Project Governance

Ralf Muller

• Publisher: Routledge
• Year: 2017
• eBook ISBN: 9781351908504
• Topic: Business
• Subtopic: Business General
• Index: Business

Without a governance structure, an organization runs the risk of conflicts and inconsistencies between the various means of achieving organizational goals, the processes and resources, causing costly inefficiencies that impact negatively on both smooth running and bottom line profitability. However, the frequency of projects failing to meet these corporate objectives has focused attention firmly on the process of project governance. In this book, Ralf Müller provides a well-researched framework to explain the different preferences organizations have in goal setting, along with the best-practices, roles and responsibilities related to governance tasks. This concise text is an important guide for project and programme managers, those managers concerned with corporate governance such as risk managers and internal auditors, project sponsors and project board members, as well as academics researching organizational and project performance. Project Governance is part of the Gower Fundamentals of Project Management Series. Practising professionals and project students will find in the fundamentals a definitive, shorthand guide to each of the main competencies associated with project management; a book that is authoritative, based on current research but immediately relevant and applicable.

CHAPTER 1
INTRODUCTION

Interest in governance is growing rapidly. Well known scandals, such as those at Enron, WorldCom and Societé Generale, made inadequate governance and investor protection a subject of public interest at the turn of the millennium. This led to the refinement of existing governance policies and laws, as well as new developments, such as the Sarbanes-Oxley Act (SOX) in the USA and the Higgs Report in the UK, aiming to prevent similar events in the future. SOX, in particular, aims for early disclosure of possible financial risk, including those related to projects.

Even though governance has become a frequently used term in recent years, it is not a new concept. The term is derived from the Latin word gubernare meaning ‘to steer’. While originally describing the government of countries, it is nowadays synonymous with the good and transparent management of firms and institutions.

Contemporary governance is grounded in foucault’s (1926-1984) philosophy of Neo-Liberalism, in which individuals are not directly ‘steered’ by their supervisors (for example, state government), but through subtle forces in the society within which they live. Lemke (2001, p. 201) summarized Foucault’s perspective:

The Neo-Liberal forms ofgovernment [...] characteristically develop indirect techniques for leading and controlling individuals without at the same time being responsible for them. The strategy of rendering individual subjects ‘responsible’ [...] entails shifting the responsibility for social risks [...] into the domain for which the individual is responsible and transforming it into a problem of ‘self-care’.

Governance is thus about ‘the conduct of conduct’, shaped by self-regulating relationships among the forces within a society. This leads to the development of laws and contextual frameworks which shape, but do not necessarily determine every action of the members of a society (Clegg 1994, Clegg et al. 2002). To that end governance is ultimately concerned with creating the conditions for ordered rule and collective action (Stoker 1998, p. 155). Thus governance within organizations is a form of self regulation where the regulator is part of the system under regulation.

The related Governance Theory was originally developed from policy research in political science. It has outgrown its initial context and is nowadays applied in different sectors of industry, for example, within construction and IT (Pryke 2005, Niehaves, Klose and Becker 2006 respectively). Governance Theory refers to two main components:

• Actors, with their individual perspectives and meanings, who act within the system, but collectively can regulate or counter-regulate the system.
• Institutions (often in the form of rules), which shape the context within which actors’ behaviour occurs.

Accordingly, governance theory addresses the overlap in responsibilities between regulating body and regulated member.

Governance, applied at the corporate level, affects projects through its impact on the behaviour of people. Thus it needs to be implemented through a framework that guides managers in their daily work of decision making and action taking. In projects governance implementation is often defined in terms of policies, processes, roles and responsibilities. This allows for a smooth integration between organization-wide, general processes and the specific sub-processes related to projects.

WHAT IS GOVERNANCE AND WHY DO WE NEED IT?

Governance provides a framework for ethical decision making and managerial action within an organization that is based on transparency, accountability and defined roles. It also provides a clear distinction between ownership and control of tasks. It sets the boundaries for management action, by defining the goals of the organization and the means by which they should be attained, as well as the processes that managers should use to run their areas of responsibility. Without a governance structure, an organization runs the risk of conflicts and inconsistencies between the various means of achieving organizational goals, the processes and resources, thereby causing costly inefficiencies that impact negatively on both smooth running and bottom line profitability.

Definitions

Throughout this book the word organization is used as a generic term for various levels of the corporate hierarchy. Specifically organization can refer to:

• The corporation itself.
• A division with the corporation.
• A department within the division.
• Work groups and other dynamic organizations.
• Temporary organizations that are projects.
• Any other organizational structure as defined by the corporation.

In most cases, the governance principles covered in this book can apply to any or all levels of that hierarchy. In cases where the entireties of all organizational entities are addressed the more specific term, firm or corporation is used. from the widespread use of the term governance and its application in, for example, politics, industry and education, a number of definitions have emerged: They range from narrow and specific to broad and general definitions of governance. Among the narrow definitions are those developed from a traditional financial perspective, which limits governance to the relationship between a company and its shareholders, thereby ignoring the interests of other stakeholders. This is often explained in terms of Shareholder Theory and Agency Theory, which is described below. Among the broader and more general definitions is the early definition of corporate governance by OECD (2004):

Corporate governance involves a set of relationships between a company’s management, its board, its shareholders and other stakeholders. Corporate governance also provides the structure through which the objectives of the company are set, and the means of attaining those objectives and monitoring performance are determined.

