Governance is a term often liberally used, but not always well understood. Good corporate governance is often attributed to well run and successful companies, but who is doing what to achieve such outcomes is not always obvious. Is this then a “nice to have” corporate compliance overhead that allows boards to tick the box? Or is it an essential factor in influencing the success of high performing companies?
The answer is that when done well, it should achieve both outcomes and more.
One of the simplest definitions of governance describes it as a system through which corporations are directed and controlled, and by which they exercise authority. In effect, it describes and manages the relationships between a company’s board, management, shareholders and other stakeholders through a framework of rules, systems, processes and responsibilities that add value to the company, and bring economic and social benefit to its stakeholders (the shareholders, customers, staff and wider community).
Within the corporate environment it provides a framework through which the objectives of the company are set, a vision and plan created and then delegated to management to achieve. It then focuses on how management’s performance toward achieving those objectives are measured and monitored. In short, governance is about steering the company toward its goals and objectives.
The board of directors, which is the chief owner of governance in a corporate entity, is responsible for setting the strategic direction of a company and then empowering and monitoring the management of the company to achieve it. It establishes the rule of governance by putting in place a framework which:
- Determines the purpose and objectives of the company and the strategy it will employ to achieve them.
- Establishes a high performing team culture at the Board level, committed to engaged and quality governance of the entity. Through constructive debate, diversity, challenge and dissent the board seeks to consider multiple perspectives and add value to decision making.
- Holds management to account through informed oversight without getting involved in the job of management.
- Ensures the company is compliant with regulatory and legislative requirements, and seeks to minimise risk to the business by constant identification and management of issues
The governance framework is established to achieve the business objectives as efficiently as possible, whilst doing it in a way that still protects and serves the interests of the shareholders, staff and the wider community. This means the company should unashamedly strive for and achieve financial and business success, increasing its economic value in the process. But in doing so it should also benefit its employees and enhance the community in which it serves, both locally and globally. This means balancing company goals with communal goals, and economic goals with social concerns.
Current business thinking maintains that it is not simply enough for boards to aim to adhere to and achieve the corporate governance framework. They must look to go beyond compliance, and establish new levels of best practice in the way the business operates and interacts with its environment. The governance framework then ceases to be a passively compliant feature of the corporate machine, and instead becomes a dynamically active and energizing force for positive change. Through this the company is able to add value to its customers, staff and stakeholders and enhance the wider community and environment in which it operates.