It is imperative to say companies need to improve corporate governance. In the absence of effective governance, companies will suffer financial, legal and reputational harm. From the risk perspective, there is no greater risk to a company than poor governance.
To improve, governance, here are 10 basic steps:
Conformity (i.e. compliance with legislation, regulation and codes of practice) has to balance itself with performance. This is the job of the Board. One can achieve this by robust strategy and policies. The Board needs to elaborate its position and understanding of the major functions it performs as opposed to those performed by management.
Knowing the role of the board and the duties with respect to governance will take the company a long way towards maintaining a good relationship between all the stakeholders. This also increases a culture of trust in the company.
The Nominating Committee should devote adequate time to identify board members who have the skills and industry knowledge to assist the board. That does not mean that there is only one type of board member who would qualify. There should be a balance between those board members who know the organization, those board members who have a helpful expertise and those that offer a fresh perspective.
What is important for a board is that it has a good understanding of what skills it has and those skills it requires. A board candidate should also be evaluated on his or her interpersonal skills since board interactions and relationships will be important to overall board performance.
Monitoring organisational performance is an essential board function and ensuring legal compliance is a major aspect of the board’s monitoring role. It ensures that corporate decision making is consistent with the strategy of the organisation and with owners’ expectations. This is best done by identifying the organisation’s key performance drivers and establishing appropriate measures for determining success. As a board, the directors should establish an agreed format for the reports they monitor to ensure that all matters that should be reported are in fact reported.
One of the most important functions of the Board is to find and appoint a competent CEO. They should continuously review and monitor the CEO. This relationship is crucial to effective corporate governance because it is the link between the board’s role in determining the organisation’s strategic direction and management’s role in achieving corporate objectives.
Every board should establish an effective system for risk oversight and management. “Risk” is not confined to compliance risks. It is a broader term which incorporates all of the risks to the company – e.g. financial risks, global warming, cyber-security, and other risks outside the compliance with law and policy requirements. Effective risk management leads to better decision-making and accurate cost-benefit or risk-reward decisions.
Better information results in good decisions. Briefings, presentations, site visits, individual director development programs, and so on can all provide directors with additional information. Above all, directors need to be able to find answers to the questions they have, so an access to independent professional advice policy is recommended.
Boards must be willing to examine their own strengths and weaknesses. On a regular basis, the board should conduct a self-evaluation process, including the performance of individual directors. The evaluation process should be used to identify weaknesses in board performance, and adopt reforms needed to improve board performance. The evaluation should be broad, cut across all issues and personnel and include senior management interactions with board members.
The chairman of the Board creates the required culture and trust required in an organization. The “leader” of the Board should demonstrate leadership abilities, sharp acumen and strong professional ethics. Thus, it helps them establish a sound relationship with the CEO, and have the capacity to conduct meetings and lead group decision-making processes.
Routinely evaluate the composition of the Board, not just the performance of the directors. As the direction and strategy of the organization shift, so should the skills and experiences of the directors. Ask the Board to conduct separate evaluations of key executives at least once a year, but seek timely feedback in executive sessions or private conversations. Above all, don’t create materials that can be subpoenaed.
Having a good grasp of corporate governance comes down to who you actually trust. If you are a director of an organisation you have legal responsibility for what goes on in the boardroom so find out who you can trust within that room. Investing time and effort in understanding the charters of the board will help you do this.
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