What Is Corporate Governance?
Corporate governance is the system that directs your company. It lays out how you organize, manage, and supervise your company, including the mechanisms of control, whether internal or external. The system also includes the principles that rule your company. This governance configuration shows the rights and responsibilities of all your company’s stakeholders and balances their needs and interests. Corporate governance defines decision-making rules and processes.
In many companies, the board of directors leads the company business. It delegates the authority to manage the business to its CEO (and through that officer to senior management). However, the board oversees and is ultimately responsible for the management and governance of the company, as well as for monitoring the senior management performance.
It is your board who chiefly defines the quality of your corporate governance. A solid board includes gender diversity, a wide range of experience and perspective, and undertaking an assertive role — but not a micromanaging one. Bad governance is characterized by a board with little diversity and an agreeable nature. Good corporate governance is distinguished by a board who asks stimulating questions, gives advice, and helps to strategize the company’s future. An effective board chooses the CEO and allows that executive to steer the company and act as the daily director, but consistently challenges them. A company with good governance has a board who is able to back up and see the big picture while its CEO deals with the grounding daily details. A company with bad corporate governance lets things like ethics and shareholder interest slip through the cracks.
Many companies make their own good corporate governance (GCG) guidelines for their employees to follow. Some public companies, like The Coca-Cola Company and PepsiCo, Inc., are so confident in these policies that they make them available on their website. The mechanisms that keep them current and effective are monitoring and continual improvement.
To build their framework, many companies turn to a professional service. This advisory service helps companies become more institutional, meaning they help make these policies comprehensive and standardized throughout organizations. Examples of these services include restructuring the senior management, creating support services to improve internal controls, creating an authority matrix, and succession planning. The same professionals that perform auditing services have the skills to advise you on corporate governance, although if they advise your company, they may not audit it.
Governance, risk management, and compliance (GRC) are related terms, so together, they refer to your organization’s tactics across these three areas. Because these three disciplines are so closely related, companies often realign them to be in concert with one another. Governance is your management approach. Risk management deals with the processes wherein your management identifies, analyzes, and responds to risks that can threaten your business goals. Compliance is conforming to laws or policies. Public companies must comply with the U.S. Securities and Exchange Commission’s (SEC) many requirements to continue operations and trade on the stock market.
Stakeholders and their interests are other crucial elements of corporate governance. Stakeholders refers to any parties who have an interest in or are affected by your company. These people can include board members, shareholders, employees, or the public. Their interests are evident: They want your company to do right by them and be ethical. If stakeholders have invested in a company, they want to make money and feel like they’re involved with an enterprise that’s doing good in the world. If they work at your company, they want to take home a decent paycheck, save some money, and feel like they are doing work that’s helping the public. If they are board members, their goals are similar to those of investors and employees. If they are the public, they want the presence of your company in their community to do more good than harm.
What Is the Purpose Of Corporate Governance?
Corporate governance seeks to make companies successful in the long term. Your company, whether through its own soul-searching or through the commission of experts, should develop a system to eliminate conflicts of interest among your stakeholders and make sure that your company assets are used appropriately. Without a good system, your company has a high risk of failure.
The current state of corporate governance differs by country. Although many consider the United States to be a benchmark for corporate governance standards, the discipline is a moving target that is constantly evolving and is the subject of much internal debate. The Securities and Exchange Board of India (SEBI) wants to make sweeping changes to Indian companies that strengthen the position and influence of boards, auditors, and regulators. The United Kingdom addresses reform by proposing secondary legislation changes to their Governance Code and preparing new guidance and initiatives in related areas. In fact, all countries that expect company compliance are headed toward more stringent governance standards. Here are some examples of initiatives that are in place or have been proposed:
- Insisting on forms and structures
- Implementing overarching regulations
- Reducing regulations
- Increasing the number of strong, independent directors
- Enforcing large liabilities for companies and officers
Models of corporate governance differ based on the varying interests of shareholders. For example, in Japan, shareholder interests combine with the interests of the workers, community, suppliers, and customers. They employ a two-tier board system, one in which the directors decide on corporate strategy and another that monitors the other directors. In the United States and the United Kingdom, governance addresses only the interests of the shareholders. The U.S. and the U.K. have single-tier boards made up of shareholder-elected directors. Non-executives make up the boards, but they often rely on company executives without voting privileges for advice and counsel.
