What is a governance framework? Common processes & examples

A governance framework, also called a governance structure, is essential for modern governance and legal operations. The framework directs the governance processes people use to interact securely with the organization, regulators, and stakeholders.

Acting as a supporting structure to entity management and compliance, a governance framework provides the trunk from which the various branches of compliant operations can grow. Along with entity management technology, governance helps companies and other organizations stay on the right side of regulators regarding filing requirements and aspects such as company culture, remuneration methods and transparency of operations.

A governance framework helps to center an organization’s approach around common themes, including who has a voice, who makes decisions and who has accountability. Here, we’ll explain the elements of an effective governance framework, including:

• What a governance framework is
• Examples of governance structures
• The steps to create an effective governance framework
• Governance frameworks for the entire corporate structure
• How governance frameworks tee up governance processes
• The role of technology in good governance

Governance framework vs. governance structure

The terms ‘governance framework’ and ‘governance structure’ are interchangeable. They both describe the system of an organization’s governance, particularly the rules, procedures and roles of responsibility that influence the organization.

These frameworks or structures most often govern people in positions of authority, such as executives and the board of directors. They dictate how they will complete the activities that drive the organization forward.

Governance structure examples

Good corporate governance structures can make organizations more competitive. With good governance, organizations ensure all their activities are consistent and up to regulatory standards, assuring the board that their rules and systems improve the business.

Examples of strong governance structures include:

1. Integrating Board Activities: Boards — and their organizations along with them — can easily slip into silos. These silos are not only inefficient, but they also leave the board vulnerable to costly oversights. Good governance structures will integrate all board activities, most often through entity management software.
2. Strategic Internal Audit: Boards need data to make effective decisions. This makes the internal audit function indispensable. A strong governance structure will prioritize regular and ongoing internal audits to ensure they catch risks and keep the board up-to-date.
3. Industry and Regulatory Standards: Compliance is integral to all board and organizational activities. It ensures that all processes and procedures follow critical regulations, such as ISO certification. Meeting these standards is foundational to any good governance structure.

What makes a strong governance framework?

A strong governance framework organizes the governance processes related to operations, risk management, reporting and finances to ensure the board is continually updated. Rules and systems create a robust framework for governance, and the framework provides the structure that drives the strategic plan. A strong governance structure can:

• Help boards make data-based decisions
• Expose gaps or weaknesses within the board or management
• Support the company in numerous ways to effectively connect leadership with operations
• Serve as an essential tool for effective board oversight; the process of building the framework is often just as important and meaningful as the end result
• Bring authority and accountability while enabling effective decision-making in an organization

The importance of governance frameworks and structures

Corporate governance structures are essential in today’s progressive and aggressive business environment. Corporate governance allows companies to put their positive traits firmly on display. With these intentions visible to all, companies are more likely to be held accountable for their behavior and actions — and thus more willing to distance themselves from duplicity.

Businesses today are held to incredibly high standards by investors and customers alike; being honest and open about processes and operations counts for a great deal. Both shareholders and consumers want to see companies operating with integrity and transparency.

What are the critical components of a governance structure?

Business advisory firm PwC calls corporate governance “a performance issue” as it provides a framework for how the company operates, stating that corporate governance structures should encompass the following:

• The company’s performance and the performance of the board
• The relationship between the board and executive management
• The appointment and assessment of the board’s directors
• Board membership and responsibilities
• The “ethical tone” of the company and how the company conducts itself
• Risk management, corporate compliance and internal controls
• Communication between the board and the C-suite
• Communication with the shareholders
• Financial reporting

This list provides a bird’s-eye view of corporate governance in action and conveys how it can influence business. To help organizations navigate corporate governance, Deloitte offers a governance framework that outlines the board’s objectives and responsibilities and how they relate to the corporate governance infrastructure.

How to start building a governance framework

Governance frameworks exist to ensure that a company remains in compliance and operates within legal boundaries, meaning that any governance structure must consider the local regulations wherever the organization has entities. The governance framework then dictates the governance processes appropriate to the aims of the organization.

To start building your own governance framework, aim to answer these questions:

• Who are the people with authority in your organization?
• What information do those people need to access, and when?
• What does the organizational structure look like?
• How does the structure influence how decisions are made?
• What are the organization’s reporting obligations?
• How does information need to flow around the business?
• What is the relationship between entities — and does this present any challenges in terms of accountability, authority or responsibility?
• What is the relationship between departments and stakeholders?
• Where does the organization have entities based — and does that influence obligations?
• How does the organization manage compliance risk?

