Change is usually an unsettling thing for most people — at least in the beginning. After the realization that change is going to happen settles in, it’s easier to let it go and start looking at the opportunities that change can present. There’s no worry about things being static in today’s volatile corporate marketplace. That means there’s plenty of opportunity to improve on governance frameworks.
One of the struggles for boards and managers is understanding how their roles need to change and adapt to meet the demands of shareholders and stakeholders. Executives and managers are aware of the increased pressure and scrutiny that boards are under. One of the new issues they’re struggling with is what information they should be giving the board as they fulfill their responsibilities to help move the company forward.
In putting the pieces of a governance model together, it helps to think of it as constructing a building. In construction, the first thing you lay out is the infrastructure. This is the underlying base and foundation. The governance framework is the support system. In a house or commercial building, this is equivalent to the stud walls and roofing. When the plumbers, electricians, HVAC and other tradespeople have completed their work, you have an operating model. But it’s not quite finished yet. There are still all the details to put into place like flooring, trim work, doors, paint, appliances, etc. When the building is totally finished, everything works well and it’s ready for occupants. All that’s left to do is monitor all the systems to make sure they’re safe and working properly.
A governance model works much the same way. It needs a solid infrastructure, a sturdy governance framework, and a functioning and reliable operating system. Just as every building is different and built according to the purpose it serves, there is no one-size-fits-all approach to the right governance framework.
Benefits of a Governance Model
Governance models are highly complex and greatly interconnected. The power of a governance model rests in how customized and specific the model is. The challenge for boards is much like some of the challenges that architects have in translating written plans into a working, physical model. Boards need to figure out how to translate governance principles into corporate wide practices.
Just as an efficiently built dwelling provides comfort and utility, a good governance model provides many benefits as well.
A well-designed governance model will improve clarity. It will outline the roles, guidelines, responsibilities, accountabilities and flow of information. A good model gives boards clear vision on management’s decision-making and risk management process. Another benefit of a good governance model is that it alleviates some of the frustration between management and the board by specifying the types of risks and exposures that the board needs to get from management.
Designing an Effective Governance Model
A well-defined governance model will help boards make decisions about coordinating the company’s departments and which parts of the company are better centralized or decentralized. Finally, a governance model supports effectiveness by specifying how the board and its committees will get information. The model will outline the governance and risks processes, and the board is responsible for ensuring that those processes are carried out in a responsible manner.
In designing an effective governance model, first consider the infrastructure that forms the base of people, processes and technology. This part of the model incorporates processes to accumulate information and report it to the shareholders, stakeholders and board directors. The framework considers developing a risk culture and establishing areas of board oversight.
Developing a Risk Culture
Risk and culture lie at the core of the framework, and they influence and impact effectiveness throughout all the other governance parts. Boards need to find a way to develop a risk-intelligent culture across the operating model. The risk culture will determine how the board manages risk and how closely the rest of the organization pays attention to the guidelines.
How will boards know if they’ve been successful in developing a risk-intelligent culture? Throughout the company, they’ll be able to detect it in the commonality of purpose, which means that it will be ingrained in the company’s values and ethics and aligned with the organization’s risk strategy, risk appetite and risk tolerance. Throughout the organization they’ll be using the same risk vocabulary and communicating about risks in a transparent and timely manner. Across the company, individuals and teams will understand the value of risk management and consider it in all activities. Individuals and groups will take responsibility for risk and continually improve their ability to manage it.
Areas of Board Involvement or Strong Oversight
Boards have certain areas where they need to provide strong oversight. These areas include governance — and that includes the board’s structure and composition. Boards also need to exercise strong oversight with strategy, performance and talent. These are areas that the board can’t delegate to management.
Additional areas where boards need to provide initial oversight to be sure things are in proper working order and then monitor after that are planning, compliance, reporting and operations.
Developing a Governance Framework with the Help of Technology
The overall benefit of developing an efficient governance framework is that it gives the board and its committees confidence in executing their responsibilities. Boards have to consider their governance framework as a work in progress and be willing to adapt it as changes in the marketplace occur.
That’s the beauty of using a board management software program to develop a sound governance framework. Board management software like Diligent Boards and the suite of software solutions that comprise Governance Cloud give boards the tools, data and insights to properly oversee every important area of governance. Having access to real-time information around competitive news and regulatory filings gives them a competitive edge to demonstrate due diligence of their board responsibilities.
Diligent Corporation takes a modern approach to developing governance frameworks with digital tools that motivate board directors to tackle change with confidence.