Improving Your Corporate Governance Framework

What is corporate governance?

Corporate governance focuses on the rights of shareholders, the equitable treatment of shareholders, the treatment of stakeholders, disclosure and transparency and the duties of board members.  It involves systems, policies and processes for ensuring proper accountability, probity and openness in the conduct of an organisation’s business. 

Why is it important?

Good corporate governance promotes accountability of board members and management to shareholders and improves transparency and disclosure.  According to the OECD, the integrity of organisations and markets is central to the health and stability of both local and global economies.  In addition, corporate governance practices are now being looked at by rating agencies, and they have an impact on the cost of capital.

Research shows that investors from all over the world indicate will pay large premiums for companies with effective corporate governance.  A study conducted by The McKinsey Quarterly found that institutional investors in emerging market companies would be willing to pay as much as 30% more for shares in companies with good governance.  In addition, it showed that companies with better corporate governance had higher price-to-book ratios, demonstrating that investors do indeed reward good governance.

What are the critical success factors?

The success of corporate governance arrangements in an organisation will depend on both external and internal factors that include:

Regulator consultation – Whilst some organisations develop their own corporate governance systems, much of today’s corporate governance requirements are due to external regulation.  Regulators often consult formally with their industry/body and good organisations are proactive. 

Involve the right people - Involving key internal people is critical to the quality of corporate governance.

Identify needs - Good governance begins with the board re-examining its charter and committee structure, evaluating directors' competencies, and making the time commitment necessary to do an effective job.

Consider stakeholders - Directors and management must continually consider stakeholder needs.  Stakeholders include shareholders, regulators, customers, competitors and industry bodies.

Good planning – Effective planning, coordination and phasing of the corporate governance program with clear direction and leadership is important.  Planning should be followed up by ongoing support processes.

Separation - The board must maintain a fine line between itself and management, while becoming thoroughly knowledgeable about management's practices on governance-related matters such as overall compensation levels and appropriate financial incentives.

Good management - Management plays a key role in creating and maintaining the systems that encourage great governance. The CEO and senior management are responsible for balancing the competitive forces that impact a company with the need to adhere to a strict code of conduct.

Robust accounting & information systems - Senior management should consider the quality and competence of the finance staff and accounting processes to make sure that they result in quality financial reporting.  Details such as determining asset valuations and assessing the initial estimates should undergo challenge and review.

Strong oversight - Clearly defined, well-monitored internal and external audit functions are paramount to the success of corporate governance.  Internal audit functions need reexamination, as well as the quality of accounting principles and the extent of disclosure.

How is corporate governance related to risk management?

Risks exist in every business and some risks may have a detrimental affect on the organisation and ultimately its stakeholders.   Risk Management is an important component of good corporate governance.  

Risk management is the process of handling a company's exposure to risk and it is the responsibility of senior management to identify, evaluate and treat these risks to reduce the likelihood and impact of risk.  Risk oversight is a complex fiduciary task and is the responsibility of the directors.

Who is responsible for corporate governance?

Ultimately, good corporate governance is the responsibility of the board and the senior business management team.  However, involving people from the wider organisation is important because the board and management team cannot oversee every transaction, project or department. 

Involving everybody in corporate governance is achieved by developing and communicating a set of principles, policies and procedures.  These policies and procedures are forms ‘internal control’ to ensure compliance to key corporate governance and organisational objectives.   The effectiveness of these internal controls must be reviewed form time to time through an independent audit process.

What should I consider when formulating a governance framework

When putting together your governance framework, you will need to consider:

• Structure of the organisation – for example, federal or highly centralised

• Nature of the organisation's business – such as policy work or operations

• Range of business functions undertaken, and the commonalities between them

• Requirements for communication and data sharing across the business functions of the organisation and its partners

• Distribution of authority and the extent of central or local autonomy

• Procedures and responsibilities for business planning and defining business strategy

• Geographic distribution of organisational units, business functions and facilities such as IT

• Existence of corporate-wide policies, such as for purchasing and procurement

• Role and authority of cross-divisional structures (for example, steering groups) in the organisation and its partners

• Extent to which standards are enforced across the organisation

• Extent to which work processes are common across the organisation

• Internal control & security policies.

What are some principles to good corporate governance?

In 2004, the OECD released its Principles of Corporate Governance which is intended to assist OECD and non-OECD governments in their efforts to evaluate and improve the legal, institutional and regulatory framework for corporate governance in their countries, and to provide guidance and suggestions for stock exchanges, investors, corporations, and other parties that have a role in the process of developing good corporate governance.  The principles are:

Ensuring the Basis for an Effective Corporate Governance Framework - The corporate governance framework should promote transparent and efficient markets, be consistent with the rule of law and clearly articulate the division of responsibilities among different supervisory, regulatory and enforcement authorities.

The Rights of Shareholders and Key Ownership Functions - The corporate governance framework should protect and facilitate the exercise of shareholders’ rights.

The Equitable Treatment of Shareholders - The corporate governance framework should ensure the equitable treatment of all shareholders, including minority and foreign shareholders. All shareholders should have the opportunity to obtain effective redress for violation of their rights.

The Role of Stakeholders in Corporate Governance - The corporate governance framework should recognise the rights of stakeholders established by law or through mutual agreements and encourage active co-operation between corporations and stakeholders in creating wealth, jobs, and the sustainability of financially sound enterprises.

Disclosure and Transparency - The corporate governance framework should ensure that timely and accurate disclosure is made on all material matters regarding the corporation, including the financial situation, performance, ownership, and governance of the company.

The Responsibilities of the Board - The corporate governance framework should ensure the strategic guidance of the company, the effective monitoring of management by the board, and the board’s accountability to the company and the shareholders.