Good governance is a business essential. All companies and organizations are in competition to attract and retain the most qualified board directors. Shareholders and stakeholders expect nominating and governance committees to do their due diligence in identifying and appointing top talent to serve on the board of directors. Boards should continually be preparing for the next stage of growth and development as they seek the right board directors and managers to lead the company.
All companies and organizations should practice good governance, not just public companies or large companies. Good governance doesn’t have to look exactly the same in all organizations. In fact, it’s better if it doesn’t look the same. Good governance practices should be customized to the needs of the organization. Try to think of it in terms of “right-sizing” the board.
Good governance has a positive impact on the performance and long-term viability of every company, and the nominating and governance committee plays a strong role in that capacity.
Basics of Corporate Governance
Governance experts have long struggled to form an exact definition of governance. McInnes Cooper describes the definition broadly as, “The processes, practices and structures through which a company manages its business and affairs and works to meet its financial, operational and strategic objectives and achieve long-term sustainability.”
Corporate governance is based on the law as it’s outlined in statutes. Securities laws and policies, as applicable, also help to define corporate governance. When issues have been uncertain, court decisions and securities regulators have given the final word on what’s right.
Fiduciary duties play a vital role in corporate governance best practices. This is mostly because when board directors fulfill their fiduciary duties to the best of their ability, good governance happens as a consequence of their actions. Finally, good governance principles are also shaped by the stock exchanges, the media, the shareholders and special interest groups.
Relevant Factors in Corporate Governance Best Practices
The objective of corporate governance is to promote strong, viable and competitive corporations that understand their responsibility to remain accountable to their stakeholders. There are no uniform, comprehensive sets of governance policies or practices — only general guidelines.
The broadness of approaches to good corporate governance is by design. Flexibility allows companies to consider the nature of their business or industry, the company’s size, the stage of the business’s development, the availability of resources, shareholder expectations, and the applicable legal and regulatory requirements.
There are many benefits to following best practices for good governance. There is a distinct connection between good corporate governance and long-term shareholder value. Long-term benefits are a high-performing board, accountable management, strong internal controls, increased shareholder engagement, better risk management, and monitoring and measuring performance.
Top 5 Corporate Governance Best Practices
To get the best results, companies must design and implement best practices that comply with legal requirements and also meet the needs of the company.
Here are the top five corporate governance best practices:
- Build a strong, well-composed board and continually evaluate their performance.
Board directors should have knowledge and expertise related to their business. All board directors should be qualified, competent, and have a strong sense of ethics and integrity. In evaluating board director candidates, committees should identify gaps in the current board’s skills and ensure that newly formed boards will have diverse backgrounds and skill sets.
In addition, committees should consider whether board director candidates have sufficient time to commit to their duties and not be overloaded because of personal duties, business responsibilities or the duties of boards.
Nominating and governance committees should keep a pipeline of potential board candidates ready to fill board vacancies at a moment’s notice. Committees should keep in mind that the majority of board candidates should be independent and should also have the qualities and characteristics that other board directors will value.
Among the listed qualities, nominating and governance committees should consider board directors who refuse to rubber-stamp management’s recommendations and be willing to gain information by asking challenging questions. Building a strong board also considers giving good board orientations, ongoing board director education and annual self-evaluations.
- Define roles and responsibilities.
Best practices for defining the role and responsibilities of nominating and governance committees suggest that boards should create a written mandate of the committee’s duties and expectations. Boards may choose to assign duties for nominations and governance to other groups or special committees. For instance, it’s common for boards to assign the task of writing descriptions and expectations for all positions to the nominating and governance committee. Current standards encourage separating the CEO and Board Chair positions.
- Emphasize integrity and ethical dealing.
Board directors should hold ethics and integrity at the highest level, which means declaring conflicts of interest and not voting on matters where they have any sort of conflict of interest. In addition to a clear conflict of interest policy, boards should also adopt a code of business conduct and a whistleblower policy, along with describing the process for reporting violations with the policies. Nominating and governance committees are often the oversight group over these policies.
- Evaluate performance and make principled compensation decisions.
The committee should set directors’ fees that will bring suitable candidates forth, establish measurable performance targets and regularly assess their performance. Boards may also opt to form a compensation committee composed of independent board directors who accept responsibility for developing and monitoring compensation plans.
- Engage in effective risk management.
Risk management often falls under best practices for nominating and governance committees. This includes the areas of financial, operational, reputational, environmental, industry and legal risks. Risk management also includes developing a risk tolerance plan and developing a framework for managing risk. The committee should develop clear accountabilities for risk management and factor in the short- and long-term plans for risk management. The committee should be willing to challenge management’s views on how adequate the processes and procedures are for risk management.
Board management software is a valuable tool for nominating and governance committees. The platform provides a secure online space where committee members can collaborate on succession planning all year long. Committee members have remote access to the platform and can access documents at any time using the electronic device of their choosing. With a Diligent board management software platform nominating and governance committees can be assured that they’re ready for the next stage of the company’s growth.