• Michael Hilb

The Promise and Perils of Agile Governance

Agility as a leadership principle has gained enormous importance in recent years. Many companies proclaim agility as a new leadership culture that is better aligned to future opportunities and challenges. At the same time, companies must adhere to corporate governance principles, some of which conflict with agility principles. This article presents considerations for improving the compatibility of agile leadership principles with the principles of effective corporate governance.



Agility as a Management Principle


Agility as a leadership principle has gained enormous importance in recent years. Many companies proclaim agility as a new leadership culture that is better aligned to address future opportunities and challenges. Even if the terms used differ, e.g. "un-bossing"[1] , "sociocracy"[2], "holocracy"[3] or simply "agility", the various approaches have important things in common. For example, all of these approaches question the traditional understanding of hierarchy, in which strategic decisions are made by management, implemented by employees, and implementation is in turn ensured and reviewed by management, the so-called "command-and-control" approach. Instead, the agile leadership approaches assume that employees, usually organized in teams, are often better able to assess the business situation than the company management and should therefore not only act autonomously but also be empowered to make strategic decisions themselves without waiting for the approval or even instructions of the management bodies.


Even though the various approaches follow this principle, a differentiation can be observed according to the degree of formality. While some companies declare agility as a value or cultural principle, other companies strive to implement the formal specifications developed by the founders of the various approaches, such as "sociocracy" or "holocracy", for example, the roles, rules and decision-making modalities defined in detail. However, many companies opt for an intermediate form when implementing agile principles.


Even though agile leadership principles have received greater attention in recent years, their origins go back a long way. For example, Auguste Comte [4] and Lester Frank Ward[5] are often referred to as the founders of sociocratic thinking. Historically, there have also been periods in the past when organizations have adopted an agile approach, as Niall Ferguson[6] points out in his historical analysis of networks and power.


The renaissance of agility as a leadership principle in recent years can be explained primarily by digitization, which since the mid-20th century has both accelerated the pace of corporate change and increased the availability of leadership tools to all employees.


Triggered by three technological developments, i.e. increasingly affordable computing power, the growing interconnectedness of people and machines, and advances in the application of artificial intelligence, not only companies but also [7] economic structures have undergone a fundamental change.[8] This has presented business leaders with the challenge of having to react faster than competitors to ensure the survival of the company. Against the backdrop of this transformation imperative, the speed of decisions and implementations became a critical success factor, further encouraging the delegation of such decisions to the "front line."


At the same time, the new means of communication and automation of cognitive processes not only enable all employees to be involved in decision-making processes but also change employees' expectations of management bodies. Increased transparency and easier exchange of information give individuals more power and opportunities to have their say, which are in some cases also actively demanded.


Requirements for Effective Corporate Governance


Since the Cadbury Report in 1992,[9] which redefined the basic principles of effective corporate governance for the United Kingdom against the background of corporate scandals, and the subsequent national guidelines worldwide, corporate governance has been regarded as a central component of corporate value creation, which is intended to ensure not only optimal word creation but also fair distribution of the value generated. The focus here is on various distributions: between companies and society, between owners and the company, but also between management and employees. In the latter debate, the focus is not only on distribution policy issues, but rather on the question of responsibility for entrepreneurial action and how this should be compensated.


It is therefore hardly surprising that members of management bodies such as the board of directors frequently refer to the responsibility attributed to them by law, such as in Switzerland to the non-delegable task of "ultimate direction of the company and the issuing of the necessary instructions.[10] This fullness of responsibility is not only referred to by the members of the board of directors, but is also supported by case law and society. Voices from society, expressed for example in the media, do not infrequently call for comprehensive responsibility on the part of management bodies for everything that is directly or indirectly related to the company. It is not uncommon for the board of directors in particular to become a projection screen for the responsibility of "business" towards "society".


The pronounced responsibility attributed to boards of directors is no accident. The transfer of responsibility for the consequences of corporate actions and contracts to natural persons was a central principle in the introduction of the corporation as a legal entity that can exercise rights and duties like individuals, but whose liability is limited. In order to be able to hold someone accountable in the event of abuse, a body consisting of natural persons must, to this day, be responsible for overseeing corporate actions in every corporation.


