Purpose — or Just from Compliance? The three layers of corporate governance most boards ignore

A recent article by Fan Yang , “Rethinking Governance: Indigenous, Western, and DAO Approaches,” stopped me in my tracks. Yang argues that governance operates across three interdependent layers: a pre-political layer (shared meaning, legitimacy, moral limits), a political layer (authority, law, collective decision-making), and an economic layer (circulation, incentives, exchange). Her key insight: when the sequence inverts — when economic logic overrides political authority and erodes shared meaning — governance breaks down.

Yang applies this framework to indigenous systems, Western institutions, and DAOs. But as I read it, I couldn’t stop thinking about something closer to my daily work: corporate boards.

Because the same structural failure she describes at the societal level plays out, with striking regularity, in boardrooms around the world.

The missing layer in corporate governance

For decades, the conversation about corporate governance has revolved around the same themes: board structure, independence, committees, incentive design, regulatory compliance. All important. None sufficient.

Most boards operate across two layers: the institutional (rules, roles, decision-making processes) and the economic (incentives, capital allocation, performance metrics). These are the visible layers — the ones we audit, regulate, and teach in director training programs.

But there is a third layer — deeper, harder to measure, and therefore easier to ignore — that determines whether the other two actually work or become corporate theater.

Let’s call it the foundational layer: the set of genuinely shared values, authentic purpose, perceived legitimacy, and internalized ethical limits that give meaning to everything else.

I’m not talking about the purpose statement framed in the lobby. I’m talking about something more basic: Why does this organization exist? Who does it owe something to? What are we unwilling to do — even if it’s legal and profitable?

When this layer is solid, institutional and economic mechanisms work as designed. When it’s thin or absent, the same mechanisms distort — not out of bad faith, but out of missing foundations.

What happens when the ground is missing

The most emblematic corporate governance failures were not, for the most part, technical failures:

• Wells Fargo (2016) had impeccable committees, policies, and metrics. What it lacked was a culture that placed real limits on the pressure for results. The incentive system — economic layer — operated without ethical constraint — foundational layer. The result: millions of fraudulent accounts opened without customer consent.

• Wirecard (2020) formally complied with German governance standards. But the institutional layer was captured: the board didn’t challenge, the auditors didn’t verify, the regulators didn’t investigate. Without internal legitimacy or a culture of accountability, the rules were decoration.

• Boeing (post-merger with McDonnell Douglas) is a textbook case of how economic logic can erode purpose. Engineering as the company’s core identity was progressively subordinated to financial metrics. The outcome — documented by Congressional investigations and analyses such as Useem (2021) — was a degradation of safety that cost 346 lives.

In all three cases, the institutional and economic layers were “in order.” What failed was the ground on which they were built.

This is precisely Yang’s point, applied to the corporate world: when the pre-political layer is thin, overridden, or absent, no amount of institutional design can compensate.

Elinor Ostrom saw it first — outside the corporation

Economist Elinor Ostrom, the 2009 Nobel laureate, spent her career studying how real communities govern shared resources without relying on either the state or the market. Her findings — synthesized in Governing the Commons (1990) — are strikingly relevant to corporate governance:

1. Rules work when they emerge from the group, not when imposed from the outside.

2. Legitimacy is built through participation and mutual accountability, not just formal structure.

3. Sustainable systems define clear boundaries — not only of resources, but of acceptable behavior.

4. Monitoring is effective when it’s peer-based, not only hierarchical.

Ostrom described, from the field of commons governance, exactly what separates a board that works from one that merely performs: the quality of the relational and normative fabric that precedes formal rules.

What this means in practice

I’m not suggesting boards abandon structure or incentives. I’m suggesting they recognize that without a foundational layer, everything else is fragile.

Some questions a board should ask — and rarely does:

On genuine purpose: Can we articulate, in two minutes and without reading the annual report, why this company exists beyond generating returns? Do our employees believe it?

On real ethical limits: Are there decisions we have explicitly ruled out — not because they’re illegal, but because they’re incompatible with who we are? Or do our limits extend only as far as current regulation?

On legitimacy: Who are the stakeholders with no voice at this table whose lives we directly affect? How do we ensure their interests are represented?

On a culture of accountability: Can the CEO be challenged in this room without political consequences? Do directors ask each other uncomfortable questions?

A three-layer model for boards

Building on Yang’s framework, I propose thinking about corporate governance as a system of three interdependent layers, where sequence matters:

1. Foundational layer (purpose, values, legitimacy, limits) ↓ informs and constrains

2. Institutional layer (structure, roles, committees, decision processes) ↓ channels and regulates

3. Economic layer (incentives, capital allocation, performance metrics)

The correct sequence runs top-down: purpose defines rules, and rules discipline incentives.

When the sequence inverts — when incentives define rules and rules erode purpose — it’s only a matter of time before the system fails. And when it fails, we’re always surprised. We shouldn’t be.

A final provocation

The next time you assess the quality of a company’s corporate governance, don’t start with the board’s structure or the CEO’s compensation plan.

Start with a simpler and harder question: What ground is all of this built on?

If the answer is solid, the mechanisms will work. If the ground is sand, no structure will hold.

This reflection was inspired by Fan Yang’s thoughtful article comparing indigenous, Western, and DAO governance models. Her framework gave me a fresh lens to revisit something I’ve been thinking about for years: why so many well-designed boards still fail.