Question

What are some ways to have good corporate governance systems in place? Provide two examples of corporate governance systems in the real world.

Answer 1

Answer:

Corporate Governance Systems:

Corporate governance is the system of rules, practices, and processes by which a firm is directed and controlled. Corporate governance essentially involves balancing the interests of a company's many stakeholders, such as shareholders, senior management executives, customers, suppliers, financiers, the government, and the community. Since corporate governance also provides the framework for attaining a company's objectives, it encompasses practically every sphere of management, from action plans and internal controls to performance measurement and corporate disclosure.

KEY Points:

• Corporate governance is the structure of rules, practices, and processes used to direct and manage a company.
• A company's board of directors is the primary force influencing corporate governance.
• Bad corporate governance can cast doubt on a company's reliability, integrity, and transparency, which can impact its financial health.

Seven Characterstics of Good Corporate Governance:

• Clear Organizational Strategy. Good corporate governance starts with a clear strategy for the organization.
• Effective Risk Management.
• Discipline and Commitment.
• Fairness to Employees and Customers
• Transparency and Information Sharing
• Corporate Social Responsibility
• Regular Self-Evaluation.

Some ways to have good corporate governance systems in place:

1. Build a strong, qualified board of directors and evaluate performance. Boards should be comprised of directors who are knowledgeable and have expertise relevant to the business and are qualified and competent, and have strong ethics and integrity, diverse backgrounds and skill sets, and sufficient time to commit to their duties. How do you build – and keep – such a Board?
   • Identify gaps in the current director complement and the ideal qualities and characteristics, and keep an “ever-green” list of suitable candidates to fill Board vacancies.
   • The majority of directors should be independent: not a member of management and without any direct or indirect material relationship that could interfere with their judgment.
   • Develop an engaged Board where directors ask questions and challenge management and don’t just “rubber-stamp” management’s recommendations.
   • Educate them. Give new directors an orientation to familiarize them with the business, their duties and the Board’s expectations; reserve time in Board meetings for on-going education about the business and governance matters.
   • Regularly review Board mandates to assess whether Directors are fulfilling their duties, and undertake meaningful evaluations of their performance.
     
2. Define roles and responsibilities. Establish clear lines of accountability among the Board, Chair, CEO, Executive Officers and management:
   • Create written mandates for the Board and each committee setting out their duties and accountabilities.
   • Delegate certain responsibilities to a sub-group of directors. Typical committees include: audit, nominating, compensation and corporate governance committees and “special committees” formed to evaluate proposed transactions or opportunities.
   • Develop written position descriptions for the Board Chair, Board committees, the CEO and executive officers.
   • Separate the roles of the Board Chair and the CEO: the Chair leads the Board and ensures it’s acting in the company’s long-term best interests; the CEO leads management, develops and implements business strategy and reports to the Board.
       
3. Emphasize integrity and ethical dealing. Not only must directors declare conflicts of interest and refrain from voting on matters in which they have an interest, but a general culture of integrity in business dealing and of respect and compliance with laws and policies without fear of recrimination is critical. To create and cultivate this culture:
   • Adopt a conflict of interest policy, a code of business conduct setting out the company’s requirements and process to report and deal with non-compliance, and a Whistleblower policy.
   • Make someone responsible for oversight and management of these policies and procedures.
       
4. Evaluate performance and make principled compensation decisions. The Board should:
   • Set directors’ fees that will attract suitable candidates, but won’t create an appearance of conflict in a director’s independence or discharge of her duties.
   • Establish measurable performance targets for executive officers (including the CEO), regularly assess and evaluate their performance against them and tie compensation to performance.
   • Establish a Compensation Committee comprised of independent directors to develop and oversee executive compensation plans (including equity-based ones like stock option plans).
       
5. Engage in effective risk management. Companies should regularly identify and assess the risks they face, including financial, operational, reputational, environmental, industry-related, and legal risks:
   • The Board is responsible for strategic leadership in establishing the company’s risk tolerance and developing a framework and clear accountabilities for managing risk. It should regularly review the adequacy of the systems and controls management puts in place to identify, assess, mitigate and monitor risk and the sufficiency of its reporting.
   • Directors are responsible to understand the current and emerging short and long-term risks the company faces and the performance implications. They should challenge management’s assumptions and the adequacy of the company’s risk management processes and procedures.

Examples of Good Corporate Governance:

Financial Management

One of the main applications of corporate governance to small businesses is transparency of financial practices and controls placed on how transactions occur. If the business has investors or partners, your governance practices should include preparing and distributing regular financial updates. This might include providing monthly or quarterly reports, or allowing key stakeholders access to view reports such as the business’s balance sheet, cash flow statements or profit-and-loss reports. Placing restrictions on how much money an individual can spend on a single transaction, requiring internal and external financial audits and requiring multiple signatures by owners on checks over a certain amount are other examples of corporate governance.

Conflict of Interest

Board members, partners, owners and key executives should sign conflict-of-interest disclosure statements as part of any company’s corporate governance. In addition, they should agree to abide by conflict-of-interest policies, such as disclosing outside business relationships with vendors, suppliers, clients and customers and personal or family relationships to these parties or job applicants.

Hiring Practices

As part of good public relations, corporate social responsibility and meeting any state or federal hiring guidelines, corporations should write and publicize hiring statements that assert the company’s commitment to fair hiring practices and non-discrimination. This statement should be the basis for providing the company’s hiring manager with goals for recruiting, screening and hiring staff. Using guidelines from the Equal Employment Opportunities Commission is a good way to start developing governance policies for hiring practices.

Board Role

Board members cannot claim ignorance of illegal behaviors by their employees if they do not exercise reasonable care in the exercise of their duties, which includes monitoring the activities of the company’s management and setting policies to limit negative behaviors. Board members should also place limits on their own activities. For these reasons, corporate governance includes specifying the roles and responsibilities of the board of directors. This might include spelling out the duties of individual board members; their role in the day-to-day management of the company or limiting that role; their authority over the company CEO or president; ethics, code-of-conduct and conflict-of-interest rules; and authority to make major strategic decisions, such as acquiring new businesses or closing the business.