While in the beginning, the focus was on possible abuses of responsibility by managers towards the owners, as discussed by Adolf Berle and Gardiner Means[11] in their important work, the focus increasingly shifted towards the responsibility of the company towards other stakeholders such as the employees but also society as a whole.


Dealing with the Tension between Agility and Corporate Governance


When the increasing demands on the accountability of boards of directors and the call for agile leadership principles coincide, a number of challenges arise for companies and especially for boards of directors, which we will discuss in more depth in II. In this context, the fundamental question arises: How can someone bear de jure responsibility that he or she de facto no longer wants to and/or can fully assume?


It is interesting to see how different companies and decision-makers deal with this area of tension. Three behavioral patterns can be identified: Ignorance of or a situational and structured approach to the field of tension.


Although a large number of companies seem to be embarking on reforming their corporate culture and organization toward agile structures with great outward enthusiasm, the implications of these measures for ensuring effective corporate governance do not always seem to have been fully thought through. Frequently, the actions rather give the impression that one is not aware of the area of tension in its entirety. This is certainly also related to the fact that it is often individual functions within the company that takes on these issues, and the implications for the company as a whole are often not visible from the singular perspectives. Certain time pressure and the motivation not to miss a trend can reinforce this behavior pattern.


Often displaying a frequently unintentional ignorance of the area of tension, companies are awakened at the latest at the first conflict and forced to take immediate measures to resolve the conflicting goals. However, the proposed and often hastily implemented solution approaches are rarely able to treat the causes of the conflict of goals but are frequently aimed at treating the symptoms. In the process, the actual problem is often not structurally solved, but rather masked or circumvented.


However, the only sustainable approach is to understand conflicting goals in detail and to make structural adjustments in corporate governance structures so that the inherent tensions can be understood and defused as far as possible. However, this requires that the issue be considered in a comprehensive and integrated manner: The legal requirements and conditions on the one hand, and the business constraints on the other. In this context, it is of central importance that the decision-makers are aware of the legally prescribed but also the effectively lived roles of a board of directors.


Challenges of Agile Governance


Legally, the responsibilities and thus also the roles of the board of directors are clearly defined. For members of the board of directors in Switzerland, Art. 716a para. 2 CO describes the non-delegable tasks: the overall management, which is reflected in both a directional and a supervisory competence and responsibility. In the lived work of board members, however, other often informal role understandings arise in addition, which we refer to collectively as coaching.

Consequently, we can differentiate three roles of the board of directors: that of the co-director, who co-determines strategy together with the executive board, that of the controller, who exercises his supervisory duties, and that of the coach, who works in partnership with the executive board.[12]


Board Diamond

What are the challenges arising from this area of tension from the perspective of the board of directors?


Challenges as a Co-Director


Unclear decision-making authority

The first challenge in reconciling agile leadership principles and effective corporate governance is that there will inevitably be irritations of authority since it is in the nature of decision-making under uncertainty that subject areas are difficult to delineate, as many topics appear new and thus do not yet have a fixed place in organizational structures.


Insufficient decision-making skills

The novelty of many of the opportunities and challenges that companies try to seize or respond to with agile methods often leads to capability gaps among decision-makers. It is not uncommon for decisions to be delegated on the grounds that the teams on the customer or technology front can assess the situation better than a central decision-making body such as the executive management or the board of directors. Ultimately, this is also an admission that the relevant bodies do not have the necessary competencies in their self-assessment to participate in discussions and take responsibility for a decision.


Lack of conflict resolution mechanisms

Third, there is usually a lack of mechanisms to resolve decision-making conflicts, which will inevitably arise should different opinions emerge on an issue for which different teams feel responsible, or more seriously, for which no one feels responsible. Who gets to overrule whom, and does this set a precedent for similar decisions in the future? These are questions that need to be answered.


Challenges as a Controller


Lack of transparency

The fundamental challenge in the exercise of the supervisory function is the lack of transparency regarding the various decisions made at different levels. Even if there is a documentation obligation, it must be assumed that decisions but also implementation reporting are not uniformly designed as long as the decision-making authority is not clearly regulated. In addition, the advantages of an agile organization, i.e., fast decisions and implementation, would become invalid if it triggered a supervisory bureaucracy.


Unclear supervisory competencies

As with decision-making authority, the distribution of authority regarding supervision inevitably gives rise to ambiguities and conflicts. Which body or team should supervise whom? To what extent are the basic principles of agility, namely anti-hierarchy thinking, violated by the supervisory wrangling that inevitably ensues?


