There are numerous benefits to good corporate governance, including improved company culture, increased accountability, ability to spot potential issues before they occur. But, more than that, it shows investors that the business is organised and well placed to work in their best interests. So, it is crucial that organisations understand how to ensure good corporate governance.
In its Corporate Governance Review 2020, Grant Thornton concluded:
“the best-performing companies are embracing governance activities, not as separate compliance needs, but as business essentials that are fundamentally linked; risks to strategy, strategy to purpose, and reward to what really matters to all.”
One of the findings of the report regarding the difference between merely performing governance and actively seeking good corporate governance relates to the handling of risk. Of those surveyed, 89% of FTSE 350 boards discussed identifying risks, but most concentrated only on the procedures for identification. Just 30% stated how they would mitigate risk, which is where real value and competitive advantage lie.
What is good corporate governance?
As seen in the example above, corporate governance is not limited to ticking boxes to make sure you remain within the guidelines of regulations such as the UK Corporate Governance Code, issued by the Financial Reporting Council (FRC).
Good corporate governance understands the requirements, but also the reasons why they benefit a business. It does not perform the bare legal minimum but uses the code to delve deeper into the organisation’s operations in order to place itself in the best possible position from which to thrive.
Some of the elements of good corporate governance include:
- Having an effective board of directors that is collectively responsible for ensuring success in the long term, led by a chair who is committed to continuous improvement
- A board that features a balance of competencies, experience, company knowledge and independence
- Directors that are able to dedicate sufficient time to their responsibilities, receive a great induction and have the opportunity to regularly update their skillset
- Regular evaluation of board performance as well as that of the individual directors and committees.
Good corporate governance can also be understood as transparent and ethical. Although hard to quantify, this approach to governance is hugely important when balancing profitability with the board’s duties to investors and other stakeholders.
What are the benefits of good governance?
The benefits of good corporate governance are countless but we’ve rounded up the most important ones below.
The business carries out its functions in a manner that complies with the rules and regulations in the regions in which it operates. This helps it avoid costly penalties and reputational damage.
Efficiency of process
Streamlining your organisational procedures allows you to look at your existing processes within the business and find ways to make them more efficient.
If you can accurately identify risk factors, you can mitigate them before they become an issue. This forward-thinking, strategic approach gives a real competitive edge.
Better decision making
Good governance gives top-level decision-makers the information they need to make quick and effective choices.
Strong strategic planning
Access to vital information coupled with good internal communication lay the foundations of a board that can create better business strategies.
Improved brand image
Good governance makes the organisation more desirable for talented new directors. As investors pay more and more attention to ESG reporting, the ‘G’ in it, which stands for ‘governance’, is also entering the spotlight. Nowadays, good governance is vital to attracting and retaining the right shareholders. It can even make it less expensive to borrow capital, as companies with strong governance, including robust financial management reporting, pose less of a risk to lenders.
How to achieve good corporate governance
1. Balance board composition
If all board members have the same level of experience, with similar skill sets, you will not find the diversity of opinion that is required to rigorously challenge the company’s strategy and ensure it is watertight. Greater diversity on boards introduces new ways of thinking and creative methods of solving problems, which prevent directors from resting on their laurels.
Board diversity is all about filling gaps in boardroom expertise to provide a broader range of viewpoints and a fresh perspective using strategic succession planning.
Dowshan Humzah, director and chair of UK Advisory Board of Board Apprentice Global says:
“The Financial Reporting Council recognises that diverse board composition in respect of protected characteristics (such as gender and race) is not on its own a guarantee.
“Diversity, inclusion and impact are just as much about difference as what I have termed POETS (Perspective, Outlook, Experience, Thought, Sector & Social background), which, of course, correlates closely to those with different protected and social characteristics. As a result, we need boards to be more uncomfortable being comfortable – and comfortable with the uncomfortable. More creative, non-linear and even oblique thinking is required to better balance our boards and serve their end-users, citizens or beneficiaries.”
2. Evaluate the board regularly
A diverse board that works well on paper is one thing, but how they actually perform in real life is another thing altogether. This is why regular evaluations are important. They help you track progress over a period of time and understand where your own strengths lie as well as giving you a good understanding of the areas that need improvement. One way to achieve this is with Boardclic’s board evaluation tool that provides you with a benchmark against your own performance and that of your competitors. This way you’ll know what ‘good corporate governance’ means for your company and your industry.