This definition of corporate governance takes a wider spectrum of stakeholders into account, such as employees, customers and suppliers. This definition is often seen as related to stakeholder theory.

In any of these definitions governance regulates the methods and processes of:

• Defining the objectives of an organization. This often derives from the strategy of an organization, or the specific contribution an organization can provide to achieve the strategic objectives of a corporation.
• Providing the means to achieve those objectives. This addresses the provision of requisite resources (in form of human resources, budget, time and so on) for the members of an organization to enable them to carry out their responsibilities.
• Controlling progress. This addresses the need for supervision to control the appropriate use of the resources provided; the application of appropriate processes, tools, techniques and quality standards to create the organization’s products or services, as well as checking the need or marketability of the organization’s products and services over time.

These three components of governance are not limited to the top of the organizational hierarchy. They are addressed at every level in an organization. While broadest in scope at the top of the organization, this is broken down to the different management functions, horizontally and vertically along the organizational hierarchy. Thus, the need for governance emerges at every node of a management hierarchy within an organization. It constitutes the overall framework for management decision making within the organization. Within the scope addressed through this book governance can be defined as:

Governance, as it applies to portfolios, programs, projects, and project management, coexists within the corporate governance framework. It comprises the value system, responsibilities, processes and policies that allow projects to achieve organizational objectives and foster implementation that is in the best interests of all the stakeholders, internal and external, and the corporation itself.

GOVERNANCE THEORIES

Shareholder Theory

The Shareholder Theory of corporate governance assumes that the main purpose of an organization is to maximize shareholder return on investment (ROI). This requires structures (such as contracts, processes and policies) to assure managerial action is always in the best interests of the shareholders. This model is often related to USA and UK based corporate governance approaches. It is strongly expressed in the Chicago School of Law and Economics. Shareholder Theory sees a company as the property of its shareholders. Managers (including board of directors) are seen as agents of the shareholders (Clarke, 2004). So the relationship between managers and shareholders is explained by Agency Theory.

This implies an organizational value system which prioritizes the interests of shareholders over those of other stakeholders, resulting in a narrow focus on quantitative financial results measures at the expense of more qualitative objectives, such as employee well-being, ethical standards and good relationships with the society in which the corporation exists. Proponents of this governance approach often refer to the difficulties in managing a diverse set of stakeholders in alternative governance structures and the need to focus managers’ attention towards a single bottom-line result.

In project-oriented organizations, portfolio managers often act in the best interest of the shareholders of a company, thus take a shareholder perspective when deciding on whether or not to take on projects (Blomquist and Müller 2006). This is supported by Turner (1998a, 1998b), who showed the influence of individual projects on shareholder value:

Projects are undertaken to add value to the sponsoring organisation. In the private sector this ultimately means increasing the value of shares to the holders of equity in the company.

However, research by Cooper, Edgett and Kleinschmidt (2004a, 2004b and 2004c) on portfolio management approaches and company results showed that companies trying to optimize their project portfolio mainly by maximizing financial returns are among the worst in their industry. Causality, however, is not yet researched. It remains unclear whether the poor performance of such companies is caused by their narrow focus on financial results, or whether an already existing poor performance causes this prioritization on financial measures.

Stakeholder Theory

Stakeholder Theory takes the wider social responsibility of organizations into account. In Stakeholder Theory a firm is a system of stakeholders, which operates within the wider host society, which, in turn, provides the legal and market infrastructure for the firm’s activities. The purpose of the firm is to create wealth and value for its stakeholders (Clarke 2004).

Stakeholder Theory suggests that an organization’s objectives should be developed by balancing the conflicting interests and claims of the different stakeholders, such as managers, employees, suppliers and the wider society. Objectives under Stakeholder Theory include traditional financial objectives (that is, Return on Assets (RoA), Return on Sales (RoS), Revenue growth and so on.) over an extended period of time, such as five years. In addition, corporate social performance measures such as the organization’s reputation, the organization’s attractiveness as an employer and generation of good-will from the society in which it operates are also important. This contrasts with companies run under Shareholder Theory which usually focus on short term financial results.

Stakeholders are defined as all those who have a stake in the organization; that is, something to gain or lose through the actions of the organization. The definitions range from narrow perspectives, which only include a few closely linked groups, such as employees and suppliers, to wider definitions, which include communities, industries and society. In recent years the latter has emerged amongst business and management schools as Corporate Social Responsibility (CSR).

Stakeholder approaches include taking into account the quality of relationships between the organization and its employees, suppliers, clients and society at large, as well as the balancing of financial gains among internal stakeholders (for example,

employees and managers) and external stakeholders (for example, shareholders and community). Proponents of the Stakeholder Theory of Governance claim that this approach allows for coordination of corporate knowledge and activities across the boundaries of individual companies to achieve concerted productivity gains. A typical example is the emergence of Silicon Valley as a combination of knowledge and productivity, based on attractiveness through technological cross-fertilization and mutual gains in form of good relationships and employee stock options (Clarke 2004).

Organizations are not always at one of the ends of the spectrum, but are at a position that allows identifying their preference for greater shareholder or greater stakeholder ori...

Table of contents

• Cover Page
• Title Page
• Copyright Page
• Contents
• List of Figures
• List of Tables
• Acknowledgements
• 1 Introduction
• 2 Objectives and Institutions
• 3 Governance of Project Management
• 4 Governance of Programs and Portfolios
• 5 Governance of Projects
• 6 Towards an Integrated Governance Model
• 7 The Way Forward
• References
• Index