Why Corporate Governance is the Territory Of The Board?
Corporate governance: it’s what the Board is primarily in charge of. That which gives the organisation its direction. It essentially encompasses the core of the firm, covering its structure, relationships with shareholders and stakeholders, and its performance. But while the corporate governance framework, which is founded on legal and regulatory requirements, is firmly tied to ethics and the requirements and common good of the community or environment in which it operates, governance must take into consideration not just what is right for shareholders or the generation of profit from investment, but what is ethically acceptable and sustainable in the long term.
Boards need to be able to guide the organisations for which they are responsible, in the appropriate direction While this can mean many things under different circumstances, the core principle of corporate governance is that the organisation should be accountable for its actions at all times. The body thus accountable is the Board. It needs to determine what is in the best interests of the company and all who are affected by the existence of the company, i.e. the stakeholders. To do this, the Board needs to be made up of competent, ethical people who understand their role and how the dereliction of this role could mean the destruction of the firm.
Corporate governance is about accountability; this implies that the Board has to be aware of what is happening at all times, i.e., the risks that the organisation is exposed to. The extent, therefore, of how much Board members should know about risks and how to manage them, cannot be emphasised enough. It is far from sufficient to leave risk management in the hands of the CEO or other levels of management. The Board – and that means every member – has to be cognisant of the fact that the organisation it helms is constantly exposed to all manner of risks, some more frightening than others. But with the correct attitude, awareness, and training these can be mitigated to minimise impact.
But to what extent can a Board be accountable? It is not always possible for every Board member to be hands-on. The Board can start by crafting strategies that puts the interests of the firm’s stakeholders at the forefront, and be transparent about it by demonstrating that all rules and regulations are being strictly adhered to, from the corporate requirement perspective. The Board should also ensure an appropriately competent senior management team is appointed. Good corporate governance is about directing and controlling organisations, so the team which manages the company should have the capability of understanding its challenges, and guiding it on a day-to-day basis in the absence of the Board.
The Board also has oversight of senior management, and the responsibility of ensuring that senior management does not defraud the company or misuse its assets. It is a given, of course, that the Board itself does not defraud the firm or abuse its position in any way because the Board is in effect, the trustee of the company, and answerable to the company’s shareholders. It cannot be denied that in this day and age, there is more scrutiny of how corporations are being governed, not just by regulators and shareholders but by stakeholders – those who feel that the company should be cognisant of how it treats the society in which it operates – who are ready to hold the company accountable.
It is to the advantage of the firm to seriously consider these voices and their perspectives, as it always pays to maintain the goodwill of as many sectors of the community as possible. Incorporating these views into strategy or operations demonstrates the organisation’s commitment to being a good corporate citizen, and can increase community support. Corporate governance is, at its root, a means through which the organisation checks itself. If it claims to follow the principles of corporate governance, then it has to demonstrate in a concrete, transparent way that it is indeed putting its money where its mouth is – and the interests of the community as a whole, ahead of its own.
This includes making well-informed decisions that consider the implications to, and long-term effects on, the company. Accountability is thus increased, and the firm will probably be able to avoid many organisational pitfalls and mitigate many risks. To be able to arrive at those decisions, the Board has to have the necessary skill sets, competence and experience – and the moral fibre to carry them out. It cannot be stressed enough that the Board has to lead by example; Board members have to be persons of integrity and be able to set the right tone at the top, which sets the direction for the rest of the organisation to follow.
What many firms do not fully realise is that good corporate governance has the potential to create value for the organisation through effective, efficient decision-making that spurs its growth and sustainability. Besides this, corporate governance is a form of risk mitigation particularly against fraud and corruption; it has the ability to keep the firm honest and hold it accountable at all levels – best summed up by Sir Adrian Cadbury who described it as “…concerned with holding the balance between economic and social goals, and between individual and communal goals…to encourage the efficient use of resources and equally to require accountability for the stewardship of those resources.”