The concept of governance is difficult to define in a sentence or two because it’s an intangible thing. It’s not something that we can see or touch. It’s a system that has a basic structure that serves as the foundation and support for all of its many parts. A governance model serves as a representation of the many possible ways that a governance system could work if you were to change one or more of its parts. Governance models can be built in various ways. The integrity of their infrastructure is often indicative of whether an organization will be successful or fail. Beyond that, what is a governance model and why is it important in today’s business environment?
Why Is a Governance Model Important?
Governance systems are complex and multi-faceted. By changing any part of a governance system, it has an effect on many other parts of the structure including the individuals and groups that make up the system and extend to it.
An organization’s mission, vision, and values comprise the primary parts of a governance system. The mission statement gives an organization direction and a purpose. It’s necessary for organizational leaders to share a common mission in order to ensure a strong foundation.
Governance Isn’t One-Size-Fits-All
The complex concept of governance accounts for many things. One thing that it isn’t is one-size-fits-all. Imagine a banking business trying to adapt its governance structure in the same way as the governance structure for an amusement park. It wouldn’t work well at all because industries are so different. Companies within various industries can also be quite different which requires them to have different governance structures. Each organization has its own goals and objectives and each organization has a different set of stakeholders.
A banking business must focus on building wealth, managing risks, and protecting shareholders as their primary activities. Banks and other financial institutions need to draw expertise from financial experts and regulatory bodies. These are essential parts of a bank’s governance structure. An amusement park is more likely to focus on safety, leisure, and entertainment as its primary purpose and function. Managing and mitigating risks is a high priority for amusement parks which means that the governance structure must look very different than aa bank’s structure.
The underlying people, processes, and technology form the infrastructure that establishes the basic rules that enable corporations to function according to their missions. Infrastructures govern the daily activities with management in leadership positions. An internal structure contains the rules and processes that make the organization function.
Every organization requires a large degree of accountability and transparency as part of its governance model to be strong and prosperous. A governance model outlines how people in authoritative positions hold themselves accountable to their stakeholders. Governance models incorporate ethics, integrity, and a responsible code of conduct for all leaders, volunteers, and workers. The behavior of its leaders has a strong influence on how people at lower levels of an organization think and act. The behavior of an organization’s leadership influences the entity’s culture which runs like a thread throughout the entire operation.
Another of the many reasons that a governance model is important is because it makes clear how an organization should model its own behavior. Good governance leads to prosperity. Part of the reason that’s true is because good governance incorporates internal affairs and internal controls to ensure justice and address problems.
Poor governance has consequences for the organization, the people running it, and the stakeholders. Governments in the United States have checks and balances so that leaders don’t become too powerful. The accountability that accompanies checks and balances helps to keep people and communities safe. The lack of accountability nearly always has negative effects on businesses, people, and society. Having internal controls prevents fraud and deception and gives stakeholders the assurance that they can rely on financial reports and earnings statements as accurate.
Why Is a Governance Model Important?
A model provides a structure that can be mirrored, modified, or changed. Models give us a starting point that can indicate how an organization needs to improve. A governance model demonstrates the types of consequences that we can expect and the risks that will likely be associated with the model.
Governance models that are weak or non-existent create distrust across the board. The lack of trust usually leads to a lack of financial support. It also leads to financial and reputational risk. Something that is even more concerning is that the lack of trust can lead to severe legal problems that can destroy an organization in short order.
An organization’s stakeholders play an important role in holding leadership accountable. The trust of the stakeholders is essential to every organization’s survival and they have a strong influence on how organizations are governed.
Modern Governance Provides the Tools for Good Corporate Governance
Today’s business world is highly complex and interconnected which makes the concept of governance models even more important. All organizations in existence today are subject to increased connectivity, visibility, and scrutiny. Business and nonprofit leaders are more accountable than ever for their successes and failures. Board performance is a crucial part of the governance model and is generally a strong indicator of an organization’s potential for success.
Success for today’s boards requires them to embrace technology. A BoardEffect board portal system provides the technical tools and resources that offer a full range of governance needs for organizations to govern at the highest level to deliver long-term success and sustainability.
As important as governance processes are, board directors can easily get lost in the weeds of the demands and complexities of the business. A governance model that includes the implementation of digital software solutions for boards is a vital aid to managing the many board responsibilities like board agendas, meeting preparation, review of financial and other pertinent reports, and overall organizational oversight. A modern governance model brings the right talent together at the right time to make it easier for boards to engage effectively in every aspect of good governance.