Organizational effectiveness

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Organizational effectiveness is the concept of how effective an organization is in

achieving the outcomes the organization intends to produce. The idea of
organizational effectiveness is especially important for non-profit organizations as
most people who donate money to non-profit organizations and charities are
interested in knowing whether the organization is effective in accomplishing its goals.

An organization's effectiveness is also dependent on its communicative competence

and ethics. The relationship between these three are simultaneous. Ethics is a
foundation found within organizational effectiveness. An organization must
exemplify respect, honesty, integrity and equity to allow communicative competence
with the participating members. Along with ethics and communicative competence,
members in that particular group can finally achieve their intended goals.

Foundations and other sources of grants and other types of funds are interested in
organizational effectiveness of those people who seek funds from the foundations.
Foundations always have more requests for funds or funding proposals and treat
funding as an investment using the same care as a venture capitalist would in picking
a company in which to invest.

Organizational effectiveness is an abstract concept and is basically impossible to

measure. Instead of measuring organizational effectiveness, the organization
determines proxy measures which will be used to represent effectiveness. Proxy
measures used may include such things as number of people served, types and sizes of
population segments served, and the demand within those segments for the services
the organization supplies.

For instance, a non-profit organization which supplies meals to house bound people
may collect statistics such as the number of meals cooked and served, the number of
volunteers delivering meals, the turnover and retention rates of volunteers, the
demographics of the people served, the turnover and retention of consumers, the
number of requests for meals turned down due to lack of capacity (amount of food,
capacity of meal preparation facilities, and number of delivery volunteers), and
amount of wastage. Since the organization has as its goal the preparation of meals and
the delivery of those meals to house bound people, it measures its organizational
effectiveness by trying to determine what actual activities the people in the
organization do in order to generate the outcomes the organization wants to create.

Activities such as fundraising or volunteer training are important because they

provide the support needed for the organization to deliver its services but they are not
the outcomes per se. These other activities are overhead activities which assist the
organization in achieving its desired outcomes.

The term Organizational Effectiveness is often used interchangeably with

Organization Development, especially when used as the name of a department or a
part of the Human Resources function within an organization.
Organization

Definitions
1. Non-random arrangement of components or parts interconnected in a manner as to
constitute a system identifiable as a unit.

2. Sequential or spatial (or both) form in which a body of knowledge, data, people,
things, or other elements, is purposefully arranged.

3. Social unit of people, systematically arranged and managed to meet a need or to

pursue collective goals on a continuing basis. All organizations have a management
structure that determines relationships between functions and positions, and
subdivides and delegates roles, responsibilities, and authority to carry out defined
tasks. Organizations are open systems in that they affect and are affected by the
environment beyond their boundaries.

Effectiveness
Definition
Degree to which objectives are achieved and the extent to which targeted problems
are resolved. In contrast to efficiency, effectiveness is determined without reference to
costs and, whereas efficiency means "doing the thing right," effectiveness means
"doing the right thing."

Organizational Effectiveness

Determining Criteria of Effectiveness

There are many ways to measure the effectiveness of an organization. Campbell
(1977) lists over 30 different criteria from productivity, profits, growth, turnover,
stability and cohesion (Scott p. 343). Different theoretical perspectives can account
for the diversity in usage of effectiveness measurements.

Rational perspectives emphasize goal attainment and focus on output variables such
as quality, productivity, and efficiency. Natural system perspectives focus on the
support goals of the organization such as participant satisfaction, morale,
interpersonal skills, etc. Open system perspectives focus on the exchanges with the
environment -- this includes information processing, profitability, flexibility,
adaptability.

