In Australia the ASX Corporate Guidance Council has defined corporate governance as "the framework of rules, relationships, systems and processes within and by which authority is exercised and controlled in corporations". It notes that effective governance can help companies create value through innovation and provide accountability and control commensurate with the rules involved.
The ASX further provides a set of eight principles that should underpin the corporate governance framework.
These principles can be expressed in an alliance context as follows:
• Lay solid foundations for management and oversight.
• Structure the Board to add value.
• Promote ethical and responsible decision making.
• Safeguard integrity to project reporting.
• Make timely and balanced disclosure.
• Respect the rights of shareholders.
• Recognise and manage risk and opportunity.
• Encourage enhanced performance.
• Remunerate fairly and responsibly.
The adoption of a corporate governance framework to an alliance has certain advantages:
• It provides a simple and easily communicated parallel between an alliance and a virtual company: (ALT/PAB being the Company Board and the Alliance Manager being the CEO).
• It provides a proven and well documented approach to alliance governance.
• It provides guidance on procedural expectations and practices for the ALT/PAB
- Meeting protocols (format, minutes, board paper etc).
- Obligations and responsibilities of PAB members (Directors).
• It provides clarity of purpose of the ALT/PAB (Company Board).
However, there are some deep and significant differences between company boards and alliance ALT/PAB's that may serve to severely reduce the effectiveness of the corporate governance approach. These differences include:
Table 6.1: Differences between alliance and corporate governances | |
Purpose | Company boards were originally established to address the potential problem of separation of ownership and (management) control. This does not exist in an alliance. Owners (Directors) of a company only profit through the overall profitability of the Company. Alliance NOPs foremost profit is through the role as a supplier (and modified by overall alliance profitability). A company board has a primary purpose of splitting company profits while for an alliance this is pre- determined. An alliance ALT/PAB has a primary purpose of settling disputes at the management level. Company Boards (generally) do not intervene in management. A key purpose of the company board is to hire (and fire) the CEO. In an alliance, the reality is that this is a NOP decision. |
Transparency of information | Company information is totally transparent to Directors but often there is only limited transparency of the Owner's information on an alliance. |
Liability and no blame | There are no restrictions on liability between the various company Directors but alliance participants have agreed to a no-suit position. |
Conflict of interest | The Owners (Directors) of a company are (generally) not the key suppliers to a company as is the case for alliance NOPs. |
Fiduciary duty | A company Director's fiduciary duty is clear and express under Corporations Law. It is only implied for an ALT member under an alliance. |
Decision making | The concept of best for company has an unlimited time horizon unlike an alliance best for project goal with a limited time horizon. A Company Board decision may be win:lose for its Directors which is contrary to the fundamental alliance principle of win:win. Company Board decisions can be made on a majority basis while alliances operate on a unanimous decision making basis. |
Context: project | A company is typically a portfolio of projects while an alliance is (generally) a single project. |
Suppliers on the Board | The suppliers (NOPs) to an alliance are given an ownership-like stake in the entity which raises the issue of what constitutes shareholder/ Owner's interests. Directors must act in the best interests of the company and are appointed by and act for all shareholders equally. ALT members are appointed by and act for individual shareholders. |
The above table demonstrates that there may be a fundamental and irreconcilable difference between the aims and practice of alliance and corporate governance which makes the application of a corporate style governance to an alliance problematic.
The adoption of a corporate governance framework to an alliance presents certain advantages but also suffers from serious differences between the underlying philosophy and intent of a Company and an alliance. These differences may lead to suboptimal performance from the alliance particularly in times of project stress when possible weaknesses in the corporate governance model are likely to come to the fore.
The question of what constitutes best practice in terms of alliance governance remains unanswered. The Study was inconclusive in this regard but did indicate widely varying and potentially ineffective governance practices that would benefit from a more informed approach.
Given the widely accepted view that effective project governance is critical to project success it is important that further research is undertaken in this area in parallel with further development of appropriate legal arrangements between the alliance participants.
Discussion Point 17 - Alliance governance There are significant variations in alliance governance. Effective alliance governance is critical to project success yet little guidance is available on the optimum form of governance. Also, governance structures need to recognise that the alliance has a limited and defined role to play in the lifecycle of the state's investment decision. The application of corporate governance is problematic. Governance above the alliance needs to be distinguished from governance within the alliance. Decision rights need to be clearly articulated and the role of the Owner outside of the alliance needs to be distinguished from the Owner's representative role within the alliance (responsible for only project delivery). |