Flawed Logic: A Simple Division of Labour: Organisations That Exclude Management from Contributing Fully to Strategic Decision Making Could Well Be Institutionalising Poor Performance, Warns James Lockhart in the Third of His Series of Articles on Governance and Management

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If a predominantly compliance view of governance is accepted as the modus operandi of boards, those assigned the responsibility for governance could be expected to be ambivalent about performance. However, should those assigned the responsibility for governance be striving for exemplary performance, there ought to be a fundamental and urgent concern over the commonly stated functions of governance--given they often leave performance and leadership to chance.

There is a complete absence of a broader contextual process or framework for governance--other than the requisite lists of what directors supposedly do. This absence can be resolved by viewing governance and management as the division of labour: The division of labour between that concerned primarily with governance (as ill defined as that may be) and that of 'employees' primarily concerned with management.

The strategic management process provides a tool through which exemplary performance is achieved. That no such equivalent exists for governance continues to escape the attention of many involved in the governance debate. Namely, there supposedly exists some second parallel process that boards, not management, follow. Yet, after three decades of governance research and some three centuries of practice, this process is yet to be identified.

The strategic management process is typically depicted as either being stepwise and deliberate or being the interaction between strategic position, strategic choices and strategy in action. Whatever the case, the strategic management process is the only framework through which the functions required to set and meet the organisation's objectives can be allocated between those assigned the responsibility for management and those assigned the responsibility for governance.

The critical issue that arises from this discussion is the appropriate allocation of functions as opposed to the allocation of individuals to roles.

Strategic management is the process used by an organisation to determine its purpose, formulate its strategy and then relate that strategy to operational and functional management. Therefore, strategic management refers to the entire process by which resources and situations are manipulated, in an environment of uncertainty, to achieve the organisation's purpose. Managers are most often involved with operational planning and control. However, the emerging model in New Zealand of boards effectively 'excluding' management from the strategic debate is, at best, flawed logic.

The five strategic management functions are typically better recognised as a series of tasks used to establish the organisation's direction; scan the environment (external and internal); establish strategy (the identification and analysis of alternate courses of action, and selection); implement the strategy; and, evaluate and control the process.

The first task of strategic management is establishing, or revisiting, the organisation's direction. An organisation's direction can be described through some combination of vision or strategic intent. The actual process of formulating organisational direction may, however, be of more importance than formal evidence of the outcome. An organisation's direction statement should also identify an organisation's stakeholders--whom the organisation is seeking to serve--as well as the process through which those stakeholders are likely to be served.

The first task of those assigned the responsibility for governance, therefore, must be to determine the organisation's strategic direction, whom it intends to serve, the minimum level of performance to be achieved, and the ethical stance to be adopted. The identification and setting of strategic direction, then, requires leadership from governance.

Herein lies the first paradox of strategic governance-that of duality. With duality one person has the primary responsibility for the organisation's management (CEO) at the same time as having the responsibility for chairing the board. …