Given the turbulent time the world has been through in the past few years, good governance could not be more important for businesses. You need to be sure that your leadership team has the tools in place to navigate the turbulent waters of pandemics, energy crises, inflation, social activism and much more. This good governance checklist is designed to help you implement best practices for leading your organisation with integrity and transparency.
One of the biggest challenges to boards is understanding the shifting governance landscape. In Gartner’s Board of Directors study in 2022, 64% of directors reported that they would be increasing their risk appetite through to 2024, recognising the uncertain nature of decision-making in unstable times. This requires expert governance to minimise the negative consequences of those risks on businesses.
This article explores the benefits of good governance and provides a checklist to ensure you are doing everything you can to arm your board with the tools it needs to govern effectively.
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What is good governance?
Good governance involves a business implementing the policies its board believes are in its best interests, fine-tuning and adapting them to successfully face future challenges. An important aspect of good governance is also ensuring the board accomplishes the above effectively.
As part of good corporate governance, organisations must work for the interests of their stakeholders, including management, employees and shareholders, as well as remaining compliant and advancing towards achieving the goals related to the company vision.
Boards must perform to the best of their abilities and in a strategic, transparent, equitable and fair manner, taking accountability for the decisions they make.
What are the benefits of good corporate governance?
When a board displays good corporate governance, this brings a range of benefits to the company. These include:
|Improved access to financing||When a company is well-run, adheres to the regulations covering its location and industry, treats people fairly and is transparent in its decision-making, it is a more attractive prospect to investors.|
|Lower cost of capital||A company that proves itself to be run in an effective manner allows investors to be more confident in its future performance. This means that they feel happier providing capital at a lower cost than for a business where the governance is less successful.|
|Improved operational performance||A company being guided by an effective and innovative board is more likely to thrive and create wealth. It will reduce inefficiencies and embrace a forward-thinking attitude that anticipates challenges and mitigates them before facing them.|
|Increased company valuation and improved share performance||Improved operational performance leads to a company’s stock being more attractive and, therefore, having a higher share valuation and performance. Increased awareness of key shareholder considerations, such as ESG factors, plays into this performance.|
|Improved company reputation||Companies are being scrutinised like never before, and that means reputation is everything. From investors to clients, there is a number of parties you rely on to thrive that can be influenced by the reputation a well-governed company garners.|
|Reduced risk of corporate crises and scandals||Good governance means taking control of regulatory issues and standing firm on the equitable treatment of others. It also means being adept at risk management, reducing the chances of conduct risk failures.|
The Good Governance Checklist
Here are the steps you can take towards good governance within your board.
☑️ Define roles and responsibilities
Defining the roles and responsibilities of the board members is important so that everyone knows how they can contribute effectively to the governance of the organisation. However, it is also important because directors can face civil repercussions if their actions fall below the standard expected and damage the company or its stakeholders.
Everyone related to the board needs to understand their role in working towards the company’s mission, and this means creating job descriptions for each director and committee.
In addition, establish clear lines of accountability between the board and the chair, CEO and executive officers. Think about how management connects to accountability structure, too. This clarity helps the board members concentrate on their areas of expertise, working together to improve the whole.
☑️ Build a strong board of directors
The way that you build your team of directors and handle board diversity with your succession planning contributes to good governance.
The aim is to create a strong, qualified board with a range of skills, experiences, personality types and outlooks, as well as promoting diversity in terms of gender, race, age and other factors. All of these qualities and attributes ensure there are different voices and points of view in the boardroom, helping to tackle issues in innovative ways and providing a challenge for received wisdom or traditional thinking.
You must also regularly evaluate your board to ensure it is as effective as possible. A deep dive into board composition, communication, the effectiveness of meetings, independence and more can help you spot any weaknesses and address them immediately.
☑️ Balance power
The point of having a board in charge of making decisions is that you gain the benefit of those multiple voices and varying approaches in order to craft a decision that reaches a consensus.
No one should dominate the proceedings inappropriately, and there should not be one person forcing through decisions. The process should be collaborative and exhibit a balance of power across the board, with the relevant checks in place to ensure this is how it works at all times.
Good governance requires the input of your expert team to craft the right way forward for the business.
