Personal Finance

What good corporate governance means


Effective risk management is an important part of good governance. FILE PHOTO | NMG

Good corporate governance is about having the correct policies and procedures in place. It does not have a single accepted definition. Broadly, the term describes the processes, practices and structures through which a company manages its business and affairs and works to meet its financial, operational and strategic objectives and achieve long-term sustainability. A governance operating model has the potential to address this need and thus enhance management’s ability to implement governance and the board’s ability to exercise proper oversight.

Successful integration and effective management of sustainability at a company requires having committed leadership, clear direction and strategic influence — and none of this will happen without a robust governance structure. Sustainability governance helps a company implement sustainability strategy across the business, manage goal-setting and reporting processes, strengthen relations with external stakeholders and ensure overall accountability.

Many believe that only public companies or large, established companies with many shareholders need to be concerned about, or can benefit from, implementing corporate governance practices. The reality is that all companies – big and small, private and public, early stage or established – compete in an environment where good governance is a business imperative. One size doesn’t fit all, but right-sized governance practices will positively impact the performance and long-term viability of every company.

Develop boards that should be comprised of directors knowledgeable and have expertise relevant to the business and are qualified and competent, and have strong ethics and integrity, diverse backgrounds and skill sets, and sufficient time to commit to their duties. Boards need to balance conformance (for example compliance with legislation, regulation and codes of practice) with performance aspects of the board’s work (i.e. improving the performance of the organization through strategy formulation and policy making).

As a part of this process, a board needs to elaborate its position and understanding of the major functions it performs as opposed to those performed by management. These specifics will vary from board to board. Knowing the role of the board and who does what in relation to governance goes a long way towards maintaining a good relationship between the board and management.

Not only must directors declare conflicts of interest and refrain from voting on matters in which they have an interest, but a general culture of integrity in business dealing and of respect and compliance with laws and policies without fear of recrimination is critical.

A vital element of good corporate governance is goal setting. Having clear, attainable objectives, which everyone in the organisation is aware of and is committed to achieving, will increase the likelihood of those objectives being met, or even exceeded. Strategies should be regularly reviewed and adjustments made to allow for changing circumstances.

Sound budgeting is another factor in good corporate governance. Goals cannot be achieved without the financial resources to make them happen. Budgets can be set as much as five years in advance, although regular review and adjustment will obviously be necessary.

Effective risk management is also an important part of good governance. Minimising risks and identifying opportunities should be an ongoing procedure, backed by sound policies and clear delineation of responsibilities. Risk can come from both internal and external sources and all members of the organization need to be made risk aware through compliance training.

Another key ingredient in good corporate governance is human resources. Hiring and retaining good employees with the necessary skills, attitude and experience is vital to an organisation’s success. Ongoing human resource management needs to focus on performance management, professional development and succession planning to ensure that vital expertise is retained within the firm.

Since the board is ultimately responsible for all the actions and decisions of an organisation, it will need to have in place specific policies to guide the organisational behaviour. To ensure that the line of responsibility between board and management is clearly delineated, it is particularly important for the board to develop policies in relation to delegations.

Also, under this topic are processes and procedures. Poor internal processes and procedures can lead to inadequate access to information, poor communication and uninformed decision making, resulting in a high level of dissatisfaction among directors. Enhancements to board meeting processes, meeting agendas, board papers and the board’s committee structure can often make the difference between a mediocre board and a high performing board.

An essential element of good governance is consultation with key stakeholders. Fostering relationships of trust and mutual respect with stakeholders is vital if organisational objectives are to be met. Key stakeholders can include government agencies, suppliers, employees and customers.

Finally, senior management performs an important role in good governance by providing leadership. If directors and managers are seen to behave ethically and always in the best interests of the organisation, your company success in 2019 will inevitably be followed by others and will contribute to the evolution of a corporate culture that values ethical decision-making.

As can be seen, good corporate governance is a combination of many different things. At the end of the day, having all these measures in place will not guarantee success, as risk is an inherent part of any business venture.

Achieving good corporate governance will, however, reduce the risks considerably and increase the likelihood of long-term success. It should therefore be the ultimate goal of every organisation.