Reform your governance from within.

• Author: Stewart, G. Bennett, III
• Position: Financial management system - Includes related article

A financial management system guided by 'Economic Value Added' responds to the needs for improved governance and empowerment in the information age.

CEO resignations, proxy battles, contested board seats, and compensation carping fuel the fires of corporate governance. They put heat on top management. They arouse the indignation of the press. They delight lawyers. But they are not governance. They represent the failure of governance.

Proper governance makes it unnecessary to resort to radical remedies. Proper governance is a closed-loop system of decisionmaking, accountability, and incentives. It makes not just the CEO or top management but the entire organization responsible for the successes and the failures of the enterprise. It results in a self-regulated, serf-motivated if not indeed self-propelled, system of "internal" governance.

Contrary to popular opinion, the universal need to reform the internal governance system is not driven by the flexing of institutional investor muscles. The information revolution is the root cause, and it won't go away.

The proliferation of powerful computer and telecommunications networks is forcing decisionmaking down to the level where the additional information can do the most good. A seemingly subtle but critical point, since therein lies the source of toppled government regimes, flattened corporate hierarchies, fragmenting customer markets, and the chief impetus for governance reform.

The worldwide failure of centrally directed economies and the privatization of state-owned enterprises is a direct consequence of the "power shift" precipitated by the information revolution. Closer to home, entire industries are in turmoil. Andrew Grove, CEO of Intel Corp., has observed that the computer industry is flattening from vertical to horizontal, from a small set of highly integrated producers of proprietary systems to a large number of small entrepreneurial entities that focus on one segment of the total market. Intel, Dell, Microsoft, and Novell have carved out specialized product niches, displacing the heretofore unassailable IBM. In the same vein, "category killers" such as Toys-R-Us, The Gap, Home Depot, and Wal-Mart have transformed retail distribution from vertical to horizontal, toppling Sears.

Furthermore, the force of new information technologies is pulling product markets asunder, precipitating "mass customization." Each and every customer is becoming an isolated market to be captured by the companies best able to sense and service their individual requirements.

The most successful firms are exploiting the changes the information revolution has brought about. They realize that the best way to differentiate themselves and add value is to access, process, and respond to information faster and more effectively than the competition. They operate more like neural networks than mainframe computers. Instead of hoarding information at the top and analyzing it sequentially, they share information across internal borders and act upon it in real time. They flatten hierarchies to put the managers closer to the information. They decentralize and empower. They recognize that in a world of rapid-fire change, informed opportunism is more important than strategic planning. And the only thing they can rely on to resolve order out of this chaos is the motivation and accountability that results from believing in people and making managers into committed owners.

Wal-Mart Entrepreneurism

Wal-Mart is a good example. The company has doubled returns and tripled growth versus K mart, its closest competitor, precisely because it acts as that neural network, zapping sales data from checkout counter to warehouse to supplier and back again. What really makes all the additional information pay, however, is decentralizing decisionmaking and ownership all the way down to "stores within the stores." For instance, as Fortune magazine points out in its 1990 "Most Admired Companies" issue: "Wal-Mart chief David Glass expects managers for each of the of 34 departments within a typical Wal-Mart store to run their operations as if they were running their own businesses. The managers are supported with detailed financial statements. Says Glass: 'Instead of having one entrepreneur who founded the business, we have got 250,000 entrepreneurs running their part of the business.'"

Now more than ever, top management must follow Wal-Mart's lead in delegating the effort to create value to the creativity and entrepreneurism of the organization. Managers accustomed to overseeing large enterprises may find it hard to swallow, but the fact remains that the tops-down command-and-control management system is now hopelessly obsolete (see sidebar, The 'Desert Storm' Principle of Management). Rather, decentralization and empowerment combined are the proper response to the information revolution.

Enter Governance

This is where governance comes into consideration, or at least a proposed model of "internal" governance. The first step is that top management must abandon one of the most...