Ownership structure certainly has a role in your company’s governance. Past research finds that ownership structure influences board priorities, and these priorities determine a board’s composition. Across different countries, ownership structures vary widely. In the U.S. and the U.K., dispersed ownership is more common. This means that there are many owners or shareholders and that they delegate the running of a business to a management team. Many investors consider this structure to be a type of institutional investment. Controlled (or concentrated) ownership is more prevalent in continental Europe. This type of ownership usually means that the business is family-owned and managed. For example, the head of the family would be the head of the business, and their son or daughter would be the CEO.
During the last decade, research on corporate governance has moved in the direction of GRC. GRC research focuses on management and compliance as the core disciplines and breaks each down further into the areas of strategy, processes, technology, and people. Research then concentrates on how GRC components and rules can be more integrated and applicable to the whole organization.
GRC can be further broken down into three different market categories: finance and audit GRC, Legal GRC, and IT GRC. Finance and audit GRC are the processes related to money and compliance. IT GRC intends to organize the information that technology mandates. Legal GRC’s focus is on tying everything together and running through the filter of your legal department and compliance officer.
Due to the ever-changing nature of governance, many people find it confusing to look for software vendor support. Software can help you meet your compliance needs; however, since the distinctions between different market categories are constantly in flux, it is difficult to find a new vendor and trust any vendor analysis.
How Are Corporations Governed?
After a series of high-profile scandals at U.S. public companies, the SEC created the Sarbanes-Oxley Act (SOX) of 2002. Also known as the Public Company Accounting Reform and Investor Protection Act and the Corporate and Auditing Accountability, Responsibility, and Transparency Act, SOX set requirements that are more stringent for public companies. This law influenced laws in many other countries. Among other things, SOX required the following:
- The establishment of a Public Company Accounting Oversight Board (PCAOB) that regulates public auditors
- The necessity of the CEO and CFO to attest to financial statements
- The independence of board audit members and the disclosure of their expertise
- The increased stringency of external audit firm requirements. For example, they cannot provide certain consulting services and must rotate their lead partner every five years.
For more information on SOX and its application to your company, see “Public or Private Company: What Sarbanes-Oxley Means for You.”
Another way that governing occurs in corporations is via their own charters or articles of association. Corporations have their own legal person status, as conferred by statutes in their area. In other words, they have their own rules and guidelines as long as those rules and guidelines do not supersede the laws of their land. Companies are subject to the common laws in their jurisdiction and any laws and regulations affecting their business practices. In many companies, shareholders may amend their own constitution based on their internal processes.
Companies must also adhere to the different country codes and guidelines, as issued by stock exchanges, corporations, associations, and investors, although these parameters may not be a legal requirement. Even when adherence is not a legal mandate, companies must disclose if they follow the recommendation of their respective codes. For example, if a company is quoted on the London Stock Exchange, the organization must disclose whether they follow the exchange’s requirements. This disclosure has a coercive effect.
Last updated in 2015, the G20/OECD Principles of Corporate Governance is a publication that lists more than fifty disclosure items across five categories. The Organization for Economic Cooperation and Development and the G20, a group of 20 governments and back governors, put together this publication and its sister publications. The five categories of this publication are as follows:
- Auditing
- Board and management structure and process
- Corporate responsibility and compliance in organization
- Financial transparency and information disclosure
- Ownership structure and exercise of control rights
Companies listed with stock exchanges must meet specific governance standards. For instance, if you want your company listed on the London Stock Exchange, you must meet the following requirements: A minimum of 25 percent of your company shares must be in public hands; there must be specific financial reporting procedures in place; and you must have a minimum of £700,000 in market capitalization. Other stock exchanges may have different standards.
