Monday, 10 January 2011

Models of corporate School Governance

Models of corporate school governance

In this blog I will discuss some of the models of corporate governance that are relevant to School governors. The concepts come from the 'Hidden Givers' report which is linked at the end of this blog article. I will also cover other sections of the Hidden Givers this week in my blog.

The principal-agent model is the dominant model of organisational governance. It originates from the ‘professionalisation’ of management and the consequent division between ‘ownership’ and ‘operational control’, and the potential conflicts of interest that may arise from such arrangements. Alternative perspectives on corporate governance have emerged as a result of the limitations of the principal-agent model.

Two are relevant to governing in schools: stewardship and stakeholder models.

The three models are as follows.

The principal-agent model. This model formally recognises that the owners of companies, the shareholders or ‘principals’, are often separate from the managers of the company, the ‘agents’. Company managers are seen to have an informational advantage over the owners because of this arrangement. Moreover, managers are assumed to act in their own interests, which may not necessarily accord with those of the principals. The ‘manager in the mind’ of the principals is one who is:

• eager to take advantage when the circumstances arise

• likely to act in her/his own best interests when circumstances permit

• not be naturally motivated to act in the company’s best interests.

From this perspective, the primary goal of ‘good governance’ is to reduce the degree of imbalance of information between the manager and the board and to control the manager. The board thus has a monitoring role. It receives reports from managers, and establishes internal systems of accountability and reporting in order that the board (the principals) can control the operational management. The principal-agent model is a form of hierarchical governance.

In the principal-agent model, the board is to some degree at least independent of operational management so it can undertake the monitoring role. Boards may be eager to align the incentives of the agents with those of principals to encourage the agents to act in the principals’ interests. The design and implementation of remuneration packages are likely to be important in aligning the interests of the board (the owners/principals) and the managers (agents). In a pure principal-agent model, the managers would not be members of the board. Such an arrangement would blur the principal-agent boundary.

The stewardship model. This model is often contrasted with principal-agent models largely on the basis of the very different sense of the ‘manager in the mind’. This perspective on the manager conditions the assumptions on which this model is based. In the stewardship model, the manager is seen as:

• ready to act in the common good

• co-operative

• motivated to act wholeheartedly to meet the organisation’s objectives.

Financial incentives are thus likely to be less important as motivators to encourage the alignment between the objectives of the manager and the board. Managers want to run the organisation effectively and the interests of managers and owners are naturally aligned. Managers may possess knowledge superior to that of the board but that is of little consequence in practice. It is assumed they will use this knowledge to the benefit of the corporation.

In the stewardship model, the board’s role is to empower the management and to collaborate with it. The board is essentially facilitative and seeks to collaborate with the operational managers in taking actions that are in the corporation’s best interests. Remuneration arrangements typically reward performance rather than incentivise it. The board will typically comprise experts who are able to work jointly with the management to enhance decision quality. If the corporation’s managers were members of the board, it would not be at odds with the underpinning principles of this arrangement.

The stakeholder model. This model comes into play when a range of players have an interest or stake in the organisation and these different interests need to be recognised in the constitution of the board. The stakeholder ‘representatives’ may be elected or nominated by the existing board. The board has a role in balancing stakeholder needs and making appropriate policies and strategic decisions. Under the stakeholder model, the relationship with the manager can be either of the principal-agent kind or of the stewardship kind. It would be contingent on the way the manager was viewed, the alignment of the managers and the board, and the concern about any asymmetries in the knowledge of the managers and that of the board.

The full 'Hidden Givers' A study of School Governing bodies can be found linked below.

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