How to best approach corporate governance compliance
In recent years, the idea of corporate governance has taken on renewed interest in the minds of business owners and decision-makers. In part, this is due to the heightened level of scrutiny public companies find themselves under from external sources. Changes in regulatory measures and the increased complexity of legislation have added to the costs and difficulties of overseeing and managing corporations.
In addition, many companies are experiencing a change in their shareholders. According to the Harvard Law School Forum on Corporate Governance and Financial Regulation, today’s shareholders expect greater engagement with boards of directors and management than shareholders have in the past. These investors want to maintain a “greater voice in the company’s strategic decision making, capital allocation, and overall corporate social responsibility.”
As Linda Henman explains in a post on Corporate Compliance Insights, strategy and successful planning address the specific “what” of a business’s action; “governance” deals with the “how.”[ii] In a corporate setting, this predominately concerns the various functions of the Board, and how the decisions made by the Board affect the rest of the company. According to the Harvard Law School Forum on Corporate Governance and Financial Regulation, one of the chief responsibilities of the Board in regard to corporate governance is the creation of strategies intended to build “sustainable, long-term value.”
Five Corporate Governance Compliance Best Practices
Given all these pressures and obligations, it is perhaps not surprising that good corporate governance can be difficult to define. Rather than a rigid or static list of instructions, it is more than likely a dynamic, ever-evolving set of conditions that varies a bit from organization to organization. That said, there seems to be a core of common attributes that typify most successful corporate governance programs. In short, those include the following:
1) An independent board not beholden to the CEO. Since the Board acts as a kind of stay on the power of the CEO and as an advisor to the CEO, it is important that it maintain a sense of independence and constructive, critical distance. Effective Board governance involves assessing the strategies put forth by the CEO, but not setting the strategies. Boards should include members who represent diversity in age, experience and background in order to optimize the vision of the company on any given subject.
As Board positions open up, the existing Board should use those opportunities to identify gaps within the current board complement and try to recruit incoming board members who can meet those needs.
An engaged Board should be willing to question and challenge the management on issues regarding company policy and strategy. The Board should also undergo regular reviews to assess whether each director is fulfilling his or her duties, and other such performance evaluations.
2) An organizational commitment to long-term planning and vision. As noted above, management is responsible for developing and implementing corporate strategy. The Board acts in an advisory role, approving those strategies that seem most likely to produce sustainable, long-term value.
As part of this duty, Board members should take lead roles in establishing the company’s risk tolerance and develop a clear, comprehensive framework for managing risk. Directors are responsible for understanding the current risk threshold facing the corporation, and must be ready to challenge management’s assumptions concerning the company’s risk management procedures.
3) A dedication to common accounting standards. The Board helps ensure the accountability of management, overseeing regular financial reports. These reports are designed to present the company’s financial condition in a fair and complete manner, disclosing to investors all details needed to assess the financial business soundness and the risks of the company.
In addition, the Board’s audit committee should retain and manage the relationship with inside and outside auditors, and oversee the company’s annual financial statement audit.
4) An active commitment to disclosure, transparency and ethical dealings. The Board is responsible for setting the overall tone of integrity and fair dealing throughout the corporation. As the final arbiter of corporate behavior, it is important that they have an active engagement in developing a set of ethical expectations for the company.
To that end, it is mandatory that directors declare any conflicts of interest and abstain from voting on matters in which they have an interest. They should also maintain policies that ensure principled compensation decisions for directors. Such fees should be suitable to attract quality candidates, but should not create an appearance of indebtedness or conflict with the director’s independence.
The idea of corporate ethics expands beyond the internal dealings of the corporation, and includes matters of social and ethical responsibility. Increasingly, consumers and investors look for corporations that take an active role in promoting social good. Corporate ethics stress the idea of growing the business while acknowledging and taking proactive measures to balance the environmental, political and social impact of the corporation’s financial dealings
5) An ongoing dialogue between Board members, senior management and all other shareholders. The Harvard Law Forum suggests that the Board “engage with long-term shareholders on issues and concerns that are of widespread interest to them and that affect the company’s long-term value creation.” Successful governance strategies must take into account the ripple effect of Board decisions and the way policies may resonate both within the company and beyond.
Effective governance programs will include appropriate ways for the Board to communicate ideas and concerns throughout the organization, and, in turn, establish and publicize safe, reliable mechanisms for employees to communicate their concerns to the Board.
While most direct engagement with customers, partners and the general public is reserved for senior management, the Board still needs to remain keenly aware of public sentiment regarding the company and must be able to take those opinions into consideration when shaping corporate strategy.
Using Technology to Facilitate Corporate Governance
The reality of corporate governance is, of course, incredibly complicated, but the ideas behind it need not be. The first steps toward better corporate governance begin at the top, but those strategies should be informed by an understanding and an engagement with the organization as a whole. For more on how you can revisit your corporation’s governance programs, contact a Diligent representative today.
