant management philosophy at the time with strict hierarchies and rules around decision making structures. In practice there was little deviation across governance approaches other than number or format of committees and make up of boards. 

Indeed, the Cadbury Report defined corporate governance as the system by which companies are directed and CONTROLLED. By giving this definition, they clearly believed that corporate governance should be a bureaucratic form of governance. 

Outside of the corporate world, there was a period of significant change – with the advent of the internet and a period of economic boom following a period of recession. This period also saw the rise of globalisation, with the formation of the EU, the break-up of the USSR and opportunities created by internet connectivity.  

The Corporate Scandals of the Noughties  

The digital age was in full swing during the Noughties. As were corporate scandals such as Enron , Lehman Brothers and the sub-prime mortgage scandal in the US that brought global financial markets to their knees. The response to these scandals was increased regulation and the introduction of individual accountability. The corporate veil that had protected individuals for so long was lifted through Sarbanes Oxley with its focus on individual director accountability for internal control in the US, and the Senior Managers and Certification Regime (SMCR) for the financial services sector in the UK.  

The regulatory lens shifted away from a single focus on control and looked elsewhere at culture. Culture was held up as the culprit for many of the scandals, with individual accountability being seen as the panacea.  

The FCA saw the SM&CR as an opportunity to set up healthy cultures and effective governance in firms by encouraging greater individual accountability and setting a new standard of personal conduct. Although there were initial issues with this novel scheme, it is now properly implemented and understood, with governance structures designed accordingly and a holistic focus across governance, strategy and culture. It is a real catalyst for change. 

This is also the era of the tech giants – Google, Facebook and the Silicon Valley boom of tech startups.  These companies were founded by individuals straight out of college who had not yet been tainted by bureaucratic working practices. And with this we started to see different management models emerging. 

The Agile Manifesto  

The Agile Manifesto was published in 2001 by a group of software developers who knew there had to be a better way to manage software development than a strictly regulated, process driven approach. The manifesto values individuals and interactions over processes and tools, working software over comprehensive documentation, customer collaboration over contract negotiation and responding to change over following a plan.  Whilst the dynamic Silicon Valley scene embraced this new approach fully, the broader corporate world was slower on the uptake.  

One of the key changes in the social environment in the Noughties was the coming of age of Millennials, the first digital natives. Multiple studies observe millennials’ associating job satisfaction with free flow of information, strong connectivity to supervisors, and more immediate feedback. There is also greater focus on work life balance than more career orientated Gen X, as well as focus on work aligning to values and altruistic attitudes. 

Still, against these tidal waves of change, the seawall of bureaucracy was still holding firm. 

To find out where we are today, on the cusp of the Governance Revolution, we hope you will tune in again next week. 

 

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The History of Governance – Part 1: From Ancient Greece to the 20th Century 

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We love all things Governance at Kuberno.  Our mission is to help organisations navigate governance and become future fit through the latest thinking and technology.  

For too long, Governance has been equated to admin and bureaucracy rather than taking its rightful place as a central tenet of how organisations run.  

So, we wanted to take a moment to put governance in context and explain how it interacts with strategy and culture. Buckle up as we take you on a three-part series through Governance: how it started, how it has evolved and where its future lies.  

And we start here.  

What’s the difference between Governance, Management and Leadership? 

Governance, management and leadership…. these can sometimes be terms that are intermingled. But they are different elements on how an organisation is run.  

Governance refers to the actions, processes, traditions and institutions by which authority is exercised and decisions are taken and implemented. The two key words being “authority” and “decisions”. 

Governance is the “top level” of the structure. It decides how authority is percolated through the organisation. This in turn decides how decisions are taken. It is also the root of accountability within the organisation – with ultimate accountability to the organisations’ stakeholders. Those who “govern” an organisation set the strategic vision and direction, formulate high level goals and set norms of behaviour. They also oversee the management of the organisation to ensure delivery against the strategic goals and meeting the needs of stakeholders.  

If Governance is the “top level”, management is the operationalisation of the governance approach. It involves running the organisation, managing day to day decisions such as allocation of resources and implementing decisions in the context of the mission and strategic vision. 

Leadership sits alongside both governance and management. In this context leadership is not about roles, but about how people are motivated and inspired to deliver against specific goals. Anyone within the organisation can show leadership – good or bad. 

Culture has a symbiotic relationship with governance, management and leadership and underpins them all. The way all three are carried out are likely to drive the culture in an organisation. However, culture needs to be aligned with the desired outcomes or mission of the organisation. Otherwise, governance, management and leadership are likely to be ineffective – particularly when it comes to driving change. 

What is governance and where does it come from? 

Let’s take you right back to Ancient Greece.  

The root of the word “governance” comes from the Greek verb Kubernao – meaning “to steer” (you may see the resemblance with our business name Kuberno  and in our tag line, “Navigating Governance”). 

Plato was the first to apply the verb in a metaphorical sense. He applied it to the way a state should be run, drawing an analogy between how a ship is run with how a state should be run. While Plato’s conclusions are sometimes controversial (being linked to totalitarian philosophies) he essentially pointed out that no single person could know everything about running a ship (state), but that equally having a group trying to steer the ship without structure or essential knowledge would be catastrophic.  

Plato concludes that the best person to steer a ship is the person who understands navigation – i.e., the person who can decide where to go and plot the route to getting there – hence steering the ship of state. 

The word governance has its roots in the concept of steering and not controlling. 

Governance in the 20th century  

The term governance does not become common place until the early 20th century. The concept of corporate governance does not become mainstream until 90 years later with the publication of the Cadbury Report in 1992. But the evolution of governance in the business context has been rapid in the last 30 years, spawning further sub-sets such as risk governance, project governance and so on.  

The meaning of governance has become diluted over the years. It’s now often confused with bureaucracy or admin. Yet the purpose of governance within business has been expanded from its original role of ensuring agency between principal (owner) and agent (manager) to, according to the OECD – restoring faith in capitalism!  

The UK Corporate Governance Code takes a more pragmatic approach, which is based on the premise that good governance should help efficient, effective and entrepreneurial management that can deliver the long-term success of the company.   

In part 2 we are going to delve deeper to understand how this has come about and where we are today, *spoiler alert* potentially on the cusp of a governance revolution. 

 

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