Effectiveness criteria also vary with time, and often subgroups have different
effectiveness criteria.
Also often there are different evaluation criteria applied by those who assign tasks and
those who evaluate performance (Scott p. 346). Often effectiveness criteria involve
self-interst, are stated as universalistic and objective, and cause conflict and
disagreement among subgroups

PARAMETERS
that the executives will be able to integrate this data into a “map” of the
whole organization. While some executives have been able to do this in the
past, they have been unable to readily share it with others.
HRI’s team has developed the first generation of this type of measurement,
the Organizational Capabilities Index ™ (OCI). The OCI creates a “map” of the
organization that enables executives to quickly see where the company’s
human capital is, or isn’t, aligned. This “map” enables executives to locate
key gaps in the company’s connecting alignments and linkages and identify
which combination of factors makes one unit better than another. Our
research indicates that information and knowledge around the interactions
and interrelations of five key components are critical for determining
alignment:
• Strategic alignment – how well the strategic priorities are transmitted,
shared and made consistent with people’s values and behaviors.
• Customer focus alignment – the strategic, performance and people
approaches needed to successfully focus on the customer relationship.
• Leadership and talent management alignment – how the leadership style,
communication, motivation, commitment and behaviors create the
climate that’s necessary for the organization to be productive.
• Performance alignment – how the processes and day-to-day behaviors
and activities match and support the strategic priorities.
• Cultural alignment – the values and beliefs of employees and the
processes that directly link them so that their behavior supports the
strategy.
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Measuring Organizational Effectiveness
Figure III illustrates these major concepts and how they are interrelated, as
well as the key concept of alignment. The environment is the largest system
depicted (the largest hexagon) with the organization as the next smaller
system. The organization is centered or aligned within its environment,
driven by its strategy that is depicted as the next smaller subsystem. The
organization’s strategy guides it within the environment, positioning the
organization to succeed. If the strategy is accurate, then the organization is
aligned with the environment and thrives. When it moves out of alignment,
moving out of its ideal environment, then it is out of balance or alignment
and fails to thrive.
The same logic applies to the subsystems within the organization, from the
customer focus culture strategy to leadership, performance and the culture.
Each subsystem needs to be aligned with the larger system (and the next
larger systems, also) that it lies within. Thus, the customer focus culture
must support the organization’s strategy, and the company’s leadership
capabilities must be able to support the needs of its customer focus and its
overall strategy.
As an example, let’s look at the toy industry. A significant segment of the
toy market is extremely faddy, dependent on the many trends and factors
that influence what children want and parents are willing to buy. Some
major toy manufacturers conduct a two-pronged strategy, with one prong
aimed at the previously proven toys and the other at the latest fad.
Divisions of the toy manufacturers that focus on fads must continually scan
their environment, essentially the popular culture, to find what is hot,
quickly design and produce the toy, and distribute it to the retailers while
the concept is still hot. Their target market is ever moving, demanding that
they be highly flexible. They have three strategic imperatives: 1)
identification of what is hot, 2) rapid development and production and 3)
flexible logistical capability to send the toys to hot retail stores and markets.
Peeking into their organizational system, we can see that their customer
focus needs to be simply designed to meet the retailers’ needs. They will not
be forming a long-term relationship with their end-users, the children or
parents who buy the toy. Rather they are focused on making the toy that is
hot this year and will not be popular next year. So the customer focus
strategy and supporting culture will be designed to meet the retailers’ needs
for just-in-time sales, with the capability to quickly produce mass quantities
if the toy is very popular.
Leadership capabilities will have to match this focus. The successful toy
manufacturer in this niche will have leadership that is fast paced and focused
on getting the product out the door. Management will be focused on current
profits and infrastructure speed and innovation. The performance
infrastructure must be able to be easily reconfigured to produce and support
the distribution of an inconsistent, relatively unpredictable flow of new
products. The organizational culture must inculcate a necessary team
approach required for rapid development of many new products.
If you are like most of us, as you read the preceding paragraphs you may
Visit cmctraining.org or call 1-877-CMC-2500 13
Measuring Organizational Effectiveness
well have become overwhelmed with the complexity
1
Measuring Institutional Effectiveness: A Strategic-Planning
Approach
Former Harvard president, Derek Bok, noted that American higher
education
faces exceptional opportunities and exceptional risks. The demand
for services of the
academe has increased tremendously in the recent past. Post-
secondary institutions are
needed more than ever to fuel the progress in health care,
environmental safety, economic
growth and other endeavors that matter to the overall well being of
the nation (Bok,
2003). With new technologies outdating the earlier ones at a
progressively shorter span of
time, the workforce needs to retool themselves with new knowledge
two or three times in
the span of a career, thus creating a growing demand in courses for
mid-career learners.