Many companies adhere (if it is relevant for them) to other guidelines. Here are some of those other guidelines:
- The International Corporate Governance Network (ICGN)
- World Business Council for Sustainable Development (WBCSD)
- International Finance Corporation and the UN Global Compact
In the U.K., in response to major corporate scandals resulting from a lack of governance, the Cadbury Report was issued. The Report of the Committee on the Financial Aspects of Corporate Governance, also known as the Cadbury Report of 1992, was the product of a committee that convened to make recommendations for reform. These included recommendations for financial, auditing, and corporate governance matters. This was the first version of the U.K. Corporate Governance Code (“the Code”). Not only did the Code make recommendations, but it also laid out a definition of corporate governance. The Financial Reporting Council last updated the Code in 2014. The following are the proposals from their report and the sections the report includes:
Leadership | An effective board should head every company and be responsible for the long-term success of the company. |
|---|---|
There should be a clear division of responsibilities at the head of the company between the running of the board and the executive responsibility for the running of the company’s business. No one individual should have powers of decision. | |
The chairperson is responsible for leading the board and ensuring its effectiveness. | |
As part of their role as members of the board, non-executive directors should challenge and help develop strategy proposals. | |
Effectiveness | The board and its committees should have the appropriate balance of skills, experience, independence, and knowledge of the company to help them with their duties and responsibilities. |
There should be a formal, rigorous, and transparent procedure for the appointment of new directors to the board. | |
All directors should be able to allocate sufficient time to the company to meet their responsibilities. | |
All directors should receive instruction on joining the board and should regularly update and refresh their skills and knowledge. | |
The chairperson should supply the board with timely information in a form and of a quality that enables it to discharge its duties. | |
The board should undertake a formal and rigorous annual evaluation of its own performance and that of its committees and individual directors. | |
All directors should be submitted for re-election at regular intervals and be subject to continued satisfactory performance. | |
Accountability | The board should present a fair, balanced, and understandable assessment of the company’s position and prospects. |
The board is responsible for determining the nature and extent of the principal risks it is willing to take in achieving its strategic objectives. The board should maintain sound risk management and internal control systems. | |
The board should establish formal and transparent arrangements for considering how they should apply the corporate reporting, risk management, and internal control principles and for maintaining an appropriate relationship with the company’s auditors. | |
Remuneration | Executive directors’ remuneration should be designed to promote the long-term success of the company. Performance-related elements should be transparent, stretching, and rigorously applied. |
There should be a formal and transparent procedure for developing policy on executive remuneration and for fixing the remuneration packages of individual directors. No director should be involved in deciding his or her own remuneration. | |
Shareholder Relations | There should be a dialogue with shareholders based on the mutual understanding of objectives. The board as a whole has responsibility for ensuring that a satisfactory dialogue with shareholders takes place. |
The board should use general meetings to communicate with investors and encourage their participation. |
The History of Corporate Governance
According to many scholars, the history of corporate governance dates back to at least the 1970s. There is some record of its modern-day roots evolving out of a dispute between shareholders and directors of the Netherlands’ Dutch East India Company in the 17th Century, but it is likely that this is relative to this company’s status as the first publicly held entity.
In the mid-1970s, the U.S. SEC pushed forward corporate governance as a reform agenda item. This effort was in response to the Penn Central Railway Company going bankrupt in 1970 after the SEC brought charges against three outside directors of the company for failing to identify misconduct by executives and misrepresenting their financial position. Further, at the time, the SEC found that many U.S. companies had bribed foreign officials to falsify their records. This widespread duplicity forced the SEC to institute policies for financial auditing.
In the 1980s, the debate around corporate governance raged between politicians, executives, and the general public. Some abatement came from the Reagan administration’s policies, but institutional investor shareholders took up the fight in the form of takeovers. At this time, economists also became involved in the governance debate, providing some of their first research.
In the 1990s, corporate governance added policies to create benchmarks that measured the performance of directors and boards. During this decade, corporate governance started going more international as well. Many foreign bodies picked up and instituted their own versions of U.S. policies. However, the U.S. model of governance was discredited after the scandals of Enron and WorldCom unfolded in the 2000s, and the financial crisis of 2008-2009 occurred. These scandals motivated the adoption of principles from the SOX Act, and many scholars think that the term corporate governance is entrenched in this field and that more reforms are on the way.
East Asia had their own financial crisis in 1997. Property assets collapsed, and foreign capital dried up when investors discovered the lack of regulation in this area’s markets. In Saudi Arabia in 2006, the Capital Market Authority of Saudi Arabia issued a corporate governance code. This regulated and made the financial market transparent.
