Governance is the process by which corporations establish their rules and policies and implement and monitor them. Good governance has various essential characteristics and can mean different things to different people. Groups and individuals that hold positions of power must have a sense of accountability and a means of carrying out checks and balances if they want to govern successfully.
In a business landscape, good corporate governance is the watchword. Regarding corporations, good governance typically leads them to achieve their goals in a way that also meets ethical and regulatory expectations and best practices. In successfully fulfilling their mission and plans, corporations with good corporate governance will enhance their prosperity and find favor in the eyes of their shareholders.
What does good corporate governance mean? Investopedia defines it as follows:
“Corporate governance is the system of rules, practices, and processes by which a firm is directed and controlled…[it] essentially involves balancing the interests of a company’s many stakeholders, such as shareholders, senior management executives, customers, suppliers, financiers, the government, and the community.”
Good governance underpins successful businesses in today’s world, where expectations around ESG (environmental, social and governance) issues like sustainability and diversity are ever-growing. Focusing on such matters encourages a mature governance framework, helping organizations make the right decisions at the right time.
Good governance is ultimately what is right for the company, for the long-term health of the company.
— Marc Hodak, Partner, Farient Advisors
Good governance is predicated on strong leadership, particularly a “lead from the front” approach by boards and senior managers. It requires corporate sign-up to an agreed good governance definition. It means recognizing the importance of sound governance principles (not difficult to prove; there’s even a Good Governance Institute dedicated to promoting governance best practices, which will undertake reviews of corporate frameworks to advise on ways to improve.)
But perhaps the essential first step on your organization’s journey to good governance is to identify:
- What is good governance?
- What examples of good governance can you use to guide your own approach?
- What role do technologies, such as board management solutions, play in solidifying your organization’s commitment to good governance?
What is good governance?
UNESCAP (the UN’s Economic and Social Commission for Asia and the Pacific) summarizes good governance as “participatory, consensus oriented, accountable, transparent, responsive, effective and efficient, equitable and inclusive and follows the rule of law.”
As a result, good governance:
- Minimizes the potential for corruption
- Increases inclusion and the ability to benefit from diverse thinking
- Reacts to the needs of society, both now and in the future
The Good Governance Institute believes that “Good governance is not about ownership, it is about stewardship” — that is, it’s about taking responsibility for an organization’s ESG and related principles, like corporate social responsibility and governance for a set time, then handing on that organization to your successors in better shape than you inherited it.
We need to challenge not good governance as a rule, but the standards that have been ossified over time.
— Marc Hodak, Partner, Farient Advisors
In a corporate context, good governance sets the tone and environment for all individuals in the organization or among stakeholders to have a voice. A commitment to good corporate governance means:
- Embedding diversity and inclusion from the top of the organization
- Putting in place a governance framework that covers all the characteristics of good governance to ensure you capture every aspect of the task
- Demanding good board practices
As in other areas of business, the role of the board of directors is a central one when it comes to ensuring your approach embraces all elements of good governance.
9 Principles of Good Governance
Good governance has nine major principles or characteristics:
The “participatory” nature of good governance requires that boards – and organizations overall – become more equitable and diverse. Moreover, these diverse board members and employees cannot be silent partners; they need an active voice in the corporate decision-making process. The board may play a key role in driving diversity, but equally, diversity within the board itself drives better thinking. But beware of tokenism; the importance of transparency in good governance cannot be overstated. Strong, well-composed boards both include and value the views of people with various skills, talents, abilities, experiences and perspectives.
Boards should expect all of their members to participate in board meetings, and a commitment to good corporate governance practices demands that board chairs facilitate meetings in ways that draw out the perspectives of all board directors.
The boardroom is an appropriate forum for hosting robust discussions and debates. In fact, it’s expected. Some of the most heated debates result in the best decisions, as representatives from many different walks of life come together with varying perspectives.
