I consult, write, and speak on running better technology businesses (tech firms and IT captives) and the things that make it possible: good governance behaviors (activist investing in IT), what matters most (results, not effort), how we organize (restructure from the technologically abstract to the business concrete), how we execute and manage (replacing industrial with professional), how we plan (debunking the myth of control), and how we pay the bills (capital-intensive financing and budgeting in an agile world). I am increasingly interested in robustness over optimization.

Tuesday, March 31, 2015

Activist Investing in Strategic Software Chapter 1 Excerpt - Why Governance Matters

I've published drafts of the introduction and first 4 chapters of my book, Activist Investing in Strategic Software. I still have some citations to finalize, several visuals to integrate and a lot of editing to do. But the foundation is there. A sample of the book (currently, just the introduction) is available on from the site.

Here's an excerpt from Chapter 1, Why Governance Matters.

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That there are abundant examples of bad governance but few examples of good ones comes as no surprise. What passes for "good" in governance is not all that remarkable. Boards, being the representatives of investors, are expected to be independent, diligent, and uncorruptable. Independent members of corporate boards are assumed to be people of capability and integrity. People in governance roles are expected to discharge their duties competently; meeting expectation is not exceptional. Hence we have few examples of good governance but many examples of bad.

This doesn't help us understand why governance is important.

Poor governance, such as in the cases of Olympus, Hollinger, Madoff, or the United Nation's Oil for Food program, can lead to devastating outcomes that are plain as day after the fact. Yet as we established in the prior section, there are objective characteristics of good governance: set expectations, invest authority, and validate results. And there is research to suggest that the presence of these have a significant impact on bottom-line results.

In a study of 1,500 companies by Harvard professor Paul Gompers, well governed organizations outperformed poorly governed ones by 8.5% annually. “Well governed companies face the same kind of market and competitor risks as everybody else, but the chance of an implosion … by ineffective management is way less.”
-- Gavin Anderson, Chairman, Governance Metrics International

Good governance reduces risk of bad things happening, and there is reason to believe it is a contributing factor to superior performance

Just as a corporation is an investment of capital, so, too, is strategic software. What is true for a company at a macro level should be true at a micro level. The characteristics of good corporate governance should be present in IT governance: an independent board that sets expectations, chooses and changes leadership as necessary, and validates results reported by that leadership.