Unclear rights of intervention

Along with the unclear supervisory competence, there is ultimately also the question of who has the right of intervention in the event of a conflict or crisis. Can decisions made by supervisory bodies be overturned if a breach of the rules is identified? To what extent would such a practice violate autonomous decision-making and thus one of the basic principles of the agile leadership understanding?

Challenges as a Coach


Unclear demarcation from other roles

The role of the board of directors as coach is usually of great importance in agile contexts since in agile approaches an important role in finding solutions is attributed to informal exchange. However, this can inevitably lead to conflicting goals for board members, as they are also co-directors and controllers, roles that are formal and legally regulated. Does this now mean that the role of the coach is always of secondary importance?


Unclear distribution of roles

It is also in the nature of coaching that coach and coachee should meet at eye level. This may prove effective for exchanges between, for example, a chairman of the board and a CEO, but it is at odds with the legally defined division of responsibilities of the hierarchy of competencies. This inevitably leads to a fundamental assessment of these interactions: May they be limited exclusively to topics that are not legally regulated - which would preclude discussions on central management topics - or may all topics be included - with the risk of moving in legal gray areas?


Lack of involvement of the committees

Since coaching interactions usually take place between two people, e.g. between the Chairman of the Board of Directors and the CEO, the challenge is how to ensure that the relevant bodies are involved or at least informed, especially if decisions should also be derived from such interactions.


Approaches to Strengthen the Compatibility of Agility and Corporate Governance


How can these multiple challenges be effectively addressed without creating a legalistic bureaucracy that would not only contradict the basic idea of agility but also negate potential benefits? Richard Scott's institutional theory offers [13]three approaches to describing how organizations deal with changes in their environment and adapt their behavior as a result: First, organizations are subject to regulatory constraints. Second, the behavior of organizations changes under normative pressure, i.e., they react to expectations from society, often in anticipation of possible regulatory changes. Third, the behavior of organizations is also strongly oriented to the example of other companies. This so-called mimetic pressure often leads to behavioral convergence within a peer group. How effectively do these three approaches prove to be in better uniting the principles of agility with the principles of effective corporate governance?


Regulatory approaches


As mentioned at the outset, the principle of personal responsibility of the members of the supervisory body is one if not the central principle of today's generally accepted logic of corporate law and consequently also of corporate governance. Although agile governance principles challenge this logic, it is neither reasonable nor to be expected that this principle will be abandoned. The legal counterpart, limited liability, is too important and decisive for progress and growth, and the alternatives presented, i.e., a return to the pre-corporate era, are too unconvincing.


Normative approaches


Nor will normative approaches alone lead to necessary adjustments. Rather, society's expectations of the responsibility of companies and their boards seem to be widening the gap between desire and reality: While attempts are being made within companies to grant more autonomy and thus also to delegate responsibility, society is placing more and more responsibility on the legally responsible bodies, i.e. primarily the board of directors.


Cultural-cognitive approaches


This leaves only the cultural-cognitive approaches that promise a remedy. In the following, we will discuss five of them.


Create shared awareness

The first step in reconciling the two concepts is to ensure that everyone in the company is aware of the possible conflicting goals. This requires a fundamental understanding of agility and effective corporate governance. This requires openness to admit one's own lack of knowledge or experience and to reach out to others inside and outside the company to jointly strengthen understanding. An open and honest exchange also ensures that the benefits of the two concepts are better understood and thus that the basic ideas are accepted.


Delimit functional areas

Since a complete harmonization of the two concepts is not achievable, as explained above, a clear delineation of the areas and the definition of the principles that apply within them is essential. In this context, the targeted value creation through agility should serve as a yardstick: While agile leadership principles are not only value-adding but often indispensable in areas dealing with innovation, partnerships, and venturing,[14] the added value in other areas such as in staff functions is often marginal if not negative. Such differentiation can usually already significantly reduce the potential for conflict.


Nevertheless, gray areas remain. A second dimension of demarcation should focus on the classification of strategic, tactical, and operational decisions. Here, a clear consensus is needed as to the areas in which autonomous decisions are permitted or even expected, and in which areas the approval of formal management bodies is needed.


