Manage the Business with R-pM for Good Corporate Governance
According to another post at the Business Change Forum, corporate governance is one of the top 10 problems of 20th century management. The corporate governance problem is caused by outdated 20th century management methods used today that do not organize and manage the actual business and cannot provide complete and accurate management information on the actual business. A myriad of different management structures are laid over the business that describe the corporation differently and produce many conflicting ways a corporation can be reported. We govern by enforcing policies and rules, because we do not understand the substance and reality of the actual business.
Now there is a solution to the corporate governance problem, Result-performance Management (R-pM), which organizes and manages the actual corporate business to utilize capital in performance to produce value in results. R-pM plans results of value needed for success, capital investments to provide solutions of worth, and performance in the utilization of capital to incur costs to create result value-added. R-pM plans the strategic business in strategic results to produce and capital solutions to be developed to produce the results. R-pM plans value creation and capital development through period by period result goals. Corporate governance can manage strategic value creation as the current business converges on the approved strategic business.
Shortcomings of 20th century management that produce poor corporate governance
20th century management organizes the corporation by laying an organization structure over the business, so the business cannot be managed. Management structures are laid over the business for plans, processes, accounts, functions, activities, reporting, and so on. Management is unable to manage or govern the actual current or strategic business.
20th century management does not protect the interest of investors and shareholders. Even the best-intentioned corporations cannot plan and manage the return on their investments. Corporations are forced to either spend or speculate with investment funds. Financial management and accounting are separated out to focus on cash and accruals, and traditional assets. The bulk of our capital investments of greater worth are neglected or labeled “intangible”, rather than being professionally managed to produce value-added and increase in worth.
Accounts record an arbitrary chart of accounts, rather than the real business, and can be defined and redefined in different ways. Accountants follow rules, instead of professionally recording actual business transactions. Rules can be bent to fully disclose distorted information. The book assets are not the true assets of the corporation. Accounting records actual and accrued cash in arbitrary accounts from the point the corporation receives money until the point the corporation spends or invests the money. Accounting requires inordinate effort, but does record the dark side of accounting, after cash is spent or invested as costs are incurred until something of value is created to receive more cash. Statutory reports do not relate to the business, so they must be taken at face value. Corporate management is forced to approve financial statements that are by definition incomplete and inaccurate.
Internal audit sees that certain rules are being followed, and recent cases have demonstrated the reliability of external auditors to ensure good corporate governance. Poor corporate governance is built into outdated 20th century management. Management is expected to govern the corporate business with no reports on the actual business and no tools to plan and manage the business strategy, strategic investments, actual performance costs, worth of capital utilized, or strategic value creation.
Corporate governance problems cannot be solved from the governance side
Exposures over the past several years have spotlighted the need to solve the corporate governance problem. Experts write and talk on television about measures to strengthen accounting, audit practices, and reporting requirements to solve the problem once and for all. But the cycle is just repeated. Whenever corporate malpractices arise, the experts strengthen the methods that produce the malpractices. And then, sure enough, bigger and stronger malpractices arise.
Experts always address the corporate governance problem from the governance side. They can strengthen outdated 20th century management methods all they want. They can even sink billions and billions of dollars of shareholder funds into modifying processes and systems for compliance reporting. All they can do is address the symptoms of problems. They can never solve the problems.
Corporate governance problems must be solved from corporate side
The only solution for good corporate governance is to structure the corporate businesses for 21st century management. We need to clear away contrived structures and precisely define and organize the business, so we can manage substance in addition to enforcing rules. This solution is provided by Result-performance Management (R-pM).
R-pM defines the corporate business as “investments in capital as solutions of worth utilized for costs and effectiveness of performance to produce value and quality in results”. R-pM organizes the corporate business using only three components: 1) specific results of value that management and the board want produced by the business and, 2) capital the corporation invests in and must utilize as specific solutions of worth to produce the results, and 3) performance domains for each capital solution deployed with rules to incur costs to produce a specific result. The business organization does not organize business units or people! Business units and people are deployed as solutions, where they have the capability to manage and produce results.
Once the actual business is organized, R-pM manages the corporation in three dimensions:
- Result: Manage economic output to create value, achieve goals, and maximize revenues across the business
- Performance: Manage invested capital utilized to control costs, improve worth, gain returns, and maximize profit margins
- Management: Manage by time period to develop capital and execute the strategy to create strategic value and shareholder returns
The enterprise strategy is defined by the value to be created by achieving approved strategic results and the capital solutions to be developed to produce future results. Corporate governance is a part of corporate management to ensure that proper results are being produced and proper capital solutions are being developed and utilized, and to manage the transformation period by period from today’s result value to the strategic result value.
Principles for Good Corporate Governance
R-pM employs principles to simplify corporate management and aid good corporate governance:
- Organize and manage all results produced across the complete corporation as an interrelated set, not as separate entities like products, sales, revenues, etc
- Organize and manage all capital investments as solutions of worth available to produce results for which they are qualified
- Organize and manage the costs and effectiveness of solutions utilized in performance to determine result value-added and manage result value-quality chains
- Set a clear strategy for improving the value and quality of existing results and producing valuable new results to create customer and shareholder value
- Establish time periods for planning and reporting within the approved strategy with the result goals and capital performance expectations that carry out the strategy
- Organize capital, including financial supply, utilized to produce results into categories so that it can be managed professionally
- Plan investments and manage capital development to develop capital solutions to produce valuable new results to provide the benefits and return
- Govern each project as a business to utilize assigned capital in performance to produce project results subsidiary to a set of one or more corporate results
- Manage the cost of capital consumed, including executive compensation and external contracts, against the value created in the results produced
- Manage capital solution worth assumed in development costs and assessed in result value-added attributed for a past or future period
- Set up stakeholder and shareholder value as managed results with tracking by period against goals and estimates
- Establish professional facility records management based on accurate and comprehensive official records including all metrics, qualitative measures, and documentation of results, capital, performance, and enterprise interactions
- Expand the financial records sub-set from cash and accruals to provide governance solutions on result value and evaluations, performance costs, capital assessments, result value-added, capital worth, specific investment returns, strategic estimates, etc
- Utilize management information on the complete business cycle to know all performance costs, performance effectiveness, result volumes, result quality, result values, result value-added, supplier and customer and other enterprise interactions, tangible and intangible assets of positive capital worth, liabilities as specific solutions of negative capital worth, and accurate corporate business net worth
- Establish tactical management results to evaluate results, assess capital performance, optimize results and performance, anticipate result symptoms and performance problems, and develop tactics solutions to be implemented by management
- Assess the worth of the corporation in terms of the capability to produce results of value over future periods at a cost of capital compared with reported net business worth
These principles, which can only be employed through Result-performance Management, build good corporate governance into the on-going corporate management routine. Securities and Exchange Commissions and other regulatory bodies can use R-pM for complete, accurate, and auditable reporting on real-life corporate results, capital, and performance.
R-pM enables transparent corporate governance of business reality
We can never enable good corporate governance, until we simplify our corporations through R-pM to utilize capital in performance to produce value in results. Then we can achieve good 21st century corporate governance to manage the substance of cost-effective performance producing value-quality results period by period on the planned and approved road to strategic value creation. Learn more about R-pM and download The R-pM Toolkit for complete details at result-performance-management.com.
