Article | Stanford Social Innovation Review | summer 2009

Mission-Driven Governance

by Raymond Fisman, Rakesh Khurana and Edward Martenson

Abstract

The purpose of this paper is to provide a useful, easily applied theory of governance performance. The existing model is fundamentally adversarial, rooted in the paradigm of principal-agent conflict. At its base is an image of governance as a never-ending struggle between board members and executives—"principals" who guard the organization's resources but have limited information to "monitor" how these resources are used and "agents" who have insider knowledge and control the information-filtering apparatus of the organizations. Many of the concepts and ideas in this traditional model are shaped by a long history of governance failure and organizational pathology. It suffices as a solution to the challenge of meeting legal compliance standards through formal systems, but we believe it utterly fails to show how to create a governance system that supports organizational effectiveness. We propose a framework that gives equal weight to creating a governance system whose effectiveness is measured by the achievement of the organization's mission or purpose.

In this article, we argue that this reluctance to evaluate an organization's governance against an organization's stated mission, coupled with a narrow focus on a rules-based approach to governance, are jointly responsible for the persistence of problems in governance performance, despite decades of high-priority attention. These governance misconceptions translate into four basic barriers to effecting change:

1. Many leaders who are dissatisfied with the state of their organizations' affairs are nevertheless resigned to it because they do not think it can be changed. They are schooled to think that solutions require new rules, but new rules are inadequate to treat the performance problems that they encounter most often.
2. The refusal to see governance as a performance element that can be improved may be viewed at least in part as a defense mechanism. No one likes to be evaluated, and board members have the power to avoid it. This might explain why only about one in ten nonprofit organizations have implemented governance evaluation routines.
3. When confronted with governance problems, we tend to follow the path of least resistance, seeking simplistic solutions with bright-line rules such as the policy/implementation division of labor for board and management. The difficulty, of course, is that governance is a highly complex activity, requiring decision makers to integrate many kinds of knowledge into a coherent whole.
4. Finally, the dominant model of governance that persists is fundamentally flawed and out of date. It simply doesn't fit experience on the ground. Without a broadly accepted theory of governance performance to provide a standard against which organizations can evaluate and improve their practices, every decision maker applies their own tacit theory. These, in turn, tend to cancel each other out in a lowest-common-denominator way. An organization's definition of "good governance" should be explicit and agreed to by all, not left to individual interpretation.

Keywords: Corporate Governance; Governing and Advisory Boards; Knowledge Management; Standards; Mission and Purpose; Organizational Change and Adaptation; Performance Effectiveness; Performance Evaluation;

Citation:

Fisman, Raymond, Rakesh Khurana, and Edward Martenson. "Mission-Driven Governance." Stanford Social Innovation Review 7, no. 3 (summer 2009).