How to define corporate governance?
Organizations striving to improve governance need to take a close look at their internal business structures, processes and projects. Corporate governance can refer to any of the policies and processes that control a company, but that definition does not do a very good job explaining what corporate governance really is. It is more helpful to say that governance refers to the policies and processes that help the corporation move toward its goals, while preventing unwanted conflicts.
Governance must balance the needs of several groups, including shareholders, board members, customers and the various communities within an enterprise such as executive management, operations, project management, process improvement and information technology.
When done well, governance creates an honest, open environment that promotes structure in planning, agility in execution and encourages board members and executive committees to dedicate money to the corporation to innovate and grow. Good governance is embedded in the good behavior and sound judgment of those who are charged with running an organization.
Why corporate governance matters and how to get it right
A corporation without governance is like a train without a track. No matter how much potential the business has, it will never undergo the business transformation needed to get to where it wants because it has nothing directing its progress. Unfortunately, corporate governance did not get much attention until 2002, when President Bush signed the Sarbanes-Oxley Act into law.
The Act issued a number of reforms intended to improve corporate responsibility and prevent financial fraud. Changes mandated by the Act may not have seemed important before, but widespread fraud that bankrupted Enron and WorldCom created a serious disruption in markets.
Many investors worried that they would lose their money if corporations continued to mismanage their funds and investments. The Sarbanes-Oxley Act made investors feel more comfortable.
Today, however, proper governance is not simply about investor security; it is necessary for corporations to succeed. Without good governance, project management and corporate improvement strategies have higher failure rates that will make potential investors wary.
Corporations need comprehensive governance frameworks that give themselves the tools to prevent risk and make effective decisions. Once a company establishes its rules of governance; board members, steering executives, as well as managers should know exactly what their roles are and how they play into the overall organizational structure.
Governance solidifies each person's position so that they do not stray from the mission. Proper governance structures identify the distribution of rights and responsibilities among different participants in the corporation and outline the rules and procedures for making decisions in corporate affairs.
Good governance can offer a number of important benefits to organizations, including:
- Better organizational strategies and plans
- Improved operational and process effectiveness/efficiency
- Improved project management and delivery
- More prudent regulatory compliance, financial and risk management
- Improved member and stakeholder/employee engagement and communication flow
- Increased agility to which an organization can deliver on its purpose and goals
Effective governance structures allow organizations to create value, through innovation, development and exploration, and provide accountability and control systems commensurate with the risks involved.
How to develop an effective governance structure
An effective governance structure must be lean, simple and straightforward. This starts with the creation of an Executive Committee devoted to aligning all levels of the organization so that they contribute to achieving defined strategic goals and objectives.
Members of the Executive Committee need to review the organization and its investment portfolio to make sure strategies reach their intended goals. A truly great Executive Committee will also review organizational performance (including processes and policies) to anticipate future needs and avoid regulatory infractions.
Directives from the Executive Committee flow down the organizational chain to members of various Sub-Committees. Sub-Committees usually include department managers who have the ability to make changes within their areas of the organization. Since these individuals are responsible for process and project performance, they can execute plans that bring their departments in line with the organization's overall goals.
Recurring reviews play a key role in good governance. Sub-Committees need to investigate performance to decide whether project, process, system, departmental, or data changes have reached their goals.
In many cases, they will have to propose changes or ideas that will further improve processes and systems. The Executive Committee can then review these proposals to determine whether they want to endorse these paths and commit investment funds, or create new plans or goals for improvement. If the organization’s strategic plan needs revision, changes ultimately come from the Executive Committee.
The top 10 principles that promote good governance
Roles and responsibilities
There should be clarity regarding individual responsibilities, organizational expectations of executives and the role of executive and steering committees.
Structure and composition
An executive committee needs to have the right group of people, with particular regard to each individual’s background, skills and experience. It also needs to know how the addition of an individual builds the collective capability and effective functioning of the committee.
Purpose and strategy
The executive committee plays an important role in setting the vision, purpose and strategies of the organization, helping the organization understand these and adapting the plans to implement them.
Risk management
By putting in place an appropriate system of risk oversight and internal controls, executive committees can help increase the likelihood that their organizations will deliver on their purpose.
Organizational performance
The executive committee determines and assesses appropriate performance categories and indicators for the organization.
Committee effectiveness
An executive committee's effectiveness may be greatly enhanced through: careful forward planning of board-related activities; committee meetings being run in an efficient manner; regular assessments of organizational performance; having an executive succession plan; and the effective use of sub-committees, where appropriate.
Accountability
It is important that the executive committee ensures a few elements are in place: a flow of information to the board that aids decision-making; transparency and accountability to external stakeholders and to employees throughout the enterprise; and the safeguard of the integrity of financial statements and other key information.
Organizational maturity
The executive committee has a role to play in enhancing the capacity and capabilities of the organization they serve.
Culture and ethics
The executive committee sets the tone for ethical and responsible decision-making throughout the organization.
Engagement
The executive committee helps an organization to engage effectively with stakeholders and employees.
Conclusion
Proper governance requires time and thought from committed leaders who understand the benefits of aligning every level of an organization to produce desired results. Good corporate governance ensures that a businesses environment is fair and transparent and that employees can be held accountable for their actions.
Conversely, weak corporate governance leads to waste, mismanagement and corruption. Regardless of the type of venture, only good governance can deliver sustainable and solid business performance.
