How Does Corporate Governance Work?
The company’s board of directors establishes corporate governance frameworks, rules, and processes for organizational conduct. The board also has to ensure that corporate governance policies comply with external regulations, such as laws set by the government.
As a company’s governing body, the board has the power and authority to manage a company’s business. Board members have a fiduciary responsibility to ensure they act in the company’s best interests and provide beneficial outcomes for its shareholders.
Boards usually delegate authority to an executive team, which oversees day-to-day operations. Some responsibilities that cannot be delegated include advising the chief executive officer, monitoring the company’s financial structure and reporting, deciding on major transactions and changes in control, and overseeing strategy, performance, and risk management. Although the board mainly handles high-level governance, sometimes management issues can arise—especially if the company is in the middle of a crisis.
Establishing the Framework for Strong Corporate Governance
Have an Effective Board of Directors
Seeing as the board is in charge of many aspects of corporate governance such as business policies and rules of conduct, having a strong board of directors is imperative to good governance. The performance of these qualified directors should be evaluated as well to ensure company goals and strategic priorities are being met.
The directors that make up the board should be knowledgeable and have expertise relating to your business. Board members should also be ethical, diverse, and hardworking to ensure they can commit to their duties.
The board should also be independent of the management team. This means that board members will be able to make decisions objectively and consider all aspects of the situation rather than risk making a biased decision.
In addition to being knowledgeable and objective, board members should also be engaged. Being independent of management allows the board to challenge decisions and ask questions to ensure due process is followed.
If there are gaps in your current board of directors, identify which qualities or characteristics would be ideal to fill a vacancy. It is wise to keep a list of potential candidates to fill spots on the board of directors if needed.
Educating your board of directors is also crucial to a well-functioning board. Once board members are familiar with their duties as well as your business, they can make better-informed decisions.
To ensure the board of directors—and thus corporate governance and business policies—are effective, you must clearly establish the roles and responsibilities of individual board members. This holds individual members accountable and increases the probability that the board will be more effective.
You can do this by creating written mandates for the board as well as any committees. This will set out any duties and responsibilities that may need to be accomplished. In addition to these mandates, you can include descriptions of roles for the board chair, board committees, or the CEO and other executive officers. It is important to note the difference between the board chair and the CEO; while the board chair leads the board to ensure the company’s long-term interests are being met, the CEO leads the management team to develop and implement business strategies. The CEO reports to the board as a whole.
Delegating certain tasks to committees made up of board members can be effective as well. Typically, businesses have committees that handle audits, nominations, compensation, and corporate governance. Special ad-hoc committees can also be formed for certain needs as they arise.
Your company’s values should be emphasized at the board table. Seeing as the board makes decisions on governance-related issues and strategic priorities, it is important to ensure your company’s values are reflected in every decision.
This can also extend to ensuring board and company decisions are made with integrity. For example, directors should declare conflicts of interest and refrain from voting if any biases come to light. The board, as well as management, should also ensure their decisions are adhering to the law as well as any company policies. To ensure these policies are known and followed, a specific person or committee could be assigned the responsibility of overseeing and managing these policies to help hold everyone accountable.
Use Effective Risk Management
Every company faces risks—that is why it is important to know how to mitigate them. Risks can be financial, operational, reputational, environmental, industry-related, or legal, and it is up to companies to regularly identify and assess these risks.
The board of directors oversee risk-management for the company and is responsible for strategic leadership regarding issues such as risk tolerance. Developing and reviewing adequate systems and policies for management to identify, assess, mitigate, monitor, and report risk is part of the board’s responsibilities.
The board of directors is also responsible for understanding both short and long-term risks that a company might face as well as the resulting consequence. Along with reviewing the policies surrounding risk management, the board should regularly question management’s practices and assumptions, acting as checks and balances to ensure better risk mitigation.