The processes and quality of governance of organisations have become highly relevant concerns of directors. This is especially so following highly publicised corporate failures over the last 10 years, notably in the United Kingdom and the United States, and more recently Parmalat in Italy.
While directors responsible for governance often focus on compliance auditing and oversight – whether that is compliance with internal or external best practices and regulations – it is now recognised that there is a separate and equally important focus of governance.
That focus is the oversight of the performance of the organisation – is it doing the right things (investment initiatives) necessary to achieve strategic objectives, and are those things proceeding satisfactorily in order to ensure that wealth will be created?
The International Federation of Accountants Committee (IFAC) has been promoting enterprise governance, an initiative they introduced recently. This maintains focus on both conformance and performance aspects of an organisation, to ensure that governance does address the issue of wealth creation.
A common demonstration of under-performance in this aspect of governance is the repeated failure of organisations to achieve strategic objectives.
Very often, this is the result of deficiencies in their processes for selecting, managing and monitoring the projects necessary for such achievement.
Recent international surveys show that the levels of project failure are very high burdens on the majority of organisations. And this cost overlooks the waste of resources where the wrong projects are pursued.
It is recognised that a useful improvement in this area has the potential to dramatically enhance the performance of the organisation, and thus its net worth.
The issue of performance governance concerns many organisations around the world. There are, as a result of this interest, a number of concepts and methodologies that are applicable to this challenge.
The areas that need to be addressed include enterprise project management, portfolio selection, portfolio governance and uncertainty management.
Those responsible for high-level performance governance need to adopt appropriate criteria and performance measures to the selection of the project/investment portfolio, and the ongoing oversight of project implementation.
The Malaysian Code of Corporate Governance includes a number of best practice governance provisions which address this issue, including strategic planning, oversight of the delivery of the strategy, and risk management.
Enterprise project management
For an organisation to implement projects effectively, it needs an integrated framework of project management processes, training, and tools, together with a centre of excellence, and the ability to develop and retain suitably skilled and experienced personnel.
In addition, the culture of the organisation must embrace the paradigm of project management which involves real and visible senior management support.
Directors benefit from having a broad understanding of this framework, and the significance of the relative “project management maturity” of the organisation.
Given that analysts report some 40% of projects are not aligned well to strategic objectives, the waste of resources is clearly significant.
But the challenge is not limited to alignment, it is also about balancing and prioritising those projects that meet the criteria for alignment from a total portfolio perspective.
Effective portfolio management ensures both the appropriate allocation of resources, ensuring the organisation has the capacity to deliver the portfolio, and selecting the portfolio so that it meets appropriate and agreed criteria for balance and prioritisation.
Defining those criteria is fundamental, but it is not a simple matter. Projects need to be classified in a number of ways, and may be allocated against a matrix of strategic initiatives, asset classes, focus areas within the Balanced Scorecard model, Baldrige Model criteria, risk versus benefits, and short, medium and longer term planning horizons.
To ensure that the selected projects are delivered effectively, it is necessary that the organisation adopts an integrated governance framework.
The components of this framework include roles and responsibilities, processes, and performance indicators for projects and the portfolio.
As the top layer of the governance structure, directors need to understand the options available before they agree on the framework adopted.
While many people know about risk management, few understand the need to implement the processes that provide a consistent basis for identifying, analysing, treating and monitoring risks.
The typical consequence is avoidable and sometimes results in embarrassing losses and costs.
Of equal importance is the need to have a similar framework in place for managing opportunities that may arise – that way potential windfalls may be more regularly converted to real gains.
Therefore, company directors need to develop an operating understanding of the relevant issues, problems, and recommended practices in this area. Governance of projects is a most relevant topic and one that is of value to directors of Malaysian companies today.
Did you find this article insightful?