Define subsidiarity rules

To overcome this dilemma, clear principles are needed that can also be applied to new issues and circumstances without having to discuss the classification on a case-by-case basis each time. Here, the definition of generally applicable subsidiarity rules plays a central role. It is important to determine that, in principle, all topics are regulated decentrally and only those that are explicitly specified are regulated centrally. This approach leads to clarity about responsibilities, while responsibilities can be flexibly and transparently adapted to needs and circumstances.


Align goals and expectations

Due to the inherent differences between the two approaches, translation aids are needed. Thus, not only the terms must be translated, but above all, a transition of target terms and target systems is necessary to ensure continuous implementation monitoring. Since the approaches to goal definition and reporting, in particular, differ fundamentally in agile and classic approaches - agile approaches assume that the goal can change in the course of an activity, while fixed goals are usually set in classic controlling - approaches such as conditional milestones are needed to measure progress and derive possible risks. This requires a close exchange between the departments involved.


Codify principles

However, all the approaches described above can only have a sustainable effect as long as they are understood, accepted, and also lived by all those involved. In this context, a certain degree of institutionalization is necessary. The definitions and the set of rules must have a long-term effect, but must also be able to evolve flexibly. Therefore, it can be useful for organizations to summarize the basic rules in a kind of constitution. This not only makes it possible to ensure a certain coherence, consistency, and binding nature of the approaches but also gives the topic the necessary visibility within the company and among the business partners, whose involvement is also frequently the trigger for the application of agile management principles.


Outlook


Dealing with fashionable topics always requires a certain amount of caution. Not infrequently, they disappear with the same speed and force as they entered the arena of public discourse. Even with the topic of agility as a management principle, a certain zeitgeist cannot be dismissed. On the other hand, it can also be assumed that the topic will gain in importance, as the trends described at the beginning of this article will increasingly intensify.


The attempt to "reconcile" the two approaches of agility and corporate governance requires not only an in-depth discussion of their basic principles and potentials but also a look beyond the confines of law and business administration. The cultural-cognitive approaches outlined above may be novel for organizations, but they have already been successfully and value-creating practiced for hundreds of years in a different context, in federal political systems such as those of the USA or Switzerland. The design of those systems is also ultimately an expression of the attempt to "reconcile" different interests and approaches.


The future will show to what extent insights for the design of "governance agility" can be derived from today's focus on "agility governance," i.e., a way of dealing with agility that conforms to the principles of corporate governance. It is not only organizations that cannot escape change; the same also applies to legal and business concepts such as corporate governance.


References

[1] Kolind, Lars/Bøtter, Jacob, Unboss, Aarhus 2012 [2] Priest, James/Bockelbrink, Bernhard, Sociocracy 3.0., Berlin 2015 [3] Robertson, Brian, Organization at the leading edge: Introducing Holacracy, Integral Leadership Review 2007, Nr. 3, 1 ff. [4] Comte, Auguste, System of Positive Politics: Preliminary Discourse and Fundamental Introduction, Paris 1851 [5] Ward, Lester Frank Chapter XXXVIII: Sociocracy, The psychic factors of civilization, Boston 1893, 311 ff. [6] Ferguson, Niall, The square and the tower: Networks and power, from the freemasons to Facebook, New York, 2019 [7] Hilb, Michael, Cracking the collaboration codes - How to succeed in ecosystems, in: Michael Hilb (Hrsg.), Governance of Ventures, Bern 2020, 97 ff. [8] Hilb, Michael, Toward an integrated framework for governance of digitalization, in: Michael Hilb (Hrsg.), Governance of Digitalization, Bern 2017, 11 ff. [9] Cadbury, Adrian, Committee on the Financial Aspects of Corporate Governance (Cadbury Committee), London 1992 [10] Art. 716a para. 2 CO [11] Berle, Adolf und Means, Gardiner, The Modern Corporation and Private Property, New York 1932 [12] Hilb, Michael, Toward artificial governance? The role of artificial intelligence in shaping the future of corporate governance, Journal of Management and Governance 2020, Nr. 24, 851 ff. [13] Scott, Richard, Institutions and Organizations, Thousand Oaks 1995 [14] Hilb, Michael, Venture governance - The hidden value driver of entrepreneurial value creation, in: Michael Hilb (Hrsg.), Governance of Ventures, Bern 2020, 11 ff.

This article appeared as a book chapter in German in 2021.