Governance 2.0
In a piece for the Harvard Business Review, Harvard Law professor Guhan Subramanian proposed what he called “Corporate Governance 2.0.” Sick of the piecemeal way that governance had evolved and the fighting that had gone into it, Subramanian suggested a comprehensive rethinking of the current system of governance. He proposed three principles:
- Boards Should Be Able to Manage Their Company for the Long Term: As discussed above, there is an issue with short-term versus long-term investment for companies, and this issue can put your board at cross-purposes. Many companies must go private or go back to being private in order to focus on their long-term goals and innovation. Under this recommendation, Subramanian recommends dispensing with the practice of giving analysts previews of expected earnings, staggering the board membership terms, and holding the boards legally accountable for their actions as judged by a corporate law expert.
- Boards Should Put Mechanisms into Place to Ensure Their Composition Is the Best Possible: In order to get the best possible mix of people in the boardroom, many activists have recommended getting a diverse mix of people to sit on boards. Moreover, they recommend age and term limits so that the board stays current and fresh. Although the board members need enough time to develop their long-term agenda, they can grow stale when they are in place for too long. Further recommendations in this category include putting into place meaningful director evaluations and requiring shareholder proxy access.
- Boards Should Give Shareholders a Voice: History has shown that many boards take a “scorched earth” approach when changing things up. In response, many shareholders end up in defense of their company, and are not educated or able to decide if a new path is reasonable. Subramanian recommends a reasonable process so that shareholders have an orderly voice and are able to decide changes alongside the board rather than against it.
What Is the Framework of Corporate Governance?
A good corporate governance framework combines regulation, controls, and policies that stakeholders need. Companies can meet their objectives and thrive while maintaining good relations. Internal corporate governance controls help your business succeed, prevent fraud, and decrease risk. These internal controls include good accounting principles and audit rules. They help your company prepare accurate and complete financial statements for a defined period. Your senior leaders develop these controls to guard against theft, employee carelessness and neglect, errors, and technology failures. Additionally, good internal controls prevent fines or litigation regarding regulatory issues. Examples of internal controls include the following:
- Monitoring from the board of directors
- Internal auditing
- Separation of power
- Remuneration
- External shareholder or creditor monitoring
People and regulation outside of the company regulate external corporate governance controls. The objectives of these external control mechanisms are legal compliance and managing debt, and are in the service of regulators, financial institutions, governments, and trade unions. Industry associations suggest best practices, but companies can choose to ignore or practice their recommendations. Other means of external regulation include the following:
- Government regulations
- Media exposure
- Market competition
- Takeover activities
- Debt covenants
- Proxy firms
- Labor markets
- Public release and assessment of financial statements
Company structure is another framework issue. Corporations came about as legal entities that could bring together capital and assume the risk for big business opportunities that would otherwise be too hard to finance. Dealing with an entity in the form of a company, shareholders’ risk for their investment becomes relative, and they receive any increase in profit through either their share values or dividends. Many consider a corporation successful if it can give its shareholders value in the long term. Therefore, there is a balance between providing shareholders enough value to make their investment worthwhile and maintaining compliance. Many compliance laws intend to protect investors, but they are not concerned with maximizing profits. With the advent of more stringent regulations, this line between regulation and profit generation causes much debate.
A final issue related to the governance framework is the short-term investment versus the long-term investment. Boards are under much pressure to focus on short-term results, sometimes to the detriment of long-term success. The quarterly performance goals of the public’s investment managers puts pressure on the market for quick successes, which leaves professionals to miss the longer view. Thus, the board can find itself in the impossible position of having to decide between short-term successes and long-term solvency.
What Are the Characteristics of Good Corporate Governance?