Good governance means securing agreement from these discussions. Consensus-oriented decision-making has to take on board the different needs and perspectives of this diverse group to deliver a broad consensus that will serve the best interests of communities and companies.
Accountability is a crucial characteristic of good governance, just as it is in many other areas of business and societal life. Boards of directors are accountable to groups and individuals affected by their decisions, including their shareholders, stakeholders, vendors, employees and the general public.
Transparency and the rule of law go hand-in-hand with accountability; transparency is one of the core values of good governance, and it both drives and evidences accountability.
Good corporate governance requires that records and processes are transparent and available to shareholders and stakeholders. Financial records should not be inflated or exaggerated. Reporting should be presented to shareholders and stakeholders in ways that enable them to understand and interpret the findings.
Transparency means that stakeholders should be informed of key corporate contacts and told who can answer questions and explain reports, if necessary. Corporations should provide enough information in their reports so that readers get a complete view of the issues.
All too often, the corporate world’s focus can be taken up by sudden crises and controversies. A timely response to the unexpected is crucial, with corporations that practice good governance usually able to prioritize swift and honest communication with shareholders and stakeholders.
6. Effectiveness and Efficiency
As planners and overseers, board directors are responsible for conducting their duties effectively and efficiently. Many corporations also consider the environmental impact as they perform their duties and responsibilities. For example, using the drive for good governance as an impetus for digital transformation, an organization may transition from manual paper processes to more environmentally friendly software solutions, such as the integrated suite of board leadership and collaboration tools.
7. Equity and Inclusiveness
Each board director has an equal seat at the board table. Each director can and should use their voice to share their experiences, opinions and philosophies to enhance and broaden discussions. No one should feel left out or that their views have less meaning than others.
This same ethos should pervade the entire organization, with a culture of diversity and inclusion underpinning all of your operations. Diversity, equity and inclusion (DEI) are core elements of good governance.
8. Rule of Law
The rule of law means boards should be fair and impartial in their collaborations and decision-making. Certain circumstances may require boards to seek outside counsel, guidance or expertise from external, third-party experts. Whether making decisions themselves or working with third parties, good corporate governance requires boards to act ethically, honestly and with the utmost integrity.
9. Strategic Vision
One of the primary responsibilities of board directors is strategic planning, which includes the organization’s mission, vision and values statements. Strategic planning leads boards to understand where the corporation is going and how it will get there. Good corporate governance requires a robust planning process, incorporating action plans, budgets, operating plans, analysis, reporting and much more. The strategic plan holds board members accountable for their decisions and for monitoring their goals. Strategic planning also includes risk management and protecting the company’s reputation, and as such, is an opportunity for organizations to put into practice many of the good governance principles they espouse
Examples of Good Governance
What does good governance look like? There are numerous examples of best practices when it comes to corporate governance. Some things you may look for:
- Is your board diverse and inclusive, with a range of voices able to share their views?
- Is your board managed methodically, with meetings, documents and processes captured via a board portal that facilitates strong governance?
- Do your directors lead from the front on issues of ethics and compliance?
- Can you demonstrate compliance with regulatory and reporting requirements like NIST 800-171 and SOX?
- Is your sustainability reporting up to scratch?
- Are you working towards environmental best practices on issues like Scope 1, 2 and 3 emissions and emerging contaminants?
- Are you proactive around ESG reporting, even when there is no legal imperative to report?
- Do you have sufficient — and sufficiently robust — internal controls to measure progress in all these areas?
How Technology Can Accelerate Your Journey to Good Governance
Good corporate governance is multi-faceted but ultimately achievable. Harnessing the ability of technology to support and accelerate your good governance journey can make all the difference. By bringing the power of automation to your governance processes, you can make them more comprehensive, more consistent and more robust. Good governance is a realistic objective for all organizations that want to achieve it, and today’s technology solutions can play a crucial role in getting them there. Contact us today to find out more on how Diligent can bring a higher level of governance to your organization.