Evaluations are mandatory in some jurisdictions, but they are also important, no matter what the legislation mandates. They are critical to building sound corporate governance and stakeholder value.
Open communication and transparency in the evaluation process breeds confidence and trust within the company and helps you in your efforts to grow that diverse board of directors.
Evaluations should not be a tick-the-box exercise; they should feature candid, in-depth conversations that give you real data to work with to instil a culture of continuous improvement.
3. Ensure director independence
Independence is desirable on a board that wants to break away from safe, conservative thinking. Forward-looking boards need directors that are not afraid to think outside of the box, rather than simply continue down the same road the company has always taken. It helps create innovation and avoid stagnation.
In addition, independent directors are more likely to provide insights that benefit the shareholders, given their different perspective on matters.
4. Ensure auditor independence
Undue influence over the work of audit committees and independent auditors is a concern in terms of corporate governance. Investors need to know that they can trust the financial reporting that an issuer makes, so independence is key to show that the reports are accurate and tell the true tale of the company.
5. Be transparent
The previous point feeds into this one. Transparency is essential for good corporate governance. The openness and willingness to share accurate, clear and easy-to-understand information with stakeholders, including shareholders, breeds trust and solidifies a business’s reputation.
This means that organisations have to accurately report the bad news as well as the good. Trying to avoid negative publicity only to be found out later is more damaging for a business and its reputation. Full disclosure breeds integrity.
Create a plan of what you will share with shareholders and how often so that they can see that your intention is to be as transparent as possible.
Shareholders should know their rights when they invest in your business and you should ensure that the rights you provide are backed up by your Articles of Association, constitution and company bylaws.
Decide whether all shareholders have the same voting rights or whether different classes of holdings have preference.
Can they approve certain transactions?
Can the board act without their approval?
Do you have policies for extraordinary transactions?
These are all issues you need to resolve before formalising shareholder rights and ensuring you regularly review your policies.
7. Aim for long-term value creation
Although short-term wins look good and create opportunities for publicity, long-term value creation should be the aim for a company with solid governance. A business that is committed to sustainable growth is likely to be much less volatile than a company with its eye only on the short term.
8. Manage risk proactively
Identifying risks is important, but taking a proactive approach to mitigate that risk before you face it is the goal. Rather than attempting to weather the storm, it is better for the organisation to avoid the storm completely.
A solid risk management process, an internal control framework and an up-to-date disaster recovery plan are all key to achieving this aim.
9. Follow sustainability best practices
Sustainability and strategic management are increasingly intertwined in the corporate world, as investors make their preferences heard. Major events such as Covid-19 and the climate crisis have thrown into sharp relief the need for a sustainable outlook from issuers. Consumers have also started to prefer shopping with businesses that boast sustainable practices.
In addition, there is increasing regulatory pressure for reporting of environmental, social and corporate governance metrics, so issuers are advised to get ahead of the game and be prepared for the upcoming ESG compliance legislation.
10. Document policies and procedures
There should be easy to access documentation of your policies and procedures relating to shareholder rights, executive compensation, board meeting operation, the election of new directors and more. This ensures transparency and consistency within the organisation.
Examples of good corporate governance
Here are some companies that have achieved long-term success by upholding the principles of good corporate governance and displaying ethical behaviour.
Good Governance Examples
The drinks company is renowned for its good governance, including:
The insurance company’s governance efforts include:
The aerospace business shows strong governance performance, including:
How do you promote good corporate governance?
Everyone needs to know their role in order to best contribute to corporate governance structures. This could be the board understanding its strategic function and its part in risk management or the chief executive officer understanding they work for the board. Better organisation leads to better governance. This includes, for example, preparing directors with the materials they need in good time before board meetings and other events.
What makes good corporate governance effective?
Good corporate governance practices are effective because they are based on organisation, transparency, accountability and strategic planning. These elements breed confidence and trust in investors and other stakeholders, provide risk oversight and help prevent scandals.
Effective corporate governance is key to the long-term success of the company in an ever more competitive business landscape. It is a way of gaining an advantage over competitors through creating leaner processes, as well as entering into an honest and open dialogue with shareholders, suppliers, employees and all other stakeholders.
When it comes to how to ensure good corporate governance, an annual board evaluation that asks the right questions, delves deep into data, highlights weaknesses and tracks progress over time is essential. Boardclic’s digital evaluation platform provides this along with the opportunity to benchmark your company against peers and understand exactly what good governance looks like. Request a demo today to learn more.