Having good ethics seems like shorthand for what most people consider the appropriate characteristics of good corporate governance. Company leaders should promote these principles through their business management and their commitment. This responsibility is less about making perfect or correct decisions and more about using the best possible process for making decisions. Here are the outcomes of good corporate governance that shareholders want to see:
- Ensuring that there is a managerial commitment to applying the principles of openness, accountability, responsibility, independence, fairness, and prudence
- Dedication to improving your company’s performance, efficiency, and service to stakeholders
- Finding ways to attract investors’ interest and trust
- Fulfilling shareholders’ interest in improved values and dividends
- Protecting the company from political intervention and lawsuits
In reality, to achieve these outcomes, you want a board to exhibit the same characteristics as you would expect from anyone with whom you do business. These characteristics include the following:
- Accountability
- Transparency
- Lawfulness
- Responsiveness
- Equitability and inclusiveness
- Effectiveness and efficiency
- Participation
- Discipline
- Fairness
- Social responsibility
There are several systemic problems in corporate governance that can detract from the valuable work and best intentions of good corporate governance policies. These include the following:
- Not enough active and objective board involvement
- Not enough accountability to shareholders
- Demand for information from shareholders before the board is ready
- Monitoring costs that can be high when answering shareholders queries
- The supply of imperfect accounting information
In fact, it is difficult to discuss good corporate governance without discussing the discipline’s problems, issues, and hot topics. For example, in October 2012, sweeping changes went into effect for the U.K.’s Corporate Governance Code via their Financial Reporting Council. In that same year, Japan had their Olympus scandal, and the U.S. had their JPMorgan Chase scandal (resulting in a loss of $6 billion). In 2015, there were several dominant corporate scandals: Volkswagen had an emissions scandal, FIFA was in the news for taking bribes, Toshiba had creative accounting, Valeant had an extra company listed that inflated their sales numbers, and Turing’s CEO defrauded his investors (in addition to price gouging on life-saving medicines). These are just a few of the big accounting scandals that corporate governance laws can take lessons from in order to do better and assure investors. Here are some other hot topics that are in constant rotation in the world of corporate governance:
- Executive pay
- The separation of CEO and chairman of the board roles
- Power asymmetry
- Information asymmetry
- The interests of shareholders as residual owners
- The role of owner management
- The theory of separation of powers
- The division of corporate pie among stakeholders
- A long-term fiduciary focus
- Shareholder influence and engagement
- Strategy, risk, and performance
- Director elections
- Board compensation and diversity
- Board leadership structure
- Succession planning
- Corporate responsibility
- Compliance program effectiveness
- Corporate political contributions
- Activist investors
- Litigation and protectionism
- Clear messaging from boards
- Reputation risk for companies
- Digital disruption
- Human resource needs
- Communication with shareholders
- Reporting standards
- The creation of value for shareholders
- Proxy advisors
- The limits of oversight
- The rebuilding of trust
- The framing of a corporate governance structure
- What to invest in corporate governance development
How to Build Good Corporate Governance
In 2015, a group of prominent public company owners gathered to discuss key issues concerning corporate governance. At that time, they came up with what they called “The Commonsense Corporate Governance Principles.” They did not mean for these principles to be absolute, but to serve as a starting place for the conversation. These principles addressed the following, among other things:
- Rights and equitable treatment of shareholders
- Interests of other stakeholders
- Role and responsibilities of the board
- Integrity and ethical behavior
- Disclosure and transparency
- Mechanisms and controls
- Bureaucratic layers
- Board of directors composition and internal governance
- Public reporting
- Board leadership
- Management succession planning
- Management compensation
- Asset manager's role in corporate governance
- Accountability
- Responsibility
- Independency
- Fairness
Building a good corporate governance program takes much more than laws and suggested rules and processes. Effective corporate governance programs also include a strong board, the fostering of loyalty and trust, and streamlined processes.
In this guide, we have already discussed the importance of having a board that is diverse not only in gender and talents, but in experience as well. We have also covered the suggestion of term and age limits for your board. Additionally, your board should be passionate about your company having a positive impact on the world. Finally, they should have the time, energy, and tools to devote to their position. They need to be aware of your company and its unique challenges and be willing to pursue an ongoing education regarding your company’s needs.
Every company should be loyal to their stakeholders. As nonprofits serve specific communities, public companies serve their shareholders. It is appropriate to ensure proper collaboration and communication with your shareholders. Some companies encourage dialogue between their board and shareholders. In some fashion, your board must receive shareholder input. On the flip side, your board must impart to its shareholders their challenges, goals, and upcoming changes. This two-way communication creates a culture of trust that positively affects your company’s reputation.
Your company must also have a system in place that sets and carries out your board’s agenda. Look for ways to help make the communication between your board and your managers seamless. There are tools available, such as software and portals, that can aid you in this process.
