When I hear the numbers eighty and twenty, the Curaçao 80/20 Act of 2016 immediately comes to mind. Its implementation has been postponed for now. This Act intends to ensure that no more than twenty percent of the employees in a company can be of foreign heritage. In other words, at least eighty percent of the staff in a Curaçao company would have to be a Curaçao native. I don’t know if it’s a coincidence, but this 80/20 division refers to a universal ratio which has been used over a hundred years already, in the management of companies and in the supervision of this management. It is the so-called Pareto principle.

Pareto was an Italian mathematician who discovered early in the previous century that in Italy, eighty percent of all houses was owned by (only) twenty percent of the population. Since then, this ratio (80/20) has been applied to numerous other observations. Time allocation, project planning, and supervision of companies. That is why the Pareto principle is also relevant to Corporate Governance.

Examples? Eighty percent of the turnover in your company often comes from only twenty percent of your clients. Twenty percent of your employees are the cause of eighty percent of your staff problems. Looking back on a working day, twenty percent of your time has contributed to eighty percent of your productivity. If your company provides a service, probably eighty percent of the complaints come from only twenty percent of the clients. Twenty percent of what you read is worthwhile, eighty percent not so much. You spend eighty percent of your HR time on twenty percent of your staff.

The Pareto principle seems to be almost universally applicable. Although the ratio of percentages (80/20) is rather an indication than an empirical fact. You can use the Pareto principle as a model for analysis, as a selection mechanism to set priorities and as a supervision principle. You can even use it as a time management tool and as meeting skills. Let me give you some examples. You can often do eighty percent of the work in twenty percent of your time. Twenty percent of your time spent is productive, the rest is often much less productive, as a matter of fact, sometimes even a waste of time. In an average meeting, only twenty percent of the time is used effectively. For the rest, you move away from the topic, talk nonsense, or supposedly thoroughly discuss completely irrelevant issues.

The key is: if you are aware of the Pareto principle, you can use this often unintentional ratio as a steering mechanism. You can arrange the agenda items in accordance with this principle, for instance: select the twenty percent of the topics that are really relevant to the future of the company, and be aware to spend eighty percent of the time on those topics during the meeting. Don’t spend more than twenty percent of the time on the remaining eighty percent of the topics, which are less or little relevant. Are you assessing  board members? Most likely, twenty percent of your board members are troublemakers and eighty percent are cooperative. It is also very likely that twenty percent of your board members contribute to eighty percent of the discussion. You can then verify whether these are discussions concerning the eighty percent of irrelevant topics, or rather those twenty percent that really matter. This way, you will automatically see what twenty percent of your board members are really important! And this column? Only twenty percent is relevant. Or is it eighty percent?

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Do you have a question about corporate governance yourself? Please e-mail it to governance@vaneps.com and perhaps your question will be discussed in the next blogpost.

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