Advancement in communication technology has opened up the
access rapidly, breaking
down physical boundaries. As the value of scientific discovery and
continuing education
keep increasing, pressures have increased from several quarters to
make the educational
services available to all those who need them.
These increased opportunities allow the post-secondary institutions
and their
faculty to diversify their activities in more ways than ever before.
Broad range of
activities undertaken by the education institutions makes measuring
and communicating
organizational effectiveness a challenging task. The stakeholders
outside academe often
find it difficult to comprehend the overall effectiveness from a range
of output measures.
At the same time, the ever-increasing resource crunch has
reinforced the need for culture
of accountability in the academe. It is necessary for the post-
secondary institutions to
develop a set of consistent, relevant and simple to understand
measures that will
collectively capture and communicate their effectiveness.
2
Most of the work done on effectiveness of postsecondary education
has focused
on four-year institutions (Smart, Kuh, and Tierney, 1997). Though
two-year colleges
occupy a large part of American post-secondary education, work
done on assessing
institutional effectiveness for two year colleges is limited. The two
year institutions differ
from their four-year counterparts in many ways. One of the main
differences is the
mission diversity of two-year colleges (Smart and Hamm, 1993).
While most institutions
dedicate their services for broadening access and promoting
success of their students, the
mission determines the priorities of a particular institution.
Effectiveness measures are often developed because of external
pressures on the
institutions to improve their performance or accountability
(Birnbaum, 2000). It is easier
for the external communities to have one set of measures to judge
the effectiveness of all
institutions; however, the mission diversity stands in the way of
developing a uniform set
of measures. While every institution need to develop its own
indicators of effectiveness
based on its mission, translating the significant outcomes of mission
into measurable
outputs is a difficult task. One approach to address this issue is to
identify the objectives
of strategic plan, as it is driven by the environment and the mission
of the institution and
fit those measurable outputs into parameters of organizational
effectiveness. This paper
provides a framework to develop institutional effectiveness matrix
based on the mission
and the strategic plan.
Existing theories of institutional effectiveness
Development of criteria for effectiveness measures faces two major
obstacles: the
selection of set of parameters that will express the effectiveness of
an institution as a
3
whole and the sources who will track those measures. According to
Cameron (1978), the
problems of selection of parameters revolve around the following
four issues:
1. What is the focus of the measurement criteria? Is it goal
accomplishment,
resource acquisition, or internal processes?
2. Can the measures be applied universally to an institution or it is
specific to an
area?
3. What are the normative or descriptive characteristics of the
criteria?
4. Are the criteria static or dynamic?
(Cameron, 1978).
The sources of measures are critical because viewpoint of the
constituents developing the
criteria influences the outcome. Who should determine the criteria
and who should
provide the data forms the basis of this controversy (Yuchman and
Seashore, 1967).
Institutional researchers assess several output parameters and
outcomes – access, success,
graduation rate, serving the underserved, public service, creation of
knowledge through
research, training workforce – the list is long. However, traditional
approach measures
the individual areas as stand-alone silos and do not recognize the
inter-relationship
among them completely. This stand-alone approach multiplies the
need of indicators of
effectiveness; recognizing the cross-functional relationship can help
reduce the number of
measures and convey the state of effectiveness more concisely.
Using a multivariate and univariate analysis on the data collected
from nearly 200
respondents, Cameron (1978) tested the ability of nine constructs to
express institutional
effectiveness. The nine dimensions of effectiveness propounded by
Cameron are
clustered around three areas: student-focused, faculty and staff-
focused, and system4
focused. Four constructs of student-focused measures are
educational satisfaction,
academic development, career development, and personal
development. Faculty and
administrator employment satisfaction, and professional
development & quality of
faculty were two measures focused on personnel. System openness,
ability to acquire
resources, and organizational health expressed the measures of
systemic effectiveness
(Cameron, 1978). Smart and Hamm (1993) studied a sample of two-
year colleges to
conclude that the nine dimensions of Cameron represented key
management and
institutional performances. Their study also showed that
organizational effectiveness of
two-year colleges was, at least in part, a function of the mission
priorities.
Cameron’s nine dimensions encompass a range of organizational
effectiveness
factors. However, none of the measures capture the institutional
culture, the nature of
decision-making and its ramification on institutional effectiveness
(Smart, Kuh, and
Tierney, 1997). The issue of institutional culture is of particular
importance because it
provides an insight into the decision making process and
participation by various
constituents in decision making. Welsh and Metcalf (2003)
researched the difference
between of attitude of faculty and administrators towards
importance of institutional
effectiveness activities. The underlying hypothesis comes from the
research that gaining
the interest and support of institutional constituents, particularly
faculty, is critical in
implementing institutional effectiveness measures (Friedlander and
McDougall, 1990;
Morse and Santiago, 2000). The conclusion of the study was that
