Corporate governance of the actual business is essential to prevent losses
How many billions of dollars did US corporations spend conforming to the Sarbanes-Oxley Act of 2002, and how many trillion dollars more will the financial crisis, stock price declines, and business losses cost; before we realize that the whole approach to corporate governance is wrong?
Corporations govern by enforcing rules, because they cannot govern the business
Corporate governance is an unsolvable 20th century management problem that arises because corporations, financial institutions, and other enterprises do not organize and manage the business; “investments in capital as solutions of worth utilized for costs and effectiveness of performance to produce value and quality in results”. Organization, strategy, business process, account, activity, performance management, administrative functions, and other structures are laid over the business and prevent actual business management. Overlaid structures manage contrived entities, like department, object, activity, and account; and do not capture actual business data. Since the business is not organized, the business cannot be managed or governed. Since corporations cannot govern the actual business, they can only govern the corporation by enforcing policies and rules. As we said in our article The Corporate Governance Problem and Solution, authorities address corporate governance through strengthened accounting, auditing, and compliance reporting rules on the governance side, because they cannot strengthen business management of the corporate side.
Eliminate contrived 20th century structures through Result-performance Management (R-PM)
We need to look at governance from the “corporate” side to eliminate contrived overlays that complicate management, and directly organize, plan, direct, control, and report the business to simplify management. Best corporate governance practices include having a well-defined and approved strategy to create planned corporate and customer value, and clearly measuring and governing the progress time period by period against the strategy. The means to do this is Result-performance Management (R-pM), as explained further in the article “Seeking Good Corporate Governance by strengthening Bad Governance“.
Corporations can govern strategic value creation by managing the business with R-pM
Rule No. 6 of the Ten Rules for 21st Century Management states Plan and govern the transition from today’s value to approved strategic value.
R-pM simplifies management and governance by organizing the corporation business through only three components that define the business:
- Results: Economic outputs of value produced by business performance
- Capital Solutions: Capital investments in specific solutions of investment cost and worth available to the business to produce results
- Performance Domains: A capital solution implemented to produce a result and utilized to incur costs in business performance
Results define the outputs that the board has approved in the enterprise strategy, to create current and future value. Capital Solutions define the human and other capital acquired and developed through investments that the board has approved, to enable the enterprise to produce results. Performance is the actual utilization of specific capital solutions to incur costs and create value in specific results. Time periods are defined to set result goals and performance expectations on the way to the strategic business structure at the strategic horizon.
The business changes every time management decides to produce a new result, close a finished result, or utilize a different capital solution in performance, so these entities must be managed to manage the business and business change.
Manage and govern the corporation in three dimensions
Once the corporation is organized, the corporation is managed in three dimensions:
- Result: Manage all capital solutions utilized for total performance costs for each specific result of value for value-added and quality along result chains leading to customer results
- Performance: Manage the implementation and cost-effective utilization of specific capital solutions for each result that utilizes the solution
- Management: Manage the business by time period to plan and converge on the strategic business structure
Result value less total performance costs is result value-added. A result manager utilizes implemented capital solutions in the result dimension to add value and achieve specific goals for each result. Results are managed result by result along chains and across the business.
Performance utilizes capital solutions to consume capital, incur costs, and contribute to result value-added. A performance manager is responsible to provide and support specific solutions that meet expectations in the performance dimension.
Managing the result and performance dimensions enables the corporation to create value-quality chains, use Result-performance Costing to manage result value-added, manage performance effectiveness to assure result quality, manage result value-added return on investments, manage ongoing changes in capital worth, and optimize corporate operations and development. The enterprise can manage all capital to maintain current capital solution and total business worth and anticipate potential write-downs.
The third dimension managed in R-pM is the management dimension over time periods selected for corporate planning and reporting. Investment managers are designated to manage result research and capital solution development and to manage the return on implemented development investments over time periods. Top management and the Board of Directors manage change and the creation of strategic value over time, according to plans that carry out the approved strategy. The enterprise is managed on the management dimension to achieve return on investment goals and is governed to achieve result value-creation and reach shareholder result value goals.
Result management manages each result (R) for all capital solutions utilized to produce the result. Performance management manages each capital solution (CS) for all the results produced by the solution. Corporate management manages each month (Mth) or other time period for all results produced against goals from the utilization of capital solutions in performance during the period. R-pM can be instituted by defining result and capital solution entities in existing information systems. When we organize results and capital solutions and effectively manage the result, performance, and management dimensions, we will have a well-governed corporation through 21st Century Management.
Accounting must be transformed to professional records management
A recent article discussed the need to broaden accounting to provide professional records management, which keeps complete financial records on capital worth, performance costs, and result value produced, in additional to conventional actual and accrued cash. Professional facility records management also manages all non-financial, documentation, and imaged records on results and performance. Facility records management provides the information solutions from records capital needed for effective corporate governance.
Internal auditing is incorporated into management tactics capital to ensure that approved strategic value is being created at a reasonable cost, that capital investment returns are gained, and that future result value-added and disposal result value maintain accurate capital worth. Statutory reporting can be expanded to establish corporate capital worth in the capability to produce future results of value, at a managed performance cost.
Eventually, corporations will be forced to organize and manage the business
Instead of spending money on compliance, and enduring continuing crises and losses we must organize and manage the corporate business and institute guidelines for good corporate governance of actual business operations and development. Business owners, corporate shareholders, and representatives on the board must take the lead to govern the actual business to create strategic value and prevent more financial losses.
Corporations worldwide are now planning to employ R-pM, so the corporations themselves must organize the business through R-pM for competitive 21st Century Management.
The details of this article require some knowledge of R-pM. Visit Result-performance-Management.com to download information to learn more about R-pM. Download the new report “A Business Management Program to Answer the Financial Crisis” to learn about the crisis and the only solution available in the world. After you know more about R-pM, review this article again to understand fully how to achieve effective corporate management and good corporate governance.
