Riches to Ruin – The Criticality of Good Corporate Governance

Strong corporate governance is often neglected by well-established companies and overlooked in early stage businesses that prioritise starting-up and scaling as foremost priorities. After all, how can you govern a company well if there is no company yet to truly govern, right? Think again.

The fact is it’s important for companies, even start-ups, to develop and build strong corporate governance foundations to de-risk their business operations and to give confidence to the various third-party stakeholders they will inevitably engage with later in the evolution of their business.

What Is Corporate Governance? 

A company is directed and controlled by its processes, practices, rules and procedures. The system which a company develops and deploys to orchestrate such, defines its corporate governance which includes the systems in place to manage relationships between management, workers, the board of directors, shareholders and other stakeholders.

Whilst most companies focus on making revenues and profits, effective corporate governance is critical for ensuring that a company operates in a transparent, ethical, and accountable manner, something that may prove to be a chink in the corporate armour most often needed to attract investment that drives towards a high level of success.

Poor corporate governance can also lead to dissent within the organisation, confusion over policies and procures, a lack of clear focus and strategy and, which in turn, can result in legal repercussions if rules, laws or other regulations are breached or remain unimplemented.

What are the Important Factors to Consider?

It’s essential to adopt the following principles to building strong corporate governance in your organisation:

1. Board of Directors: The board of directors of a company are typically appointed by the shareholders to act in the best interests of the shareholders in implementing the business. The primary function of the board of directors is to manage the risks and direction of the business. A well-functioning board should meet regularly and have a diverse composition, involving people who bring a good range of skills and expertise. It’s important to consider including independent directors who are impartial to the shareholders also and can give fresh, unbiased insights into the business.
2. Executive Compensation: An aspect which is often overlooked within companies is the subject of executive compensation, and specifically not linking that compensation effectively enough to the performance of the business across a multitude of measurements – profits being perhaps a main area of focus, but also employee happiness, environmental impact and social contribution being others which are increasingly more relevant to businesses and their shareholders today. Compensating executives for the longer-term and broader goals of the organisation is a key element to consider within a company’s corporate governance policies.
3. Shareholder Rights: Whilst shareholders, typically, will inherently have a ‘one vote per share’ say in the fundamental aspects of a business, including major decisions such as proposed mergers and acquisitions, changes to the company's business or bylaws, and electing and dismissing directors to represent them; too often, majority shareholders can have and exert influence and control over a company to an extent that becomes detrimental to there being strong corporate governance. What happens too often is a shareholder drops governance standards because they have the majority shareholding and control the board of directors, so they believe there is less need to summon governance forums and follow due process. What’s important here is that, just because a shareholder may have majority rule of the company and the board of directors, governance must still apply in that meetings are held regularly, minority shareholders have visibility on operations and decisions and are able to provide their inputs constructively in the right forums. This helps to promote transparency and unity within the organisation.
4. Risk Management: Large companies continually develop strategic scenarios and tactics to plan for macro and micro economic, environmental, and political outcomes which are relevant to them, such as a recession, health event or pandemic, or price instability or supply chain issues within a certain market. Such effective risk management is critical for ensuring the long-term success of a company and allows firms to act quickly with mitigation strategies if such an event occurs. All companies, whether large or small, should therefore have processes in place for identifying, evaluating, and mitigating the risks faced by their company, their people, their customers, profits and stakeholders. An effective system to facilitate reporting of current and potential risks to the board of directors and shareholders is important to ensure company leaders can manage and mitigate such. 
5. Ethics and Integrity: It’s important for companies to set ethical standards and embrace high levels of integrity, which includes adopting and communicating clear policies on sensitive or controversial issues, ensuring laws are understood and followed to avoid discrimination or harassment in the workplace and encourage equal opportunity. An effective dispute resolution process which is simple, transparent and fair, is essential, and whistleblowing should be encouraged, where appropriate and relevant, without the fear of an employee or director being marginalised or discriminated against.
6. Transparency and Disclosure: Companies increasingly need to be more transparent towards their employees and customers on their financial, social and environmental performance and circumstance. Often such information is withheld or concealed, yet it’s important to empower stakeholders with clear and transparent information on a regular basis to confirm their engagement in the organisation’s ethics, functions and practices.

Newfields Consulting is a leading management consulting firm based in the Dubai International Financial Centre (DIFC). Our team of experienced consultants and advisors can provide valuable support and guidance to businesses in evaluating their company's effectiveness in corporate governance, strengthen their governance policies, principles and practices and build world-class levels of trust with their stakeholders. 

Reach out to us for a complimentary discovery session and collaboration opportunities.

Stefan Hickmott, CEO

[email protected] | www.newfieldsgroup.com | +971 4 343 4001