As the decision-making body, the board should be empowered to think deeply about the process.
Directors should not just understand where the company wants to or should go but also why it should work toward that goal. When the directors understand this, they can focus their decision-making more keenly.
You can also achieve better decision-making when you foster free and flowing discussions during meetings. This is the responsibility of the chair and helps board members better understand all sides of an argument before making their decision.
☑️ Promote accountability
Accountability is an important aspect of any successful corporate governance system as it helps to ensure that the board of directors is acting in the best interests of the company and its shareholders. It helps to protect the company from any potential mismanagement, fraud or abuse of authority. It also ensures that the board is making decisions based on accurate and up-to-date information and that board members are not taking any decisions that could be detrimental to the company.
To promote accountability among board members, companies should ensure that they are aware of their duties, responsibilities and authorities. As directors, they should be encouraged to take responsibility for their decisions and actions through a robust follow-up system.
☑️ Ensure transparency
The G of ESG has maybe not been talked about in the press as much as the E and the S in recent times, but the corporate governance of an organisation is still relevant to today’s sustainable investors. Yes, environmental and social issues surround us on a daily basis, but the transparency with which a board carries out its work and the accountability it exhibits matter to company stakeholders.
As seen in the Enron scandal, if board members are not transparent in their actions and motivations, this can lead to the destruction of even the mightiest of businesses. Owning that accountability and being even more transparent than is required shows strong governance and instils trust in the business.
☑️ Foster integrity
Linked to transparency, you must foster an environment of integrity within the boardroom. Being a director is a position of power and influence, which in the wrong hands, can be used for personal gain.
Although the board does not intervene in the day-to-day running of the business, they should be asking the right questions of management to ensure that a culture of integrity permeates throughout the organisation. This involves creating early-warning signs for unethical behaviour that could cause a compliance issue and lead to a loss of trust from shareholders or customers.
☑️ Encourage diversity and inclusion
A diverse board of directors can bring different cultural, economic, and social backgrounds to the table, allowing for a wider range of ideas and solutions to be considered when making decisions. Additionally, diversity and inclusion can help to foster better working relationships amongst board members and create a more fertile ground for decision-making.
To implement this good governance practice, you may start to actively seek out a diverse range of candidates, encouraging people from different backgrounds to participate. It will also help to embed diversity into your company values. This enables you to create a culture of inclusion and respect where each board member feels comfortable speaking up and voicing their ideas.
☑️ Make principled compensation decisions
Boards must balance creating compensation packages that attract suitable candidates with working toward the best interests of the organisation and its investors.
During the COVID-19 pandemic, many boards were warned against what might have been seen as extravagant compensation packages in businesses where they had laid off staff, cut pay or taken government grants funded by tax payers. In fact, Blackrock increased the number of votes it made against pay packages for this reason. Its Investment Stewardship Annual Report stated:
“We are sensitive to the need for compensation committees to reflect stakeholder matters in pay determinations, particularly when companies have received government support.”
☑️ Engage in effective risk oversight
In order to most effectively steward the organisation, the board must understand the risks that the company faces at any one time. This is a fluid process that involves regular identification and assessment of the risks across a range of risk categories.
You also need to prioritise risks and develop mitigation plans to help prevent them from affecting the business detrimentally. The role of the board could be seen as risk oversight rather than management. It should ensure the correct levers are in place and are consistent with the business, its strategy and risk appetite.
What is a good governance framework?
A good governance framework establishes a benchmark for the elements that make up good governance. It allows companies to track their performance over time to make sure they are continually evolving in the right way.
Should local governments follow good governance principles?
The principles of good governance can easily be transposed from the corporate world to local government. Transparency, qualifications, accountability and integrity are universal governance attributes that lead to better decisions.
A strong board of directors is essential for guiding businesses forward in a volatile economic environment. We hope this good governance checklist will help you facilitate the decisions that inform a company’s direction of travel. In addition, making it easier for your board to collaborate and engage with their work more effectively leads to better governance.
iBabs meeting portal helps in this aim, allowing you to visualise the levels of engagement of your board members. The more engaged they are, the better the levels of governance. Request a free demo of iBabs today to find out how it can strengthen your governance efforts.