It’s easy to forget that the concept or meaning of the term governance is not clear to many, and not just among people outside of the boardroom. In part, this lack of clarity reflects established board practices that are primarily ‘review and respond’ in their design, rather than being proactive and forward-looking. And to some extent, confusion over the meaning of ‘governance’ is rooted in an unclear sense of what boards are actually supposed to be governing. This is a common(s) problem.
When working with boards and board members, one of my first challenges to them is to identify the drivers of success at their organizations and the elements that support those drivers. This sounds cliché, or at least it should, because the direction taken by many boards and board advisors after this point is usually quite standard and predictable. Rather than reviewing reports on successes and failures, the next step for a board needs to be identification of the commons among the elements that drive success. Commons, or common pool resources, are resources to which many have access and which, if not cared for, could be consumed and ruined by those same people.
Within organizations, commons include things like brand or reputation, credit rating, risk-taking capacity, physical capital, liquid capital, and similar stocks or flows that can evaporate without proper care. Examples of commons include the trust that clients put into an investment manager to hold and manage their assets well. This is a key driver of success and can be ruined by almost any employee. Risk points or risk capital that is formally allocated is another type of commons at financial firms. And in the rapidly evolving blockchain space, the ecosystem of a particular blockchain — the protocol, security, and value of the token that provides developer access to the blockchain infrastructure — is a commons that is essential for the success of the blockchain, as well as those who use it.
Commons are more widely known because of Garret Hardin’s branding in the Tragedy of the Commons, where he studied how common pool resources are abused and ruined. His research suggested that the only salvation for commons to avoid tragic outcomes is through intervention by some external force — such as a government or authoritative administration. Far less ‘popular’ attention, though, has been paid to work by Elinor Ostrom, winner of the 2009 Nobel Prize in Economics. She found that when certain principles are put in place (see below), commons can be managed more efficiently than almost any other model of organizational management.
After boards identify the commons in their own organization and define the role that these commons play in supporting the drivers of success we previously mentioned, they need to name the people and groups who have access to the various commons for use in their pursuit of corporate objectives. Boards can then govern their organization by empowering those with such access and allowing them to self-govern the commons.
For the board, empowerment of self-governance of all these commons is given to the Chief Executive Officer, but with the directive to cascade that kind of authority throughout the organization. Thus, governance becomes what it is intended to be, which is the establishment of a framework — objectives, rules, checks and balances, and evaluations — that fosters the most effective use of these commons and the organization’s long-term health.
Elinor Ostrom was influenced in her research by work of her husband and others around the efficiency of polycentric governance models — those that divide the various commons and distribute them to efficiently sized groups. Organizations cannot realize top performance if they direct all the activity from the top as in a typical hierarchical structure. Instead, they need to guide towards goals, set rules and limits for pursuit of those goals, have effective ways of monitoring and intervening if necessary, and encourage innovation and experimentation within these restrictions.
Ostrom’s rules for successful management of commons (note that I say management here and not governance), in more simple terms than she used, fall into eight categories:
1. Setting boundaries that define both the commons and who has access to it
2. Proportionally allocating the costs and benefits of the commons in a manner that is consistent with the corporate culture
3. Allowing those with access to the commons to set the rules for using them through a democratic process
4. Stakeholder monitoring of the condition of the commons
5. Applying graduated forms of punishment for any abuse of trust or the commons itself by users
6. Establishing clear methods to resolve disputes among those with access to the commons
7. Formal recognition of the rights of each sub-unit of governance by those who allocate the commons to them (this begins with the board)
8. Nesting these sub-units within a larger common ecosystem or corporation — a network
The board’s role in governance, then, is putting these principles in place as a matter of culture — establishing the framework. Management is what is done within the culture according to these principles. So, the board focuses on how to best create this culture that can pursue its strategic objectives, with checks and balances, all while evaluating the success of the Chief Executive Officer at implementing the distribution of power and innovation that a polycentric form of governance allows. This is the board’s own commons.
My term for this approach is Networked and Distributive Governance of a Commons and its what I write about and regularly use as a guide in conversation with boards and board members. It’s based on both Ostrom’s ideas and those of many others who look at how organizations can best be governed to succeed.
As a board member concerned with good governance, ask yourself if your full board could easily identify the commons that are central to the organization’s success and whether you have thoughtfully put in place the framework and culture that empowers innovative use of those commons. In other words, have you managed your commons well? If not, it’s time to start looking at the term ‘governance’ differently than you have until now.
David R. Koenig is the author of Governance Reimagined: Organizational Design, Risk, and Value Creation. His work focus is advisory to boards and board directors, as well as the evaluation of trust and sustainable value in publicly traded companies. He is the founder of the Directors and Chief Risk Officers group — a global organization of leading board members and c-level executives focusing on developing and sharing best practices around board risk governance. He was the recipient of one of the inaugural M-Prizes for management innovation as well as the Higher Standard Award, the top honor bestowed by the Professional Risk Managers’ International Association. His LinkedIn profile can be accessed at https://www.linkedin.com/in/davidrkoenig/