Rule 4: Organisational Effectiveness for Good Corporate Governance

Organisational effectiveness should not be seen as a goal in itself but rather the means to an end - achieving your goals. Since our definition of corporate governance is in essence about good management, it follows that to achieve your goals, through the implementation of an ongoing strategic management process, requires an appropriate and effective organisation.

So our Fourth Golden Rule of Corporate Governance is that the organisation should be framed to embody the most appropriate shape and style of management to achieve success, and that it is constructed to serve the needs of all the key stakeholding groups.

With an inappropriate organisation in place, the goal will not be achieved, and the approach to business will be vulnerable to a falling short in ethical behaviour. Furthermore, any relationship between the way the business is being run and the expectations of the various non-managerial stakeholders will be purely coincidental.

Before embarking on change to improve organisational effectiveness we must first understand where we are now and where we want to get to. This once again highlights the importance of strategic management, our third Golden Rule of corporate governance. During this process, we analyse all our available resources and how they are currently organised. This will give clear insights into pros and cons of the present way of organising the business, and the strategic plan will indicate desirable modifications.

Guiding the decisions about organisational change will be:

  • clear-headed logic about the natural way to organise in the most effective way, disregarding the baggage of current practices
  • paying due regard to the experience of the past in assessing what appears to work well and what appears to give problems
  • putting in place the mechanism to deliver the agreed strategy, with whatever modifications and additions are needed

Into this process must be built the means of providing appropriately for the needs of all the various stakeholders to ensure that their interests are properly taken care of.

There are two key elements to be considered when designing for organisational effectiveness:

  • Shape: there are five basic types of organisation structure:
    • simple: an organisation run by an individual, with little formal structure, unworkable beyond a certain size
    • functional: an organisation based on the functional elements, sales and marketing, production, finance, and found in smaller, more focused businesses, and the divisions of larger ones, since the structure gives rise to a big co-ordination requirement as businesses grow
    • multi-divisional: an organisation combining functional business units with central support services, and requiring more sophisticated management techniques, but useful to serve the development of product/market businesses in a larger company
    • holding company: suitable for the larger organisation in which the centre exercises little day to day operational control but behaves more like an investment company
    • matrix: representing a significantly more complex way to organise, with business, functional and geographical dimensions sharing responsibilities, and leading in different circumstances; a structure praised for focusing skills and experience but criticised for confusing ultimate responsibilities.
  • Style: there are three basic styles of management:
    • strategic planning: with the centre operating as an overall planner, developing a detailed central plan and laying out roles for the divisions
    • financial control: where the centre sees itself as a shareholder or banker for the divisions with little desire to get involved in defining their individual product/market strategies
    • strategic control: where the centre allows the divisions to develop their own plans and approves them against an objective to implement an overall strategy and achieve a balance between the divisions

To achieve maximum organisational effectiveness, we believe the stakeholder approach is required. Through regular consultation with all stakeholder groups we can assess how effective our chosen shape and style are and where and how it needs modification. As long as this is performed as part of the ongoing strategy process, it can only contribute to the success of the business in achieving its goals. As we say in our second Gold Rule, an essential part of this process is the need to align business goals through the same process of consultation.

This way, we know we have a common goal that the majority of stakeholders believe in, a coherent strategy to achieve it, and a high level of organisational effectiveness to implement the strategy and out-perform the competition. 

This is the fourth in our series on Best Corporate Governance Practice - the Golden Rules of corporate governance: 
Rule 1: The Importance of Business Ethics
Rule 2: Towards a Common Goal - Align Business Goals
Rule 3: The Importance of Strategic Management
Rule 4: Organisational Effectiveness for Good Corporate Governance
Rule 5: The Importance of Corporate Communication

Return from Organisational Effectiveness to Best Corporate Governance Practice

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