Governance is the process by which corporations establish their rules and policies and implement and monitor them. Good governance has a variety of important characteristics, and it can mean different things to different people. Groups and individuals that hold positions of power must have a sense of accountability and a mode of checks and balances if they want to govern successfully.
As it relates to corporations, good governance typically leads corporations to achieve their goals. In successfully fulfilling their mission and plans, corporations that embrace good corporate principles will enhance the company’s prosperity and find favor in the eyes of their shareholders.
One of the first forms of governance was the monarchy. Since then, many other different forms of governance have emerged. In addition to formal types of governance, people in our society sometimes create their own versions of informal governance practices. A couple of notable examples are mobs or the mafia. A powerful member of the family could also govern others in how they live and behave. Informal governance practices have taught us much about the importance of checks and balances and about how governance without accountability can lead to fraud and corruption.
What Constitutes Good Governance
Good governance has nine major characteristics:
- Consensus oriented
- Effective and efficient
- Equitable and inclusive
- Follows the rule of law
- Strategic vision
Good corporate governance sets the tone and environment for all individuals to have a voice, whether they’re a majority or a minority. Good governance holds that many perspectives combine to result in the best possible decision-making. Good governance is important for the way it impacts today’s decision-making, as well as how it impacts the decision-making of the future.
Use this free checklist to evaluate where your organization boasts best-in-class governance practices:
Nine Characteristics of Good Governance
Best practices for good corporate governance include highlighting the importance of multiple perspectives in the boardroom. Historically, men have held board positions. As women have risen as leaders in the corporate world, governance experts have seen the value of having gender and ethnic diversity on corporate boards. Some boards have responded to pressure to add women and members of ethnic groups to their boards by increasing the number of board seats in order to give the appearance of diversity. Tokenism has become a common practice in business, but it’s not an acceptable practice as part of good corporate governance. Strong, well-composed boards include a variety of people, skills, talents, abilities, experiences and perspectives.
Boards should expect all of their members to participate in board meetings, and board chairs should facilitate meetings in ways that draw out the perspectives of all board directors, especially the quiet ones.
The boardroom is an appropriate forum for hosting robust discussions and debates. In fact, it’s expected. Some of the most heated debates result in the best decisions. Representatives from many different walks of life come together with varying perspectives. They represent various historical, cultural and social contexts of their lives and experiences. A broad consensus typically serves the best interests of communities and companies.
Accountability is a key corporate governance best practice just as it is in many other areas of business and societal life. Boards of directors are accountable to groups and individuals who are affected by their decisions, including their shareholders, stakeholders, vendors, employees and the general public.
Transparency and the rule of law go hand-in-hand with accountability.
Good corporate governance requires that records and processes are transparent and available to shareholders and stakeholders. Financial records should not be inflated or exaggerated. They should be presented to shareholders and stakeholders in ways such that they can understand and interpret the findings. Transparency means that stakeholders should be informed of whom the contact is that can answer questions and explain reports, if necessary. Corporations should provide enough information in their reports so that readers get a complete view of the issues.
The corporate world can often become overtaken with crises and controversies in record time. Corporations that practice good governance are usually able to find time to better communicate to shareholders and stakeholders within a reasonable timeframe and in ways that enable them to provide honest answers to the direction of the organization.
Effectiveness and Efficiency
As planners and overseers, board directors have a responsibility to conduct their duties effectively and efficiently. Effectiveness and efficiency pertain to material resources and time. Many corporations also consider the impact on the environment as they perform their duties and responsibilities. One example of effectiveness and efficiency is the trend of corporations transitioning from manual paper processes to environmentally friendly enterprise governance management software solutions, such as the integrated suite of tools provided by Governance Cloud.
Equity and Inclusiveness
Each board director has an equal seat at the board table. Each director can and should use their voice to share their experiences, opinions and philosophies to enhance and broaden discussions. No one should feel left out or feel that their opinions have less meaning than others.
Rule of Law
The rule of law means boards should be fair and impartial in their collaborations and in their decision-making. Certain circumstances may require boards to seek outside counsel, guidance or expertise from outside, third-party experts. Good corporate governance requires boards to act ethically, honestly and with the utmost integrity.
One of the primary responsibilities of board directors is strategic planning, which includes the mission, vision and values statements. The process of strategic planning leads boards to understand where the corporation is going and exactly how they will get there. Planning incorporates action plans, budgets, operating plans, analysis, reporting and much more. Strategic planning is a coordinated and systematic plan for the short- and long-term direction of the company. The strategic plan holds board members accountable for their decisions and for monitoring their goals. Strategic planning also includes risk management and protecting the company’s reputation.
Wrapping Up Thoughts on Good Corporate Governance
Because good corporate governance is so multifaceted, it can be difficult to conceptualize and to achieve in its totality. However, good corporate governance is an ideal that continues to evolve as businesses evolve. Every corporation should strive to master the basic principles of good corporate governance.