Corporate governance is the systems with which an organization is run, delineating the roles and interests of stakeholders, board members, executive staff, and to a certain extent, members of the wider community.
It goes without saying that a poor corporate governance framework can lead a company towards reputational damage, lawsuits, fines and loss of major investments. Once-successful companies have seen their downfall as a result of poor governance. It is important to ensure that the company is operating ethically with strong internal systems so that the company will not have to face any issues in the long run.
The key elements of corporate governance can be different depending on the industry, country, stock exchange and regulators. However, there are a few fundamental principles. An important element is transparency and accountability. Board directors and the executive leadership have the responsibility to exercise due diligence. In the age of data, the required information should be made easily available and accessible to all relevant parties. A robust corporate governance framework should address any gaps in policies or guidelines so that the decisions and actions of board members and executive leaders are held to certain standards of conduct. There should be a communicative and collaborative relationship between stakeholders, board, and senior management, with all sharing and working towards the same vision.
Current challenges in corporate governance
There are various challenges in corporate governance that companies have to face:
Conflict of interest
A common issue with widespread consequences is conflicts of interest. When a member of the company has financial interests conflicting with the objectives of the company, it can negatively impact the trust of stakeholders and the public, with the risk of being subject to litigation.
In the words of Mervyn King, Chairman: King Report, “Good corporate governance is about ‘intellectual honesty’ and not just sticking to rules and regulations, capital flows towards companies that practice this type of good governance.“
Issues in accountability
Without a comprehensive framework of accountability, abuses of power or ethical violations can occur. Under current models of corporate governance, senior management and the board are accountable to stakeholders. In addition, shareholders could use their votes in order to create organisational reforms.
Culture flows from the top. When governance standards are not applied consistently throughout the organization with a good enforcement mechanism, the organization can be exposed to legal violations or reputational damage at the operational level.
It’s become common knowledge that diversity of experience, skill, and background can benefit any workplace. However, boards often don’t prioritise evaluating the diversity in their composition, whether there is the mix of race, age, gender, competencies and so on.
Monitoring risk & addressing the challenges
In order to protect the interests of stakeholders as well as the organisation’s reputation and value, it is important to ensure deliberate steps are made to address the common challenges outlined above. While the full board has a general responsibility for risk oversight, it is often suggested that there be a separate risk committee to support the Board in discharging this oversight responsibility. Given the wide-ranging scope of Enterprise Risk Management, senior management and board members can often struggle with communicating effectively on the critical risks that should be discussed, reported, or monitored. Of course, each organization will have varying needs, but establishing an effective risk oversight process can help in adequately addressing the challenges in corporate governance, so that both senior management and the board can operate with shared understanding and focus.
As digital technology becomes the norm at the operational level, it is expected that the use of data and business intelligence technologies will become more prominent in corporate governance as well. Organizations that are able to leverage on these technologies in the future as well as holistically address the shortcomings in their corporate governance frameworks will be able to foster greater sustainability and enhanced value in the long term.
Good governance may be difficult to achieve in its totality but is what organisations should strive for. Governance typically involves well-intentioned people who bring their ideas, experiences, preferences and other human strengths and shortcomings to the policy-making table. Good governance is achieved through an on-going discourse that attempts to capture all of the considerations involved in assuring that stakeholder interests are addressed and reflected in policy initiatives.
To this end the IERP®, via its annual global conference, certification programs, tea talks and networking functions, has been a vocal and strong proponent in the establishment of practical and robust ERM and Corporate Governance programs which support and embed organizational sustainability, agility and resilience.