faculty support for
institutional effectiveness activities is a key factor in determining
their fate (Welsh and
Metcalf, 2003). Leadership style and interaction between faculty and
administrators both
5
strongly influence the overall institutional effectiveness (Smart, Kuh,
and Tierney, 1997;
Welsh and Metcalf, 2003).
The role of strategic plan
Strategic plan is defined as the process of developing and
maintaining a long-term
fit between the organization and its changing marketing
opportunities (Kotler and
Murphy, 1981). It is appropriate to expand the definition to take the
fit beyond marketing
opportunities alone and include all strategic functions of the
organization. A strategic
plan analyses the environment, and establishes a route to achieve
the organizational
missions within the constraints of existing resources. Environmental
analysis is
conducted to answer three critical questions:
1. What are the major trends?
2. What are the implications of the trends for the organization?
3. What are the most significant opportunities and threats?
By including both internal, and external environment, strategic plan
maps out how the
organization can best accomplish its mission within the existing
resources. Essentially,
the strategic plan is driven by the vision of the institution; it
recognizes the limitations
imposed by historical events & existing commitments and orients
the institution to align
itself with emergent trends and market dynamics (Kotler and
Murphy, 1981). The process
synergizes internal resources (human, capital and physical) with
broad socio-economic
environment and trends. Though it evolved as a corporate
phenomenon, it quickly spread
to higher education over the past two decades. A strategic plan
identifies broad areas of
outcome that the institution should strive to achieve to attain its
goal.
6
The strategic plan of an organization is based on its goals and
mission, and it
identifies as well as articulates the outcomes that are desired by the
organization (Kotler
and Murphy, 1981). The outcomes help the institute create desired
impact on its
constituents. Strategic plan realigns the resources with
environmental trends and
conditions to provide a roadmap to achieve the desired outcomes.
From the measurability standpoint, an institution tracks several
outputs, both in
quantitative and qualitative areas. The typical outputs measured by
an academic
institution are enrollment, retention, graduation, placement, fiscal
efficiency, professional
development, interaction between faculty and staff – the list goes
on. For an outsider, it is
difficult, if not impossible, to pick the outputs that capture all
aspects of organizational
effectiveness and track its trend over the years. It is necessary to
express the combine the
effects of outputs to institutional outcomes, and their significance
on the mission
accomplishment. The hierarchical relationship between output,
outcome, impact, and
significance is shown below:
While output typically measures the quantity or quality delivered,
the combined effect of
the outputs expresses the outcome. The impact created on
institutional objective is a
result of the outcomes; if all impacts are in the desired direction,
significant benefits
should be achieved by an institution. The implicit assumption of a
strategic plan is the
outcomes will impact the stakeholders in a significant way and help
achieve institutional
Outputmeasures
quantity/qu
ality
Outcomeindicates
objectivity
of output
Impactidentifies
benefits of
outcome
Significancedocuments
lasting benefit
of impact
7
mission. Thus, capability of the outcomes to accomplish institutional
mission is assumed
in this model. Once the effectiveness matrix is set up, the institution
can measure the
impact in critical areas by observing whether the outputs are
changing significantly over
time.
Institutional Effectiveness matrix
The mission complexity of higher education makes identifying
outcomes that
would indicate institutional effectiveness an onerous task. According
to Ruben (2003), a
way out of this problem is to categorize output measures in four
broad categories. Each of
these categories overlaps across academic, administrative, outreach
and research
initiatives. There are several output measures to indicate
effectiveness in any of the
categories and the institution is free to select specific measures
appropriate to it. The
measures for a specific institution should be driven by its strategic
plan outcomes.
Collectively the measures should be capable of assessing and
predicting performance in
the following four areas of institutional excellence framework:
• Program quality: the quality of programs, services, and activities as
judged by peers
and professionals
• Program relevance: the extent to which programs, services, and
activities are
perceived to meet the needs and expectations of their beneficiaries
• Organizational culture: the quality of the organizational climate, and
the
satisfaction of faculty and staff from their perspective as employees
• Process efficiency: the effectiveness and efficiency of operational and
financial
dimensions of the organization
8
These four areas collectively define a way of thinking about
departmental or
institutional excellence, in terms of which evaluations can be made
(Ruben, 2003). It is
critical to note that institutional excellence is achieved by
addressing each of the above
four areas of outcomes. There are several output measures
maintained by the institution
that can be used to evaluate the outcomes. For example, program
quality can be measured
by student educational satisfaction, student academic development,
and student personal
development. A measure of student career development should fall
under the area of
program relevance. Organizational culture should capture the
output measures of
management styles, whether it is a clan, adhocracy, market or
bureaucracy (Smart, Kuhn
and Tierney, 1997). Ability to attract resources, plant operation and
maintenance should
fall under process efficiency. While the outcome areas are universal
for any institution,
the output measures are driven by individual institutional mission.
This approach allows
