Effective governance through

real-world system thinking

There is ever-increasing pressure on organizations of all types to have effective governance mechanisms and risk management practices in place and to be able to demonstrate them effectively. With this in mind, Rob Peddle and Ian Rosam explore how system thinking can help

We have all experienced the significant movement towards mandatory reporting of environmental and social activities and impacts, alongside the traditional economic ones. However, for some regulators and institutions this does not go far enough. Already on the table are suggestions such as:

• the mandatory requirement for organizations to create a single corporate officer who bears statutory responsibility for ensuring environmental, or indeed any other, compliance
• the introduction of mandatory governance processes to fulfil the new obligations placed on directors

To many people, these suggestions appear to be appropriate ways to address risk management, by ‘forcing’ compliance into organizations. However, if we take a look at such approaches in the past, have they actually delivered what the regulators wanted to achieve? Equally importantly, do they assist organizations to create sustainable solutions that help them balance their economic, social and environmental risks and performance requirements?

Although attractive solutions in their apparent consistency, the ‘one-size-fits-all’ approach is usually over-bureaucratic, drives over-complicated solutions and becomes impractical. Are such suggestions really the way to address the ‘real-world’ problems they seek to confront?  

There is a need to create high levels of compliance, but forcing everyone to do everything in the same way is the road to disaster. Organizations will make every effort to look as though they are compliant, but the result will be many apparently demonstrating compliance while everyday activities continue to tell a very different story.

The intent of such suggestions is admirable, so solutions to address these must be found if we are to operate successfully in the global commercial world.

Business leaders need to be able to address their stakeholder requirements in a way which avoids the pitfalls of the historical approaches of regulation and blind compliance. So, what is the alternative?

The solution

Such an option is system thinking, which recognizes that organizations are single, living systems, constantly changing to deliver, prioritize and measure all of their impacts – economic, social and environmental – through a framework of key business processes.

The reality is that many elements of new requirements are already being carried out somewhere within the organization, as they are normally just good business practice.

The difficulty is that they are probably not being done in the clearly ‘joined-up’ way defined in the mandatory governance requirement or standard/framework that they need to apply.

Without this clarity of how the requirements fit into an organization’s current activities and management methods, many organizations create a new ‘system’ to demonstrate that they are complying. This usually results in increased cost, duplication, yet another initiative and worse of all the perceived movement of responsibility from line management to whoever is tasked with managing this new ‘system’. Usually a single person takes responsibility for ensuring that all elements of a specific regulation, standard or framework are embedded into day-to-day activities, but it is very dangerous to then give them responsibility for its continued use.

If system thinking is applied, changing regulations become much clearer to manage:

• directors will realize that their organization only has one system, with everything they do joined together and achieved by different parts working together. Developing individual ‘systems’ to address each new requirement is unsustainable, as the organization needs to apply an ever-increasing number.
• system thinking will allow directors to analyze what parts of any new requirement are already being done and adjust where needed, without needing a huge initiative. As system thinking defines key business processes, which are owned by line managers, the person that embeds new requirements into the organization will not become responsible for also making sure it continues to be applied. The main responsibility for delivery will firmly rest with the managers responsible for everyday activity. As all will rely on each other for success, there will be much less conflict or battling for their personal goals. Without system thinking, this ‘joined-up’ effort becomes difficult to achieve.
• the single system will define the eight to 15 key business processes running across the organization to deliver its objectives. It will be managed using a single business management System reflecting the reality of both what actually happens and what is needed to deliver the range of performance needed in the 21st century. This is only a picture of what drives performance, with things such as culture, teamwork and communication mostly not written down, yet having a fundamental effect on performance. It’s just a way of helping to communicate and understand what needs to happen.
• directors will recognize that currently applied compliance auditing methods cannot usually assess these ‘softer’ issues, even though they are key to sustainability of compliance with regulations, delivery of performance and business effectiveness. Proactive auditing has moved beyond compliance into a key element of risk management.

It is these areas of risk that directors and senior managers are increasingly being required to manage. They still need to be assured that compliance is taking place, which should be the responsibility of junior and middle managers to maintain. Suitable mechanisms to help them know it is happening and provide real-time alerts are needed, not annual audits.

Current auditing methods also mean that compliance is often all that is reported, so no wonder directors and senior managers see little value in it and prefer to leave middle managers to address what is found. Behaviour-based assessments will raise the game, providing true future-focused and risk-based reports, with information closely aligned to what these senior people need to manage – the strategic and business risk issues.

Interestingly, many new regulations require directors to take personal responsibility for ensuring that risks associated with organization processes are understood and managed. With well-applied system thinking and behaviour-based assessment, they can truly demonstrate that they are carrying out these responsibilities. Without them, there is a lot of activity, but can they really justify that they are discharging these responsibilities?

System thinking will not mean new requirements can be ignored, but it provides the clear foundation from which any organization can mature the processes within its single business management system to effectively and efficiently deliver new requirements as they arrive. It means that every requirement will be truly integrated into the organization and its system, with the best placed managers balancing the range of requirements on a day-to-day basis in support of the business objectives. In other words, ‘real-world’ management can take place.

About the authors

Rob Peddle and Ian Rosam bring widely different areas of expertise together in their system thinking approach to business, corporate social responsibility management and behavioural based auditing. Having jointly written a number of books on the subject, they are passionate about creating the capability for organizations to deliver the broad range of business requirements now demanded by stakeholders, through a whole-organization ‘real-world’ management system.

Both are directors of the High Performance Organization Group (www.the-hpo.com). They can be contacted at rob.peddle@the-hpo.com or ian.rosam@the-hpo.com.

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