A governance framework is essential for modern governance and legal operations; it directs how people interact with the organization, with regulators and with stakeholders to closely guide and monitor operations.
Acting as a supporting structure to entity management and compliance, a governance framework provides the trunk from which the various branches of compliant operations can grow. It is through governance that companies and other organizations stay on the right side of regulators, in terms of filing requirements as well as aspects such as company culture, remuneration methods and transparency of operations.
A governance framework helps to center an organization’s approach around common themes, including who has a voice, who makes decisions and who has accountability. The governance framework acts as an essential supporting structure, a framework of rules and practices by which the board ensures accountability, fairness and transparency in both how the company runs and how it communicates with its stakeholders.
What makes a strong governance framework?
A strong governance framework organizes operational, risk management, reporting and financial processes to ensure that the board gets continually updated. Rules and systems create the robust framework for governance, and the framework provides the structure that drives the strategic plan. A strong governance framework is integral to organizational success: it helps boards make considered, data-based decisions.
A good framework can expose gaps or weaknesses within the board or management. Beyond the broad governance processes, a solid framework supports the company in numerous ways to effectively connect leadership with operations.
A governance framework is an important basic tool for effective board oversight; the process of building the framework is often just as important and meaningful as the end result. Governance brings authority and accountability while enabling effective decision-making in an organization.
The importance of governance frameworks and structures
The importance of corporate governance in today’s progressive and aggressive business environment cannot be denied. Corporate governance allows companies to put their positive traits firmly on display. With these intentions made visible to all, companies are more likely to be held accountable for their behavior and actions — and thus more willing to distance themselves from duplicity.
Businesses today are held to incredibly high standards by investors and customers alike; being honest and open about process and operations counts for a great deal. Both shareholders and consumers want to see companies operating with integrity and transparency.
Business advisory firm PwC calls corporate governance “a performance issue” as it provides a framework for how the company operates, stating that corporate governance should encompass:
- The company’s performance and the performance of the board
- The relationship between the board and executive management
- The appointment and assessment of the board’s directors
- Board membership and responsibilities
- The “ethical tone” of the company, and how the company conducts itself
- Risk management, corporate compliance and internal controls
- Communication between the board and the C-suite
- Communication with the shareholders
- Financial reporting.
This list provides a bird’s-eye view of corporate governance in action and conveys the extent to which it can influence business. To help organizations navigate corporate governance, Deloitte offers a Governance Framework that outlines the board’s objectives and responsibilities, and how they relate to the corporate governance infrastructure.
How to start building your own governance framework
Governance frameworks exist to ensure that a company remains in compliance and operates within legal boundaries. This means that any governance framework must take into account the local regulations wherever the organization has entities located. The governance framework then dictates the governance operating model appropriate to the aims of the organization.
To start building your own governance framework, aim to answer these questions:
- Who are the people with authority in your organization?
- What information do those people need to access, and when?
- What does the organizational structure look like?
- How does the structure influence how decisions are made?
- What are the organization’s reporting obligations?
- How does information need to flow around the business?
- What is the relationship between entities – and does this present any challenges in terms of accountability, authority or responsibility?
- What is the relationship between departments and stakeholders?
- Where does the organization have entities based – and does that influence obligations?
- How does the organization manage compliance risk?
Governance structure for portfolio companies
A strong governance framework is built to guide an organization in how it can achieve accountability, authority and sound decision-making. By contrast, a weak governance framework will cause a breakdown in the stages of the investment process and affect overall economic growth.
For portfolio companies, a governance structure should ensure that all shareholders are provided with the opportunity to vote on matters of governance. All shareholders should have a voice and foundational rights.
Portfolio companies should conduct business with respect for both the shareholders’ interests and the capital that has been entrusted to them.
A portfolio companies’ governance structure should take the following into account and demonstrate:
- The company’s ability to create value – and yield long-term profits – in response to demand
- The ability to facilitate investors’ predicted earnings as a result of accurate and timely disclosure
- A commitment to ethical conduct as a member of society
- A commitment to fulfilling corporate social responsibilities including, but not limited to, the organization’s environmental impact.