an institution to integrate its mission accomplishment with
achieving organizational
excellence.
The constructs of organizational effectiveness matrix is shown below
for a small
technical college located in semi-urban Appalachia. The college has
identified five areas
of focus based on its institutional mission and vision. These
measures are shown along
the rows in the effectiveness matrix below. How does the college
ensure that by
identifying measures of the five areas identified, it will touch upon
all the aspects of
institutional effectiveness? The institutional effectiveness matrix
provides a way to check
whether the output measures identified provides an overall picture
of effectiveness for the
institution. The indicators of effectiveness for this college are
clustered into five areas.
Each of the rows in the following matrix indicates one area of
effectiveness.
9
The Institutional Effectiveness Matrix
Areas
Outcome
Program
Quality
Program
Relevance
Organizational
Culture
Process
Efficiency
Access & Equity √ √
Student success √ √ √ √
Placement √ √
Workforce &
Economic
Development
√√√√
College/ Community
Partnerships
√√√
Each of the output measures of institution-identified initiative is
mapped to one of the
four broad effectiveness categories described above. The
organizational effectiveness
matrix attempts at integrating the output measures with the
outcomes: the rows of the
matrix denote the main objectives derived from strategic planning
initiative; these are
indicative of the desired outcomes as enumerated by the strategic
plan. The four columns
are taken directly from the institutional effectiveness framework;
these are the areas
where both quantitative and qualitative outputs are placed. Rather
than being individual
silos standing by themselves, the outcomes of strategic plan cuts
across several areas of
institutional effectiveness. The outputs that measure each of the
outcomes are aligned in
the appropriate row under the relevant column. Let us illustrate this
point with an
example. Access and equity is identified as a key area of
institutional effectiveness by the
College. How does a measure of access and equity tie with program
relevance and
organizational culture?
An institutional vision of increasing access and equity includes
attracting
traditional and non-traditional students, enhancing market
penetration, and augmenting
academic support services. A survey of existing students in the
college showed that the
10
most important reason cited by the students for attending the
college is availability of
programs. As most of the students come to the college to get a
degree that helps them
find a job, the programs offered must be relevant to the job market.
The demand for
programs by the student is determined by the employment
potential. Unless relevant
programs are offered, the vision to increase access would not be
successful, despite
appropriate resource allocation. Program availability is critical for
access and an output
measure of program availability is an indicator of effectiveness also.
An integrated
approach to factor in program relevance with access captures and
communicates the
results more comprehensively.
Organizational culture, on the other hand, impacts the ability to
develop a fit
between the student and the institution and help make all students
feel equally welcome
and comfortable; this has an indirect bearing on fulfilling the vision
of access. Research
on the college students show that effective communication between
student success
center, developmental education and program faculty is expected to
contribute to student
success. Therefore, the output measures of access and equity
should also be indicative of
organizational culture.
The institutional effectiveness matrix establishes qualitative and
quantitative
output measures and maps how they relate to the strategic
outcomes and overall
institutional effectiveness. It is possible to have multiple measures
of effectiveness for an
outcome. As explained above, access and equity is dependent upon
program relevance,
and organizational culture. The check marks for each of the
outcomes indicate how they
impact various areas of organizational effectiveness. In its
completed form, every cell
should have an appropriate output measure. The constituents can
see for themselves how
11
the output measures given by the institution tie to its strategic plan
and how the overall
strategic plan outcomes enhance institutional effectiveness.
References
Birnbaum, R. (2000). Management fads in higher education. San Francisco:
Jossey-Bass.
Bok, D. (2003). Universities in the marketplace: The commercialization of higher
education. Princeton, NJ: Princeton University Press.
Cameron, K. S. (1978). Measuring organizational effectiveness iin
institutions of higher
education. Administrative Science Quarterly, 23, 604-632.
Friedlander, J., and McDougall, P.R. (1990). Responding to mandates
for institutional
effectiveness. New Drections for Community Colleges, 72(4), 93-100.
Kotler, P., and Murphy, P.E. (1981). Strategic planning for Higher
Education. The
Journal of Higher Education, 52(5), 470-489.
Morse, J.A., and Santiago, G., Jr. (2000). Accreditation and faculty:
Working together.
Academe, 86(1), 30-34.
Ruben, B.D. (2003). Excellence in Higher Education 2003-2004: A Baldrige-
Based
Guide to Organizational Assessment, Improvement, and Leadership. Washington,
D.C.: National Association of College and University Business
Officers.
Smart, J.C., and Hamm, R.E. (1993). Organizational effectiveness
and mission
orientation of two-year colleges. Research in Higher Education, 34, 489-
502.
Smart, J.C., Kuh, G.D., and Tierney, W.G.(1997). The roles of
institutional cultures and
decision approaches in promoting organizational effectiveness in
two-year
colleges. The Journal of Higher Education. 68(3). 256-281.
Welsh, J.F., and Metcalf, J. (2003). Faculty and administrative
support for institutional
effectiveness activities: A bridge across the chasm? The Journal of
Higher
Education. 74(4). 445-468.
Yuchman, E., and Seashore, S.E. (1967). A system resource
approach to organizational
effectiveness. American Sociological Review, 32, 891-903.

