Conformance vs. performance

The question of “conformance versus performance” refers to the two principal ways that boards may view their roles, as bodies that: 1) focus on conformity with rules and compliance with the directives of the owner, versus; 2) focus on corporate performance. An important aspect in the role of the board of directors is to focus on strategic guidance and performance. This implies shifting a focus away from “conformance” and compliance checking.

SOE boards have traditionally been prone to a greater conformance mentality than private sector companies. This may have origins in direct state control where boards served to ensure that instructions from the state were complied with. It may also emanate from governance traditions where the setting of detailed quantitative performance targets and monitoring achievement against such targets was viewed as the best way to encourage and manage the SOE for results.

Good practice: The role of the board of directors should focus on strategic guidance and corporate performance, and shift focus away from a traditional “conformance” role.

Certainly, the focus on conformance emanates from view that the role of the board is to prevent corporate excesses and political embarrassment from a misuse of public funds. Within the board, a compliance mentality often manifests itself through a preoccupation with the budget setting process and variations from budgets and plans. Often this attention is at the expense of larger issues such as the effectiveness of the overall business strategy. Focusing excessively on conformance can give boards and owners a false sense that they are fulfilling their fiduciary functions.

A visible trend over past decades among both private sector and SOE boards is a greater concern for the drivers of performance. This being said, there are SOEs in both OECD countries and elsewhere where the control environment is still not sufficiently developed for boards to safely shift their focus towards performance issues. Attention to compliance and control is often warranted. The renewed attention to risks and risk management in the wake of the 2008 financial crisis show how important such issues can be. However, concern for a sound control environment is not the same thing as having a conformance mentality. A balance should be struck between focus on performance versus conformance (see related discussion in Chapter 6 on board efficiency).

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