Where Accountabilities Start Transparencies Begin
Debt leveraging is a detrimental financial concepts; a concept fueled by the desire to capitalize an asset beyond its leveraged value – securities of packaged subprime loans and credit default swaps. This desire to keep on leveraging with perpetuity has led to the collapse of large US financial institutes. 15 or so banks have failed to date while several others have been rescued through government intervention or acquisitions by other banks. Because we live in a global economy, the affects of this financial disaster is not just confined to the United States, it has rapidly evolved into a global crisis. Resulting in a number of bank failures in Europe and triggering a sharp decline in the value of equities and commodities worldwide. Iceland was immediately threatened by bankruptcy. The International Monetary Fund (IMF) dubbed this financial downturn as a complete meltdown of the world financial system.
In today’s business world financial profitability plays a central role in strategic organizational decision-making. With increasing emphasis towards return on capital, we frequently put aside social justice, public trust and civic responsibilities. Corporate scorecards are myopically evaluated by stakeholders, only to focus in on year end profits. Performance, quality and customer satisfaction are viewed only in terms of their impact to financial bottom lines. Year end profit and loss statements have become the only guiding tool for economic health and performance measures. Transparency although is offered by myriad governance philosophies and management frameworks, yet the focus tends to always be the promise of a greater return on investment.
Free enterprise benefactors have long argued that corporate governance layers stifle a market’s creative abilities and create roadblocks to financial prosperity. The notion that free enterprise system inequities adjust automatically to induce innovation and growth is a very narrow perspective. The analysis is limited when it is based solely on market financial performance. It ignores other equally important market growth parameters such as education, social services, environmental sustainability etc. When other elements of growth are removed from the equation, we end up with a meltdown of the very markets, we strive to sustain. As a result, socio-economic interdependencies breakdown inflicting enormous strains on our economies and our way of living.
Unfortunately in the free market system corporate governance is generally a lagging influencer, meaning that we introduce rules and regulations after a negative event has already occurred. Our knee jerk reactions to unforeseen performance results almost always give rise to efforts for greater transparencies. Although greater transparencies may create short term performance correction, they seldom create accountabilities to the right entities. The concept of a balanced governance model is one which is built on the foundation of accountability. Because where accountabilities start transparencies begin.
A balanced corporate governance model is one where accountability, commitment and transparency are the foundation for organizational management responsibilities. Responsibilities only to stakeholders in terms of financial performance leave other governance components either under utilized or over leveraged. If financial performance is then put ahead of all other performance parameters, imbalance is created. In such one-dimensionally run organizations when the financial element weakens or buckles, the entire organization collapses instantly. Wonderment and unbelief follows as leaders and analysts are left dazed and confused only to blame their failure on external market economic forces. Financial uncertainly and risk are always part of the equation and can not be totally isolated or controlled.
When asked to define the significance of his students’ existence in this vast universe, a teacher replied that it was the recognition of the interdependencies of the smaller elements in life that give meaning to the bigger universe around us. And true interdependence can only be realized by looking at the universe from the outside in, not the inside out. Organizations have long looked at corporate governance from the inside out perspective. However, an outside in approach to evaluate governance in terms of balanced and broader economic growth perspective is an exercise worth conducting.
Intrinsic to long term economic sustenance of any organization is the adherence to a balanced governance framework; a framework that is built on the pillars of accountability, commitment and transparency. Balance is core to universal governance laws. It is this balance that in turn induces sustained prosperity.
A balanced corporate governance approach is one where accountability, commitment and transparency are the fluids that run deep into the veins of organizational management practices nourishing all aspects of governance equally.