The Six Steps to Better Corporate Governance
Justin Moran, Director, Risk & Internal Controls, Mazars, explains why private sector boards need to develop a sharper focus on corporate governance issues.
The benefits of effective governance for private sector companies includes more strategic thinking, improved decision making processes, proactive risk management and, ultimately, leveraging investment and capital at more competitive rates.
Yet, many private sector companies not subject to regulation operate outside any mandatory governance codes. Findings from Mazar’s “Corporate Governance Matters Survey 2017”, indicates that 60 percent of respondents (from the SME sector) say they don’t have formalised, well-structured corporate governance processes in place.
For SMEs and large companies, this places a significant burden on the board of directors. The present business environment also means that the board must:
- Be more proactive in the establishment and monitoring of strategy, including those objectives which underpin growth.
- Assess how well the organisation is positioned to attract and retain the skills and resources necessary to deliver the strategy.
- Remain alert to developments in competition and innovation.
- Be aware of new and emerging trends in the use of technology and data, digital marketing and social media.
- Identify and monitor risks as they develop and emerge including financial, operational and compliance-based risks.
Overall, board effectiveness plays a key role in ensuring that companies are adequately positioned to face these challenges and opportunities.
Improve board performance and outcomes
To enhance board effectiveness and outcomes, private sector companies should consider the following elements within an overall governance framework.
1. Aligning the governance structure with the growth of the company
Identifying where the company is positioned within the corporate lifecycle is key to determining its governance needs. It is imperative that companies strike a balance between what has been effective in achieving their success so far, and what strategies can sustain longer term success. If the governance approach results in too much bureaucracy, organisations will inadvertently create a potential downside risk.
2. Identify and promote the intangible asset of culture
One of the significant challenges facing boards is identifying how to strike the right balance when seeking to understand and develop the intangible asset of culture.
Boards can start by asking: what are the vision, mission and values of the organisation and how well are these articulated? What behaviours are desired and undesired within the organisation? How is the ‘tone at the top’ set and is it permeating throughout the organisation? When considering these questions, the board should assess the type of culture that is desired and suited to their implementation of governance measures relative to their position in the corporate lifecycle.
3. Board composition and structure
It is well recognised that not having the correct people with the necessary skills is a huge impediment to development as a board. While its effect on boardroom behaviour and culture should not be underestimated, any private sector enterprise seeking to grow new markets, build wider networks and harness experience based on a proven track record must carefully evaluate whether the board has the necessary skills in place.
A key step is to invite external directors (non-executive directors) onto the board. More diverse board composition generates a significant impetus towards better governance and is likely to have a significant impact on the culture of boardroom decision-making.
4. Maintaining the appropriate balance of formal processes
It is important that the board implement a combination of both formal and informal processes, which are reflective of the maturity and culture of the organisation. Examples of key formal processes include setting a board agenda that does not focus purely upon short-term objectives. The agenda should be set by the chair and should also be informed by input from non-executive director(s) where required.
Risk and opportunity management (ROM) should be embedded within board agenda to promote engagement and discussion on scenarios that impact upon the organisational strategy and objectives.
Larger businesses also look to add independent assurance activities, such as internal audit, to help facilitate the initial development of risk management processes and ultimately provide value added advice on how well those risks and opportunities are being managed and monitored.
Board meetings should be adequately chaired, engaging and ultimately add value to the organisation. It is hugely counterproductive if meetings evolve into ‘talking shops’ without effective decision making processes. Distribution of the agenda should allow adequate time for board members to consider the agenda and review the supporting board pack. This will maximise the effectiveness of the meetings.
High quality and up-to-date management information, which helps the board understand and analyse key performance data and indicators, should be used.
A clear understanding and focus upon performance data can underpin the board’s role in setting and monitoring CEO and executive level performance objectives and the approach to remuneration.
5. The importance of informal processes
Many boards often overlook what may be considered ‘informal processes’ when seeking to improve board effectiveness. It should be remembered that board conduct, decision-making and effectiveness are dependent on a combination of factors including relationships, teamwork and communication. Investment of time and commitment in building strong relationships among board members will normally lead to improved outputs and performance.
6. Private Sector governance codes
The UK Corporate Governance Code is primarily aimed at listed companies rather than SMEs or larger unlisted companies. While it is recognised as the leading corporate governance framework, it may not always be suited to organisations that require different considerations to function cohesively.
The NSAI Swift 3000 code provides an alternative governance framework and involves rigorous assessment of the board in areas including appointment, composition, competence, independence, remuneration, information, reporting, accountability and audit.
Justin Moran can be contacted at: Tel: 01 449 4461 or Email: firstname.lastname@example.org
This article first appeared in the Sunday Business Post March 19th 2017.