The Environmental, Social and Governance (ESG) agenda has become increasingly important to all organisations in recent years. Every public business now needs to meet reporting and audit requirements, and good corporate governance is absolutely central to the business processes that public companies need to ensure their long-term sustainability in dealing both with regulatory standards and with the needs of an ever-expanding list of stakeholders in their environment.
If you look at The Oxford University Press Business English Dictionary, you will find corporate governance defined as the ‘…way in which directors and managers control a company and make decisions, especially decisions that have an important effect on the shareholders’. One often reads that good governance is one of the cornerstones of any good business. It would not be difficult to argue that it is THE cornerstone, without which the building is entirely unstable. The definition found on Wikipedia summarises this concept neatly: ‘The cornerstone…is the first stone set in the construction…… All other stones will be set in reference to this stone, thus determining the position of the entire structure’.
With the seemingly never-ending list of scandals that appear on the front page of business news—or are viral in our interconnected little world—it is easy to see governance as simply and only a way of staying out of trouble. But this article seeks to adjust our view of good governance to one that is more positive, principally operating in terms of benefits and not avoidance. Of course, this is about preventing regulatory error, damaging scandals and company implosions, but more than this, it is also a way to realise so many valuable benefits.
The approaches to good governance set out below seek to set the strategic direction of the company and monitor performance against that strategy. They lower the risk of non-compliance with statutory and regulatory obligations and promote well-managed, accountable, and ethical decision making at all levels of the business. This is about more than the bare minimum of ticking compliance boxes, but an embracing of the wide range of benefits that will follow from strong governance, putting the business in the best possible place to thrive. Good governance leads to efficiency of process, effective identification of risk, better decision making, stronger strategic planning, and even an improved brand image. It is robust yet flexible, defensive but often aggressively promotional, and unified whilst championing diversity.
Eight Important Steps to Take for Better Corporate Governance
- The board of directors should meet regularly to maintain effective oversight and retain control over the organisation. Meeting minutes should be thorough, leaving a clear evidence trail, and they ought to demonstrate constructive challenge and debate within the board.
- Give consideration to the role of the chair, who needs to be a facilitator, not a dictator. The chair needs to ensure the board remains focused on governance and be clear that the company’s governance code and procedures are adopted and maintained by the whole board and indeed by the entire corporate group.
- Develop a diverse board with an appropriate balance of executive and non-executive directors that features a balance of competencies, experience, knowledge, and independence. It will be vital to ensure that the board understands in some depth how the company functions, as this will allow it to make the best decisions, guard against error and take an informed long-term strategic position.
- The board, and all senior managers should undergo thorough inductions into their roles and understand the culture of the business and their role and responsibilities in it. Do members grasp that their ongoing training, a process of monitoring, and assessment and penetrative evaluation of the board are important essentials in the future success of the whole business? Is that evaluative development process for the board in-built from day one?
- Develop mechanisms to ensure that those in governance stay in touch both with the detail of regulations in each jurisdiction of operation, and with the realities of the company’s operations in practical terms. This could well entail building greater links and more widespread sharing of useful information from all levels of the business with those in the position of company governance.
- The quality of communication at all levels can define the standard of governance in an organisation. Within the board, and between the board and senior leaders and other stakeholders there needs to be effective, ongoing, and regular communication in a form that is well managed, timely, and focused on the necessary. Purging this communication process of clutter from time to time can pay significant dividends. Healthy, well-defined, and regular communication will do much to prevent misunderstanding, neglect, and even possible malpractice.
- High-quality reporting demonstrates good governance. This includes all regulatory returns, meeting minutes, independent audit and accounting outputs and reports for investors and other stakeholders. Whilst generating, presenting, and retaining these reports represents a significant administrative burden, and may require an entity management system (EMS) to compile and control the corporate records of a company, it achieves one of the most important and influential goals of any business; investors need to know that they can trust the financial reporting they are presented with to tell the true story of the company. The willing and open sharing of accurate and transparent information with all stakeholders, at the appropriate level, feeds trust and garners reputation by demonstrating that the business is organised and well placed to work in the best interests of all of its participants.
- Finally, we highlight here the effective management of risk. Good governance can identify, mitigate and, to an extent, control risks. Through an effective accountability framework, a decisive division of responsibility, and with well-structured actions, processes and traditions, authority can be exercised, and decisions taken and implemented early on to prevent risk from occurring or multiplying its influence. Plan from the outset how risk management will operate in your organisation; don’t leave it to chance evolution.