Whenever you’re navigating yourself somewhere, it helps to have a roadmap of where you’re going. Some things naturally lend themselves to steps, patterns, or processes. If you’re looking for an established, easy process for corporate governance, you’re likely to spend hours of futile time looking for it and be disappointed altogether. That doesn’t mean that it’s not worthwhile to understand what good corporate governance is or to work toward achieving it. Organizations have much to gain by setting their own processes for good corporate governance.
What makes it so challenging? First, corporate governance is something that has to be customized to some degree for every organization. Second, corporate governance is ever-evolving. As changes occur in the business world, the principles of corporate governance must keep pace.
By having a good understanding of what good corporate governance is, working towards the benefits that it offers, being adaptable, and following best practices, your board will be able to set its own process for good corporate governance and evolve with the times.
Defining Corporate Governance
What exactly is corporate governance and what is the process of corporate governance? Does corporate governance have meaning and purpose for your organization?
The purpose of corporate governance is to help organizations realize effective entrepreneurship and sound management that can deliver sustainability and long-term success for an organization. Corporate governance is a system that directs and controls organizations to ensure that they operate ethically and fairly, and that they follow all laws and regulations.
Boards of directors are responsible for governing their organizations. Shareholders and stakeholders serve as a check and balance. For public companies, the shareholder’s role in governance is to appoint the directors and the auditors and monitor the leadership to ensure that appropriate governance is in place and is enforced.
Boards of directors are responsible for setting the organization’s strategy, providing leadership, supervising management, overseeing all operations, and communicating results to shareholders and stakeholders.
Essentially, corporate governance is about how the board goes about overseeing the organization and how it sets its values. These duties are starkly different than the duties of managers which is to manage the day-to-day operations of the company.
Benefits of Establishing and Abiding by Good Corporate Governance
If there’s any question as to the reasons for boards to work toward good corporate governance, you only have to look at the many valuable benefits that it provides.
Good corporate governance encourages honest, ethical behavior. Board directors and managers that establish clear policies and processes and who maintain a compliance culture pave the way for improved results. It’s essential for board directors to establish a respectable culture at the top and ensure that they extend that culture by communicating it to management and throughout the rest of the organization. It’s just as important for boards to be alert and responsive to suggestions or symptoms of poor culture at any level within their organization.
In addition, good governance practices go a long way toward reducing the cost of capital, which is significant in today’s volatile environment. Organizations that are stable and reliable are better able to mitigate potential risks and secure funds than organizations with weak governance. Also, organizations that demonstrate good corporate governance are more apt to attract investors and supporters.
The Corporate Governance Institute states that there is a strong and demonstrable link between good governance and rapid decision-making and improved performance. At the same time, a fair number of organizations with poor performances have also been directly linked to poor governance. Good governance ensures quick access to information and good communication with stakeholders, both of which lead to better results. Good governance also motivates boards to continually prioritize their actions and decisions. These are important considerations because they enable organizations to weather tough economic conditions and volatility.
Internal controls are an important part of running any organization. Good governance supports strong internal controls. Accountability is important because it positions organizations better to take action when the internal controls send up red flags about non-compliance.
Good governance sets the stage for better strategic planning. Accessibility of information and sound communication, boards are better able to strategize more successfully. Along these lines, good governance allows for efficient allocation of resources and capital. Good governance also helps board directors to better understand the regulatory environment that governs businesses, leverage technology, and manage the interests and expectations of the stakeholders.
Potential board director candidates are drawn to organizations with good governance which means that they’re likely to recruit and appoint a better quality of leadership. It’s vital for boards to recruit board directors with complementary skillsets which will lead to the overall sustainability of the organization.
Is There a Set Process for Good Corporate Governance?
In learning more about good corporate governance and the best practices that help to define it, it’s easy to see why there can’t be a specific, designated process for good governance. Some of the structure behind good governance has to do with the requirements for organizations that have been set by laws and regulatory bodies.
There’s not so much of a process for good corporate governance as there are elements to it. The most common elements of good corporate governance are:
- Rule of Law
- Consensus Oriented
- Equity and Inclusiveness
- Effectiveness and Efficiency
Best Practices for Corporate Governance
For the full protection of stakeholders, good governance demands legal frameworks that are fair and are enforced by regulatory bodies. Best practices for good corporate governance include a number of things including developing a qualified board of directors and evaluating their performance, as well as engaging in regular succession planning. The easiest way to do this is by implementing a BoardEffect board management software system.
Best practices for good corporate governance also entail defining roles and responsibilities and emphasizing integrity and ethical dealings. Board directors that follow best practices make principled compensation decisions and engage in effective risk management decisions. Get your board off to the best possible start with a BoardEffect board portal system.