Here are some other strategies and best practices of good corporate governance:
- A clear strategy
- Effective risk management
- Discipline
- Fairness
- Transparency and accountability
- Social responsibility
- An ethical approach
- Balanced objectives
- Each party playing its part
- A fair and balanced decision-making process
- Equal concern
- Legal and regulatory requirements accounted for
Many professionals consider the following principles to be the gold standard for corporate governance practice. Feel free to print the visual below to serve as a reminder:
Frankly, having a good corporate governance strategy is no different than being successful in business: You must have clear and achievable goals as well as a strategy to achieve those goals. You must have an organization that can deliver your desired result. And, you must have a reporting system that can help guide your progress. Our experts in corporate governance have their own opinions and insight for you:
According to Jennifer Hancock, Owner and Director of Humanist Learning Systems, “I have served on several nonprofit boards, been an executive director for a nonprofit organization, and provided training for the board. The biggest challenge is always oversight. There is a desire to trust staff, but the job of the governance board is not only to set the direction of the organization, but also to oversee the work. Where boards run into trouble is when the staff are unethical and do not do their oversight work properly.
Boards that do good oversight work figure out within a few months when staff members are lying to them and take corrective action. My sister and I were discussing this the other day in relation to the Democratic Party. We asked, ‘Why did it take the governance board seven years to find out that the finances were crap, that they were deeply in debt, and that their executive director was fudging the numbers and moving money around?’ The boards we have been on would not have allowed that to be the status quo for more than a few months! The oversight board of the Democratic National Convention failed in their most basic duties.
A board decides direction and provides oversight. Oversight is a ‘trust but verify’ job. Failure to verify means the dereliction of duty. This is and will always be the biggest challenge for any board in any organization. It is the reason I do not accept board appointments unless I feel like I have the time to dedicate to the task.
For the future, I see that technology makes it easy to meet, discuss, and make decisions, but the basic job has not changed and will not change anytime soon. The function of corporate governance is necessary so that more than one set of eyes is watching to ensure that companies make ethical decisions about direction and expenditures. The need for that will never go away.
It would be nice to see boards taking (and enforcing) a more humanistic approach toward the business of business, meaning that they ensure that the business is ethical and responsible and that corporate social responsibility is not just a buzzword that glosses over the bad aspects of the business. The point of business should be to provide return for shareholders while providing a good return for the community. We need to eliminate the greed motive and replace it with the humanistic motive. Think of this as corporate enlightened self-interest. Our business interests move forward while we make more money engaging in ethical business practices that take into account our needs, our employees’ needs, and the needs of the communities in which we operate. In other words, incorporate more than just shareholders’ needs into the decision-making process.
This is the point of humanistic management, and it is a necessity now. Shortsighted decisions that harm the company and the community but enrich a small group of owners is not good business. We need more long-range thinking, and the way to do that is to incorporate humanistic ethics into the operation of the business itself. This must be at the governance level.
If I could speak directly to directors, investors, and/or corporate boards, I would say several things. First, ‘Make sure you all receive training on what your exact responsibilities are. This is not just about making money. You are supposed to be involved in oversight functions, and it is your job to make sure the company is run in an ethical, responsible, sustainable way and that the company does well as a company for everyone involved. This includes shareholders, employees, customers and community.’
Second, ‘If you aren’t already oriented to or familiar with humanistic management, learn about it and start integrating humanistic management philosophy into your oversight duties. Take this seriously. You can use the business to make the world a better place and get rich at the same time. This is not an either/or decision. You can do both and should be trying to do both. This is a philosophical mindset. Adopt it, integrate it, and make decisions accordingly.’
Third, ‘Trust, but verify. Do not allow your personal feelings for the staff prevent you from doing your job. Make sure that the company’s directors and leadership are behaving ethically, and if they are not, take corrective action.’
Finally, ‘Stop tolerating sexual harassment and assault. Seriously, if they were embezzling funds, you would get rid of them, even if they were your best salesperson! Stop tolerating criminal behavior because the crime seems social to you. It still affects your bottom line and, more importantly, your ethical bottom line. If you want an ethical, well-run company, you have to put ethics first. Period. Allowing someone to abuse your staff or customers is not ethical. Period.’”
Katharine Halpin, Founder and CEO, The Halpin Companies, Inc., says, “I have been serving on nonprofit boards continuously since 1985. After a career as a CPA, I formed my management consulting firm in 1995. I have been serving consistently as a strategic advisor to boards and management since then regarding board effectiveness (dynamics, communication, and focus). I am very passionate about good governance, and my company cohorts serve as strategic advisors to boards, board chairs, independent directors, board members, CEOs, and management team members.
