The five functions of governance
A lot of people confuse management with governance so there are many myths about how governance works. Probably the easiest starting point is to recognise management and governance are different; if something is a management function by definition, it is not a governance function.
Henri Fayol defined the five functions of management in his 1916 book Administration Industrielle et Generale. They are:
- To forecast and plan
- To organise
- To command or direct
- To coordinate
- To control (In the French, contrôller is used in the sense that a manager must receive feedback about a process in order to make necessary adjustments and must analyse the deviations)
Management operates through management structures and committees such as project control boards and PMOs. (For more on Henri Fayol’s work see Defining Management).
‘Good management’ and ‘governance’ are not synonymous! Good governance, achieved by integrating, coordinating and balancing the five functions of governance will lead to good management outcomes, but governance functions are different to management functions. So what exactly are the ‘five functions of governance’?
Governance is the action of governing an organisation by using and regulating influence to direct and control the actions and affairs of management and others. It is the exclusive responsibility of the ‘governing body’, the person, or group accountable for the performance and conformance of the organisation. In a commercial organisation, this is the Board of Directors.
The objective of ‘good governance’, adapted from the definition by Sir Adrian Cadbury in Corporate Governance and Chairmanship: A Personal View (2002) is: “…holding the balance between economic and social goals and between individual and communal goals. The governance framework is there to encourage the efficient use of resources and equally to require accountability for the stewardship of those resources. The aim is to align as nearly as possible the interests of individuals, the organisation and society.”
This is achieved through the design, implementation and ensuring compliance with the five functions of governance. These are:
1. Determining the objectives of the organisation expressed through its vision and mission statements and implemented through its strategic plan. The objectives define the purpose of the organisation, and describe how the purpose will be fulfilled.
2. Determining the ethics of the organisation; defining what aspects of behaviour are really important. How much importance is genuinely given to factors such a sustainability, corporate social responsibility and stakeholder engagement over profits and short-term movements in the share process? Ethics are based on morals and values and define the rules or standards governing the conduct of people within the organisation.
The ethical standards of any organisation are set by the behaviours of people at the top and cascade down the hierarchy.
3. Creating the culture of the organisation is a more subtle process and deals with the way people interact with each other. The governing body decides on the culture it wants and influences the operating culture of the organisation through the people it appoints to executive positions.
‘Governmentality’, the willingness of people to ‘be governed’ and to support the governance system is at the centre of an effective culture. Other aspects include: how supportive the organisation is, how innovative, how risk seeking/averse, how open and transparent, how mature and professional, and how tolerant it is. It is impossible to have a culture of innovation and sensible risk taking if the organisation is intolerant of failure.
4. Ensuring compliance by the organisation, with its regulatory, statutory and legal obligations, as well as ensuring its management and staff work towards achieving the organisation’s objectives, while working within the ethical and cultural framework defined by the governing body.
5. Designing and implementing the governance framework for the organisation. The governing body is accountable for the performance of the organisation, and retains overall responsibility for the organisation it governs; however, in most organisations the governing body cannot undertake all of the work of governance itself.
To ensure the efficient governance of the organisation, various responsibilities need to be delegated to people within the organisation’s management. The governance framework defines the principles, structures, enabling factors and interfaces through which the organisation’s governance arrangements will operate by delegating appropriate levels of authority and responsibility to managers and other entities, and ensuring accountability.
In summary, the governing body appoints, provides direction to and oversees the functioning of the organisation’s management and makes the ‘rules’ the organisation’s management and staff are expected to conform to. Management’s job is to achieve the objectives of the organisation; working within its ethical and cultural framework, while complying with the ‘rules’ and providing assurance back to the governing body that this is being accomplished.
The governance system and the management system are symbiotic, but although mutually interdependent, the two systems fulfil very different functions. A well-governed organisation is designed to allow these two systems to work together to the benefit of the organisation’s overall stakeholder community.