Governance

‘Governance is more than compliance’

Regulations, legal standards and compliance are part of operational accountability.

Every organisation should be able to demonstrate how it complies with a recognised code of governance and have a clear action plan for areas of development. There should be a transparent process for providing evidence, assurance and assessment. The organisation should document in detail how it is complying with the code and applying its principles.

Codes can be frustrating and complex, but they exist to help organisations to remain resilient should something go wrong.

Making organisations accountable to their stakeholders should be the most effective way of ensuring a sustainable and future-proofed operation. ‘We do it because we have to’ is not the right approach, however. Instead, organisations must examine whether their governance and compliance strategy is geared towards implementing and supporting the right behaviours on behalf of the stakeholders (including employees). Boards need to accept that regulatory requirements are not the only consideration, because what looks good on paper might not always be sufficient or happening in practice.

‘Oversight requires good behaviour and diversity’

Every organisation should have a board comprised of members who are skilled, competent and diverse. The board should have oversight and the strength to challenge key business decisions.

The makeup of the board and the development and behaviour of its members are vital to effective governance. To improve their effectiveness, boards must:

• each year, undertake a thorough and reliable annual evaluation of their effectiveness; and
• every three years, seek externally facilitated, independent, professional support to identify areas for improvement.

Diversity – a key driver of board effectiveness - is about more than gender and ethnicity. It also extends to background and specialisms or skills. A truly diverse board will have a much broader, and more useful, perspective than a board made up of people from similar backgrounds and life experiences.

The makeup of a board can reflect and challenge an organisation’s priorities. A culture in which the board is not afraid to evolve and question itself will eventually become the culture of the organisation’s wider workforce. Best practice tells us that remuneration should be tied to reinforcing the right behaviours both at a workforce and board-member level.

Section 172 of the Companies Act 2006 defines success as ‘promoting the interests of shareholders while taking account of stakeholders.’ This means that stakeholder engagement is critical to success. Every organisation should disclose meaningful, integrated reporting on its governance. The board needs to do this transparently to avoid making key decisions based on poor business intelligence.

‘Purpose driven and stakeholder impact’

The board and the workforce should have a shared culture and work together to reach a common goal. In other words, they should be purpose driven.

To understand the impact of their approach to effective corporate governance, and to direct the executive team effectively, boards need to know who and what they are influencing. We outline some of the numerous stakeholder groups below and highlight core considerations for boards:

Workforce
Does the workforce feel engaged, listened to, and happy to work for their employer? New demographics entering the workforce will now often have higher expectations in terms of the characteristics of the business they work for, the impact that business has on society and how they conduct business.

Customers and the public
Does the general public feel that the organisation is delivering on its promises? Does the organisation enjoy brand loyalty from its customers?

Community
Does the organisation positively contribute to the communities it operates in, and does it have a formal corporate social responsibility plan?

Suppliers
Are payments made in reasonable time to secure sustainable relationships?

Recruitment
Are there any indicators in the recruitment process that the approach provides equal opportunity for all?

By mapping stakeholder and influencer relationships, boards can break down the type of engagement and activity that each stakeholder group needs to ensure effective governance.

‘Open and Transparent Ethical Values’

The board is responsible for ensuring that the highest professional and ethical standards are always upheld.

To achieve this, there should be an open and transparent communication process across an organisation. There should also be clear, concise and relevant information available to employees about all policies, reports and metrics – and the way they’re implemented and their impact on the organisation’s culture.

Business ethics and corporate governance is more important now than it has ever been. There are complex operating environments that rely on constantly evolving technologies, global marketplaces with different pressures and risks, and increasing workforce challenges. Businesses need to be ready to deal with the unexpected.

Anticipating the market is difficult, but a workforce is on the front line. It therefore pays to listen to their views and give them the means to escalate their concerns. After all, it is difficult to see how a board is supposed to govern effectively if it doesn’t have access to every part of the business.