I see team dynamics as the greatest challenge to boards. The sensitive nature of corporate boards makes these dynamics even more challenging. Most often, individual board members have concerns but lack the skills to communicate differing perspectives and the will to take a strong stand on issues. As a result, they go along to get along because of the board benefits. This makes the board into a rubber stamp instead of a strategic rudder to guide the company. This drives coziness between management and the board, which prevents the board from holding management fully accountable for results. The company's results are impacted quickly.
I see the future of corporate governance bringing greater effectiveness and transparency because of activist investors. Because of the historical coziness, these activist investors are pushing for more transparency and inclusion. I see this as a very good thing. Diverse board members will bring diverse perspectives. When a broad array of perspectives are considered, decisions will be better, and unintended consequences will be addressed in advance, not after the fact.
When I speak directly to directors, my advice is always the same: Invest the time before board meetings and soon after to think strategically about not only the agenda but also the nuances of the discussions. What are the motivators of various board members? What motivates management? Where are the landmines, and how can these sensitive issues still be fully vetted? What issues and questions need to be surfaced during the next discussions? When? How? I have a forthcoming book (March 2018) on what I call strategic think time. If people can unplug from their devices and invest the time to think strategically, the team dynamic issues can be addressed productively and in a win/win manner. I see it work every day in every situation.”
Tyler Butler, Founder and Principal, 11Eleven Consulting, says, “I have extensive experience creating corporate responsibility and social entrepreneurship programs for large companies, such as Microsoft, and I am solely responsible for producing all the charity-based efforts shared by GoDaddy. My work was integral to helping this company to a successful IPO. Additionally, my programs enabled GoDaddy to make Fortune’s 100 Best Places to Work list and garner many other esteemed accolades. Now, I have my own firm that focuses on helping companies who operate with a conscience. I work with clients such as Lyft, Universal Technical Institute, Xtreme Canteen, and HRCompany Store.
As a corporate responsibility, diversity, and inclusion practitioner, I have created, launched, and engaged staffs through meaningful employee resource groups for years. Corporate governance and how a company and these programs are managed is of the utmost importance, particularly as our culture takes on more of a watchdog mentality. The future of corporate governance will see a focus on diversity in the workplace and a greater understanding regarding how unconscious bias affects employee behaviors and professionalism. The thought patterns, assumptions, and interpretations (or biases) we have built up over time are intended to help us process information rapidly and proficiently. Sadly, the effect is more often antithetical to this intention, and creates a company culture where the company’s leaders are unconsciously skewed toward hiring, promoting, and supporting the people who look and think like them and come from similar backgrounds. This behavior, in turn, facilitates a lack of diversity.
As we see in the media right now, a lack of diversity or presence of biases can cause a culture of misbehavior and a dearth of people willing to speak up based on fear of retaliation. The #MeToo campaign is just one example of the power people can have when they feel included and empowered. In addition, as this movement progresses, we will hopefully see a safer and more progressive workplace for women.
Once you tackle this large topic, the next component to greater understanding is education and engagement. The opportunity to rally people from diverse backgrounds must be addressed in an authentic manner. Allow for grassroots leaders to emerge from within the organization and provide support to them to ensure that they have the time and guidance needed to cultivate a great employee resource group. Whether this is based on gender, ethnicity, or physical prowess, it is important that someone from within each employee group is positioned as a leader and that they serve as a conduit for employees to learn from expert guest speakers and have valuable experiences through volunteerism and offerings, such a books clubs and events. Ultimately, each company must have transparency about their intentions to introduce understanding and acceptance for all types of people through clear communication and authentic actions.
The payoff for such programs is significant, though. Those companies who authentically create and launch efforts to engage and activate employees of diverse backgrounds reap great rewards. The loyalty of employees touched by these programs is much greater, and creates less churn and more tenure, which aids company bottom lines and street cred. These employees often become strong brand advocates as well, liberally sharing their positive employment experiences via social media and personal interactions. Having employees who speak to the quality of their workplace is among the most powerful brand endorsements available. Those companies who have developed internal allies have many more external advocates. Companies with a strong and engaged company constituency have a much stronger brand, as the stories about the authenticity of the business they work for end up making their way through industries, much like a game of telephone. There are many rewards to be had through the development of diversity and inclusion efforts, and those companies who are doing this well are seeing the benefits in a myriad of ways.
