Writing for INSEAD, Dr. Yilmaz Argȕden talks of good governance as being ‘CRAFTED’ – a culture and a climate of Consistency, Responsibility, Accountability, Fairness, Transparency and Effectiveness that is Deployed throughout the organisation. It is reasonable to say that effective corporate governance should underpin every decision and action taken by the organisation. This means, therefore, that its effectiveness needs to be measured.
This is all good, at the level of an overview, but deciding what to measure is a much more challenging issue. Firstly, there are regulations which must be complied with. These are varied, forming a patchwork of ESG regulations which vary in different jurisdictions, and are constantly evolving with new legislation. Adherence here must be measured if corporate governance is to be effectively assessed. But, in addition to adherence, it is also important for organisations to determine what level of impact is being achieved, and whether its strategic objectives are being met. There is no one accepted way of measuring good governance, because all organisations are different in make-up and strategic direction. However, here we highlight some of the more important indicators of the effectiveness of corporate governance.
The effectiveness of the board is very closely tied to the success of the organisation. Boards should consider, and indeed are required in some jurisdictions, to evaluate themselves as part of the compliance code of their market. This effectiveness can be assessed by looking at roles, productivity, competencies, communication and recruitment. Many companies choose to make use of technologies such as ‘Diligent Evaluations’ to streamline their board evaluations, improve board performance and also track how well the culture of the board is filtering down into the organisation as a whole.
Diversity in the board is also an important assessment point. However, this should not just be in terms of demographic characteristics but should also include an evaluation of the relevance of the experience of board members in tackling the main challenges the company is facing.
Finally, it is important to note that the board’s effectiveness will be seriously compromised if information and reporting systems are not adequate. Ensuring that the right, clearly presented information reaches the board is crucial. Then, working to critically review, stress-test and fully understand assumptions made in this information will put the board in the best possible position to make fully considered choices.
In an ideal situation, an organisation will already be measuring the impact of its governance long before it reaches the point when it is sanctioned for non-compliance. However, it is fair to say that if it does fall foul of regulators, this can be a good way to bring issues of the governance process to the surface. Tracking any interactions with regulators, making internal and external stakeholders aware of requirements, and communicating deadlines and responsibilities effectively is a useful approach to improvement. Needless to say, if there are repeated infringements of regulations, then those in governance will need to undertake a more thorough and penetrative review of the whole workflow to identify the important causal issues.
Staff turnover and talent attraction
When there is good governance, it is often evidenced by an organisational culture that people want to be part of. A clearly defined mission and vision, backed up with an understanding of how different roles will play a part in executing that strategy, typically lead to improved staff retention and may also improve talent attraction. Measures such as staff turnover, time to fill vacancies and application numbers for positions can be a useful measure of the impact of good governance. Additionally, high employee engagement, low absence metrics, community engagement and the removal of gender pay gaps and other barriers to diversity all speak of a healthy organisation with effective governance.
Fluctuations in share price and investor/stakeholder interest
When poor governance is in evidence and there are issues with compliance, the company’s share price can be a very clear metric. Investor confidence is shaken, questions are asked and it becomes easy for stakeholders to feel that they have been mislead or let down. When there is a reliable and ingrained level of good governance, with full and robust reporting and transparency, investor interest and trust are very likely to grow. However, it is worth adding one caveat here; it is important to view the whole market, alongside that of any individual company, and assess if other factors unrelated to governance are having a significant effect on share price.
Risk management and mitigation
It is clear that good governance and secure risk management are closely aligned. Therefore, measuring and proactively applying risk management and mitigation are strong indicators of good practice in governance. By closely monitoring investments, reviewing market choices made and tracking operational practices, the impact of good governance can be inferred. Are processes and approaches deployed systematically, and is there evidence of benchmarking against the best in the industry? Further, is there an evidence trail of the continuous critical monitoring of results which then leads into improvements and development? It is worth particularly mentioning the need for IT governance to be strong. Training levels, regular inspection and review of the IT infrastructure, and a robust mitigation plan in place to deal with cybersecurity issues speaks strongly of good governance in this area.
It is vital that output measures should be evaluated, in addition to those of input. These will include not only financial performance, but also indicators such as customer, employee or other stakeholder satisfaction and brand image. Operational performance and financial measures are closely entwined and being able to assess the health of this relationship can make clear where the business is, what needs to change and how operational issues can be improved. Benchmarking the organisation’s output results against similar businesses in the market, and also against its past patterns will make this an even more robust measurement.
Time will show
Continuous improvement, through some kind of Plan – Do – Check – Act process, should be embedded in the workings of the board and the governance of a business. The process of reviewing performance and investing in development and improvement is the important sense here – and that process is not just about the current bottom line. Businesses need to also focus on how results are obtained. It is possible to achieve some impressive results over a particular period, but leaders must ask if this has been the result of excessive risk-taking which may not be sustainable in the long run. It should also be clear that there is a time lag between decisions and their impacts. It is important that any evaluation of governance should consider the longer term outcomes as more valuable than short-term successes.