Measuring effectiveness: assessing organisational

effectiveness is like wearing the emperor's new
clothes--we know it's flawed but we keep doing it.
Publication: Monash Business Review Format: Online
Publication Date: 01-NOV-07 Delivery: Immediate Online Access
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Article Excerpt
For starters, defining 'effectiveness' itself is an issue. Is it, for example, about achieving goals,
using resources efficiently, or satisfying stakeholders? Different models shed light on different
aspects of what it means to be effective at the organisational level. For example, an
organisation with clearly defined, measurable goals is best assessed using the rational goal
model, while an organisation with more ambiguous goals could be assessed by other
methods.

Much of the controversy around organisational effectiveness research is due to the fact that a
lot of the research assumes that organisational effectiveness is a single variable. More recent
approaches have seen an increasing use of multi-dimensional conceptions. Another issue is
whether organisational effectiveness is objective or socially constructed. If it is socially
constructed, then it is determined by stakeholder judgements formed in an ongoing process of
sense-making and implicit negotiation. This raises issues as to the comparability and
reliability of effectiveness measures of different organisations and the degree to which
repeated measurement gives similar values.

EMPIRICAL ISSUES

Determining suitable empirical criteria to measure a particular theoretical conception of

effectiveness can be problematic. With goal achievement, for example, the best criteria may
not be to measure the extent to which an organisation achieves its official goals, but the
extent to which it achieves its defining goals.

It can also be argued that the combination of criterion is a value judgement, since there is no
algorithm or higher order truth to which we can appeal. The result is that, as the research is
repeated, different results arise according to whatever value judgements were originally
made.

In the past, researchers have measured overall effectiveness by weighting each set criteria
values and then adding them up so that a criterion increment results in the appropriate
organisational effectiveness increment. In...