These programs, furthermore, provide greater transparency both internally and externally. Corporate governance is thus made more lucid, allowing for the oversight of employee conduct and company culture to be more visible and consequently, more effective.”
Sue Redman, Board Member, Eduvate, says, “I am currently an Executive Professor at Texas A&M University, where I teach financial statement analysis and valuation. I emphasize the importance of including an analysis of a company’s corporate governance practices as part of overall investment decisions. I was on the board and chair of the audit committee of Apollo Education Group (APOL: NASDAQ) for seven years. I have been on other public company boards as well as the boards of private and nonprofit companies. I am currently on the advisory board of GreenFig Micro Education Company, a private equity-based startup company.
Boards are scrutinized and villainized after an ‘event’ occurs. Some recent scandals include sexual harassment allegations of the CEO, food contamination in restaurants, oil spills, creating unauthorized accounts and charging excess fees, as well as violations of the Foreign Corrupt Practices Act (FCPA). When corporate scandals have occurred, many have asked, ‘Where was the Board?’
As a board member, I found one of the biggest corporate governance challenges was to ensure that a formal enterprise risk management program was created and maintained so that it would predict and manage those risks that could hamper the organization in achieving its goals and objectives. Once an event occurs, the second biggest challenge was for the organization and board to respond appropriately — conduct investigations, communicate transparently, and ‘fix’ the problem.
I believe that there will be an increase in the scrutiny of boards for violations by the companies they serve. Each board of directors has a duty of care to its shareholders. Among other things, the duty of care requires directors to keep themselves reasonably informed when making decisions on behalf of the corporation. Inherent in that duty-of-care responsibility is to ensure that the corporation has an effective corporate compliance program.
In order to fulfill its fiduciary responsibility, the board should require that substantive and meaningful reports regarding compliance with procedures, laws and regulations, and ethics be presented to them on an annual basis (at a minimum) or more often, if necessary. The board should receive a report on instances of allegations of criminal or other misconduct and the company’s responses to those allegations, including where the company took disciplinary measures to enforce its stated policies.
In addition to reporting on known compliance risks, the board should ask the company to discuss the sources of significant future compliance risks (including ‘black swan’ types of events). They should also ask how the company is addressing any significant potential exposures. The board should discuss whether the company should devote resources to preventing or containing a black swan event.”
Corporate Governance in Healthcare Organizations
Corporate governance in healthcare describes the overall structure of the organization, and to what extent they are accountable for critical business processes, like clinical and staff improvement, financial performance, and corporate adherence to regulations.
Governance in healthcare is divided into two subsections: corporate governance and clinical governance. Clinical governance deals with the comprehensive approach to maintaining and improving the care of the patients. Corporate governance is more focused on how the business performs financially, and how closely it abides by laws, regulations, and compliance policies.
Both clinical and corporate governance work hand in hand to deliver the highest quality patient care within the organization, while also ensure accountability and effectiveness of the business as a whole. To achieve optimal performance in both facets of governance in healthcare organizations, you need a comprehensive tool to track, manage, and monitor the company, it’s performance, and the regulations binding it.
Smartsheet is a work execution platform that enables healthcare companies to improve ethical corporate and clinical governance processes, manage external rules and regulation information, and track and store historical records and financial information in one centralized location, while meeting or exceeding all of HIPAA’s regulatory requirements. Streamline reporting, organize all necessary information in one place, and roll up governance reports for increased visibility.
Interested in learning more about how Smartsheet can help you maximize your efforts? Discover Smartsheet for Healthcare.
What Questions Should You Ask about Corporate Governance before You Invest?
If you are an investor, there are questions that you should consider before you part with your earnings. If you are looking at your own business, you should be able to answer these questions yourself before a savvy potential investor asks them:
- Is the company management preoccupied with hitting their quarterly earnings forecasts, or are they concerned about long-term profitability?
- Is the company’s financial reporting clear and transparent? Is their management forthcoming with information, or does it seem like they are trying to be ambiguous with their numbers?
- Who is on the board of directors? What is the board’s background and level of diversity and experience?
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