From Good to Great: How Corporate Governance Fuels Success

Corporate governance is the system and related processes by which an organization is directed and controlled. Effective corporate governance should ensure that an organization is directed and controlled in a manner that meets the needs and expectations of its stakeholders.

This can be achieved by setting strategic objectives that meet stakeholders’ needs and expectations, as well as by implementing measures to identify, assess, monitor and control the various risks that could threaten the achievement of these objectives.

A well-governed organization should take all reasonable steps to ensure it determines the right to achieve its objectives effectively, efficiently and economically.

Good governance should effectively manage, but not necessarily eliminate risk. Even a well-governed organization may encounter risk events that threaten the achievement of its objectives. As the effects of risk can never be eliminated completely, organizations need to build both resilience and agility in all their activities, enabling them to adequately respond to changes in circumstances or to deal with the consequences of unforeseen events.

Looking Ahead

For a board or senior management to appropriately determine the strategic objectives of an organization, they will need to have a good understanding of the environment in which the organization operates.

They will also need to understand the capabilities of the organization to function effectively within this environment and to exploit any opportunities that may be present. The environment will include a range of risks, including risks relating to customer demand, technology development, employee turnover or political change.

It is up to the board and senior management to direct the strategy of the organization in such a way that opportunities related to these risks can be exploited without unduly threatening its financial viability.

The Organization for Economic Co-operation and Development developed the G20/OECD principles of corporate governance which provide a worldwide benchmark for good corporate governance practice and for supervisory assessments of this practice. From a risk-management perspective, the key principles are as follows:

1. Ensuring that shareholders with a controlling interest do not force excessive risk-taking to generate short-term returns because their limited liability may help to insulate them from the costs of this risk-taking.
2. Prevention of unethical or illegal practices using whistleblowing controls.
3. Public disclosure to ensure that stakeholders have information on all reasonably foreseeable material risks.
4. The board is responsible for overseeing an organization’s internal control and risk-management systems. This includes board level reviews of risk-management policies and procedures and, where relevant, the creation of audit committees and risk committees to facilitate this work.

ESG

Corporate governance is constantly evolving, as are the ways in which corporations are held accountable. In recent years, the concept of environmental, social, and governance (ESG) has become an increasingly important part of the?corporate governance conversation.

Organisational activities can cause a range of environmental problems, which include, pollution of the air, water or earth, resource shortages (such as excessive reduction of a local water table), the destruction of natural habitats, excessive noise, the generation of greenhouse gasses such as carbon dioxide, and geological problems, such as subsidence or earthquakes.

ESG is important to consider when investing. It’s not just about having a high return on investment; it’s also about ensuring your business impact does not contribute to environmental degradation or human rights abuses.

ESG is incorporated into the corporate governance framework as well as risk management and risk assessment frameworks so that companies can better assess their risk exposure and mitigate against those risks.

Corporate Governance Dimensions

Proper corporate governance practices steer the direction of an organization across a variety of important dimensions. These dimensions include but are not limited to:

v? Strategic planning?– This is all about identifying and capturing opportunities today to position for sustainable competitive advantage?and value for the future.

v? Enterprise risk management. This includes identifying and mitigating strategic, operational, reputational, and even financial risks within an organization.

v? Financial reporting and disclosure. The corporate governance function must support financial record-keeping, as well as approve public stakeholder reporting including financial statements.

v? Talent management?– This requires that leaders understand how to attract, retain, and improve human resources within the organization. This area is often referred to as human capital management.

v? Succession planning. This is effectively talent management but with the intention of “futureproofing,” particularly at the leadership levels. This helps to ensure that a strong leadership trajectory exists within the organization.

All Round Sustainability

Leadership at many organizations is increasingly being challenged to showcase efforts towards environmental protection hence several leaders are now realizing that climate change presents more than just environmental risks but also present empirical risks to business operations due to physical climate impacts, regulatory-driven transition risks, and potential reputational damage.

With so many organizations making pledges to meet “Net Zero” or even carbon neutral emission targets, having board representation with some ESG experience has become paramount to navigate the ESG disclosure landscape and to avoid the perception of greenwashing.

There has been a growing demand for more effective risk-management practices to cope with the rapidly changing business environment, especially since the financial crisis of 2007/2008. Many of these changes involve regulatory or industry-standard-related compliance that put organizations under great public and regulatory scrutiny, such as anti-money laundering, anti-terrorism financing, climate change disclosures, corporate governance reporting, environmental compliance, contingency planning, data protection regulations and Basel financial regulations for Banks.

Governance and Risk Management

Boards have undergone a considerable evolution in relation to their oversight of both risk and strategy, often including the appointment of senior executives responsible for managing these areas. Boards are already responsible for formally approving the aggregate level of risk an organization can take in pursuing its strategy, (the risk-appetite statement). They also set the strategy that must be reflective of the organizational values and behaviors (corporate culture).

In most organizations, ensuring effective internal control is an important part of risk-management and corporate governance. Risk-management can help to strengthen internal control by providing a means to identify, assess, monitor and control internal control risks. This can be done as part of an organization’s regular risk-management activities, as well as by specialist internal control management tools, such as risk-based compliance reviews, internal audits and external audits.