What Constitutes Effective Corporate Governance

The right policies and procedures must be in place for effective corporate governance. There is no unified concept of corporate governance. It broadly refers to the procedures, techniques, and organizational frameworks that a firm employs to manage its operations, work towards long-term sustainability, and manage its finances, operations, and strategic goals. The implementation of governance by management and the board of directors could both be improved by addressing this need with a governance operational model.

A company needs committed leadership, crystal-clear direction, and strategic influence for the integration and management of sustainability to be successful, and none of this is possible without a strong governance framework of implementing plans across the entire organization, managing goal-setting & reporting procedures, strengthening internal and external stakeholder relations and ensuring overall accountability.

Many people believe that only publicly traded companies or large, established businesses with a large number of shareholders need to be concerned about, or benefit from, implementing corporate governance practices. The reality is that all businesses, large or small, private or public, early stage or established, compete in an environment where good governance is a business requirement. One-size-fits-all governance practices will have a positive impact on the performance and long-term viability of every company.

You should create Boards of directors who are knowledgeable and have expertise relevant to the business, are qualified and competent, and have strong ethics and integrity, diverse backgrounds and skill sets, and enough time to devote to their duties. Boards must strike a balance between conformance (such as compliance with legislation, regulations, and codes of practice) and performance aspects of their work (i.e. improving the performance of the organization through strategy formulation and policy making).

A board must elaborate its position and understanding of the major functions it performs in comparison to those performed by management as part of this process. These particulars will differ from one board to the next. Understanding the board’s role and who does what in terms of governance goes a long way towards ensuring a positive relationship between the board and management.

Not only must directors declare conflicts of interest and abstain from voting on matters in which they have an interest, but there must also be a general culture of integrity in business dealings, as well as respect for and compliance with laws and policies without fear of repercussions.

Goal setting is an essential component of good corporate governance. Having clear, attainable goals that everyone in the organization is aware of and committed to achieving increases the likelihood of those goals being met, if not exceeded. Strategies should be reviewed on a regular basis and adjusted to account for changing circumstances.

Another aspect of good corporate governance is sound budgeting. Goals cannot be met unless the necessary financial resources are available. Budgets can be set up to five years in advance, but they must be reviewed and adjusted on a regular basis.

Good governance also includes effective risk management. Risk reduction and opportunity identification should be ongoing processes supported by sound policies and clear delineation of responsibilities. Risk can come from both internal and external sources, and through compliance training, all members of the organization must be made risk aware.

Human resources are another important component of good corporate governance. Hiring and retaining good employees with the necessary skills, attitude, and experience is critical to the success of any organization. To ensure that critical expertise is retained within the firm, ongoing human resource management must focus on performance management, professional development, and succession planning.

Because the board is ultimately responsible for all of an organization’s actions and decisions, it must have specific policies in place to guide organizational behavior. It is especially important for the board to develop delegation policies to ensure that the line of responsibility between the board and management is clearly defined.

Consultation with key stakeholders is an important component of good governance. If organizational goals are to be met, it is critical to cultivate trusting and mutually respectful relationships with stakeholders. Government agencies, suppliers, employees, and customers can all be considered key stakeholders.