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3. Corporate and Project Governance


The case of Enron® was one of the most dramatic examples of the need for effective corporate governance. Enron®'s downfall, as described by Zimmerman (2002) in USA TODAY®, was brought about, in broad terms, by overaggressive strategies combined with personal greed. The expectations for improved corporate governance have become very noticeable, especially in the United States where the Sarbanes-Oxley Act (2002) aimed to restore investor confidence in markets by imposing codes of conduct on corporations. More recently, in the wake of the global financial crisis, governance at the corporate level has again attracted attention.

With the increasing role that projects play in the success of organisations, management's attention is being drawn to their responsibilities in this regard. There is both external and internal scrutiny of the way projects are executed. Externally, the public has close contacts with the organisation and its governance through project activities. Internally, projects are the drivers of business success and create value for shareholders/stakeholders.

The Concept of Governance

The noun 'governance' is a derivative of the verb 'to govern'. According to Oxford Dictionaries (n.d.), 'govern' comes from the Greek word kubernan, which means 'to steer' - to guide or control the movement of, for example, a vehicle or a ship, or to direct/guide in a particular direction. 'Govern' may therefore mean to conduct the policy and affairs of a state, organisation or people; to control or influence; or to constitute a rule, standard or principle (Oxford Dictionaries n.d.).

Governance denotes the 'action or manner of governing' (ibid.). While action is the process of doing something in order to achieve a purpose, manner is the way in which something is done or happened. This is succinctly captured by Mueller (2009:1): governance is about 'the conduct of conduct'. As will become apparent, governance includes two fundamental elements: processes (i.e. the action of governing) and structures (i.e. the way the organisation is designed), moderated by the behaviour of people (i.e. those required to perform or carry out the actions).

Governance can have an orientation anywhere between acting in the interests of shareholders or those of the stakeholder (Mueller 2009). Under the former theory governance seeks to maximise shareholders' returns on their investments when they take up equity in the organisation. It calculates these returns in financial numbers, typically as the 'bottom line' profit made by the organisation during the year. The board of directors and senior management are charged with the responsibility to act in the best interests of its shareholders. Project-based organisations have to take this into account when deciding on their project portfolio and project developments. A disadvantage of the shareholder theory of governance is the emphasis on short-term returns to satisfy shareholders' expectations of a dividend payout year after year.

The stakeholder theory of governance takes a broader view of investing in projects since the 'greater good' is considered. The organisation views itself as operating in a wider context, influenced by social expectations for being a good employer, and working with partner organisations to add value to the industry in which it operates. A stakeholder is any party that is affected by the gain or loss made on the project. When deciding on the portfolio of projects and project priorities, financial as well as other criteria are considered. They may be about the organisation's reputation, attractiveness as an employer, being a responsible citizen, and so on. Which of the two models is chosen, or where the organisation is located on the continuum, depends on its governance philosophy.

There are common elements across both theories:

• Objectives. Boards and senior management do not act in their own best interests but in those of outside parties, namely shareholders and/or stakeholders.

• Processes. The term 'govern' implies management's ability to implement policies and procedures that steer/guide the organisation to achieve its key objective of meeting the expectations of shareholders/stakeholders. Oversight and supervision ensure that governance processes are complied with.

• Structure. Direction and control are exercised within the organisational structure, typically headed by the board of directors and executive management. Other levels of management are usually represented in committee structures.

• Behaviour. The decisions and actions of boards and senior management are transparent and fully disclosed. They reflect a high ethical standard and corporate social responsibility.

• Performance. This is assessed by comparing business outcomes against strategic targets. Progress against plans is continuously measured so that corrective action can be taken should this be necessary.

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