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Measuring the effectiveness of corporate governance

---- by Dr. Yilmaz Argüden ----

Trust is the foundation of sustainable development. As

the world continues to get smaller, our mutual
interdependence increases and we all need to be able
to mobilise the resources and goodwill of others to
achieve success. That can only be achieved through
gaining their trust. Therefore, the ability to gain the
trust of global financial markets and of all the
stakeholders in the value chain is becoming the key to
success. Dr. Yilmaz Argüden

The essence of good corporate governance is ensuring trustworthy relations between the
corporation and its stakeholders. Therefore, good governance involves a lot more than
compliance. Good corporate governance is a culture and a climate of Consistency,
Responsibility, Accountability, Fairness, Transparency, and Effectiveness that is Deployed
throughout the organisation (the ‘CRAFTED’ principles of governance).

Boards have the basic responsibility to ensure sustainable improvements in corporate

valuations by providing strategic guidance and oversight regarding management decisions, as
well as selecting and changing the management whenever necessary. Success can only be
achieved on a sustainable basis, if boards behave as a role model for implementing the
CRAFTED principles of governance in their own operations and ensure that the corporation
follows these principles in making key decisions.
The board of directors is the most important element in corporate structures. The tone at the
top determines the tune in the middle.*In particular, clear separation of management rights
(taking initiative and implementation) and governance rights (guidance, approval, and
oversight), is critical in minimising potential ‘agency’ risks of the management such as:
• fraud
• cronyism, building a personal fiefdom with company resources
• lethargy, focusing on excuses as opposed to results
• being too risk averse that may lead to overinvestment
• being too risk prone
Issues such as the composition of boards, their agenda and processes for decision-making,
and how they Learn to continuously improve the governance of the corporation, critically
influence the both the quality of decisions and of management.The main responsibilities of the
board is to provide effective Oversight and strategic Guidance for the management. The
quality of their decisions is critically dependent on the quality of the Information they have.
Establishing a Culture that sets the right tone at the top is critical for establishing the ‘trust’ for
the corporation with all its stakeholders (The ‘LOGIC’ of governance).

The success of the board depends on making sound judgments in numerous situations that
involve balancing different interests:
• risk versus reward;
• short term versus long term;
• effective oversight versus motivating management;
• ethical considerations versus market practices; and
• competing interests of different stakeholders.

In short, good corporate governance is very important for sustainable development, not only
for the individual company, but also for the economy as a whole. Therefore, the quality of
governance should be continuously improved and good governance should be promoted.
However, what is not measured, cannot be improved. Hence, there is a need for a model to
measure the quality of corporate governance.

Most attempts to measure the quality of corporate governance focus on compliance-related

issues. Numerous rating models also seem to focus on the inputs of governance, such as the
composition of boards and the separation of the CEO and chairman roles. However, they do
not pay sufficient attention to the quality of information, decision-making processes, nor link
the effectiveness of governance to output measures such as the brand image, employee and
customer satisfaction indices, or profitability and value creation. Also, most measures fail to
deal with learning and development in governance.

First, what is more important than which demographic characteristics a board member
possesses, is what kind of experience he/she has and what types of behaviour he/she
portrays. Therefore, gender, nationality and age diversity are not sufficient to evaluate the
effectiveness of a board. One should also evaluate the relevance of the experience of board
members to address the main challenges the company is likely to face.

Another important issue is that the quality of the information that the board gets is a key
determinant of its effectiveness. Whether relevant and timely information, presented in a
context, with the benchmarks and alternatives identified, assumptions understood and stress-
tested, or whether the potential effects of various alternatives on different stakeholders have
been taken into account, would have a significant impact on the quality of the board’s
decision.

Third, the impact of a board’s decisions on output measures should be evaluated, not just not
inputs such as information quality. Governance is important for the sustainability of value
creation. If the model that aims to measure effectiveness of governance does not evalute the
linkages to output measures - not only financial performance, but also lead indicators such as
customer, employee, or other stakeholder satisfaction - it would be missing an important
dimension.

Boards should also be focusing not only on the business results, but also how business
results are obtained. As an outstanding performance could sometimes be due to excessive
risk-taking, resulting in a relatively good performance during a particular period, it may not be
sustainable. Such an elaborate evaluation of management proposals requires an open and
transparent culture, where members are encouraged to challenge assumptions and evaluate
alternatives.