A portfolio company’s governance structure should seek to ensure adherence to the above commitments, as the organization carries out its responsibilities as a market participant.
Governance structure for subsidiaries
It’s natural for corporations to seek to establish new entities to fuel business growth and deal with increasingly complex regulations – but with each new entity comes a heightened need for entity management and robust subsidiary governance.
Globalization raises legal and corporate governance issues at the subsidiary level that need constant attention. To deal with this, many company secretaries and legal operations professionals turn to a subsidiary governance framework template to help get things under control. Framework templates provide guidelines and ideas to ensure both downstream and upstream corporate governance flows are robust and compliance-proof.
A subsidiary governance framework template can help to align processes while allowing wriggle room for local action. It provides the framework to allow those responsible for subsidiary governance and entity management the space to figure out what works best for them and their needs while ensuring the policies and practices generally conform to what the parent company expects.
It means the parent company can focus on group-level requirements and issues, working to grow the business further and devise long-term strategies, and the subsidiaries can work out the part they need to play and how that works at a jurisdictional level.
It’s not practical to assume the parent will take care of the regulatory and compliance needs for every subsidiary; any subsidiary governance framework template must lay out the roles and responsibilities of both the parent and each subsidiary. ICSA has developed an “at a glance” subsidiary governance framework template checklist to help corporations operating across multiple jurisdictions and business areas.
Governance structure for public entities
Once an organization makes the decision to list and go public, its compliance and governance burden is significantly increased. Now, it’s no longer just a company’s own stakeholders and potentially the local authorities keeping an eye on how the organization is running; once it lists, that organization becomes public property.
It’s opened itself up to intense scrutiny. Market fluctuations will impact its share price, but the scrutiny can impact price, too. The movements and decisions of the Board will be publicly available for access by anyone with a genuine interest, and investors will have the opportunity to ask questions and express concern about business operations.
This is why public entities need robust and sound governance practices. Strong governance can help to mitigate some of those risks, ensuring that everyone in the business — as well as the market and investors — are aware of the steps the organization is taking. It means transparency around compliance and operations is supported by clear communications, and a paper trail can lead back to the reasons for any decisions as well as the ultimate consequences.
A public entity is bound by an obligation to report to the market on a regular basis. A schedule of reporting on board meetings and accounts, any changes in management, any security breaches and so on will be expected, as well as a detailed annual report — and if they don’t get filed with the exchange then the public entity, and potentially its parent, will face sanctions and fines.
As public entities develop and monitor their governance frameworks, they are, in essence, ensuring there are clearly assigned roles and responsibilities, that those responsibilities are carried out in the right way at the right time by the right people, and that the appropriate record is filed to keep track of what has happened. And, of course, any governance framework should be subject to regular audits to ensure it’s still fit for purpose, providing the right checks and balances.
How can entity management software support governance frameworks?
Entity management software such as Diligent Entities supports the governance framework by bringing stakeholder information and entity data to a central repository that’s easily accessed from anywhere in the world.
If you’re a paper-based organization, it can be difficult to keep track of governance frameworks and ensure that everyone in the organization is both aware of and sticking to its guidance and policies. The days of filing corporate records, only to be accessed once a year for audit purposes, have been relegated to the past; technology is fueling modern legal operations.
Boards now need to shift their processes away from paper and digitize their governance systems and processes to maximize efficiency. Today’s fast-paced business climate requires boards to make swift decisions, often in real time, as market conditions shift. Modern governance solutions bring all the tools that boards need together under one secure product suite.
Diligent Entities seamlessly integrates with Diligent Boards — a board management portal that makes tracking and logging board operations and decisions much simpler — and a secure file-sharing system to create a Governance Cloud that supports and enables the smooth running of that governance framework. Get in touch and schedule a demo to see how Diligent can support your governance framework, or help you to develop the right governance framework for your organization.