Governance structure for portfolio companies

A robust governance framework guides an organization in achieving accountability, authority and sound decision-making. By contrast, a weak governance framework will cause a breakdown in the stages of the investment process and affect overall economic growth.

For portfolio companies, a governance structure should ensure that all shareholders are allowed to vote on governance matters. All shareholders should have a voice and foundational rights.

Portfolio companies should conduct business with respect to both the shareholders’ interests and the capital entrusted to them. A portfolio company’s governance structure should take the following into account and demonstrate:

• The company’s ability to create value — and yield long-term profits — in response to demand
• The ability to facilitate investors’ predicted earnings as a result of accurate and timely disclosure
• A commitment to ethical conduct as a member of society
• A commitment to fulfilling corporate social responsibilities including, but not limited to, the organization’s environmental impact

A portfolio company’s governance structure should ensure adherence to the above commitments as the organization carries out its responsibilities as a market participant.

Governance structure for subsidiaries

It’s natural for corporations to seek to establish new entities to fuel business growth and deal with increasingly complex regulations — but with each new entity comes a heightened need for entity management and robust subsidiary governance.

Globalization raises legal and corporate governance issues at the subsidiary level that need constant attention. To deal with this, many company secretaries and legal operations professionals turn to a subsidiary governance framework template to help get things under control.

Framework templates provide guidelines and ideas to ensure both downstream and upstream corporate governance flows are robust and compliance-proof.

A subsidiary governance framework template can help to align processes while allowing wriggle room for local action. It:

• Balances subsidiary and parent company needs: A strong subsidiary governance framework gives subsidiaries space to meet the demands of their jurisdiction while still adhering to the needs and expectations of the parent company.
• Optimizes resources: Subsidiaries can focus on the governance processes at the local level, freeing the parent company to devise long-term strategies that will help grow the business.

A parent company can’t realistically manage every subsidiary’s regulatory and compliance needs. Instead, a subsidiary governance framework template must define the roles and responsibilities of both the parent and each subsidiary. The Chartered Governance Institute (CGI) has developed a simplesubsidiary governance framework template checklist to help corporations operate across multiple jurisdictions and business areas.

Governance structure for public entities

Once an organization decides to list and go public, its compliance and governance burden is significantly increased. Now, it’s no longer just a company’s stakeholders and potentially the local authorities keeping an eye on how the organization is running; once it lists, that organization becomes public property. It’s opened itself up to intense scrutiny.

Market fluctuations will impact its share price, but the scrutiny can impact price, too. The governance processes of the board will be publicly available to anyone with a genuine interest, and investors will have the opportunity to ask questions and express concern about business operations. This is why public entities need robust and sound governance practices.

Strong governance structures can help:

• Mitigate risks of going public: Governance ensures that everyone in the business — as well as the market and investors — is aware of the organization’s steps, reducing the chances of a damaging misstep.
• Offer assurances: Governance means transparency around compliance and operations is supported by clear communications, and a paper trail can lead back to the reasons for any decisions and the ultimate consequences.
• Support timely reporting: A public entity must report to the market regularly. Good governance promotes a schedule of reporting on board meetings and accounts, management changes, security breaches, and more will be expected, as well as a detailed annual report. If they don’t get filed with the exchange, then the public entity, and potentially its parent, will face sanctions and fines.

As public entities develop and monitor their governance structures, they are, in essence:

• Ensuring there are clearly assigned roles and responsibilities
• Seeing that the above responsibilities are carried out in the right way at the right time by the right people
• Taking care that the appropriate record is filed to keep track of what has happened

And, of course, any governance framework should be subject to regular audits to ensure it’s still fit for purpose, providing the proper checks and balances.

What is a governance process?

A governance process is the policies and procedures an organization follows for accountability, compliance and overall effectiveness in its day-to-day operations. These processes are secondary to the governance framework.

While the framework guides the overall structure, it’s the governance processes that employees at all levels will enact day in and day out. Likewise, governance processes can only be considered governance when they operate within the bounds of the framework.

Common governance processes include:

• Chains of command: A good governance process will clearly define the decision-making and approval process, including the roles and responsibilities of involved stakeholders.
• Policies and procedures: Every organization needs standard procedures for operations that satisfy the governance framework. These tell employees how compliantly and safely see through activities material to their job.
• Accountability: Governance processes will also prescribe what happens if an employee fails to follow approved procedures and, likewise, the benefits of adhering to good governance.
• Compliance: At their best, governance processes are also a map to compliance, ensuring all procedures follow relevant laws and regulations.

Governance process examples

Governance is essential across entities, but corporations shouldn’t rush to uniformly apply it. Understanding examples of how governance adapts across entities will ultimately boost its effectiveness.

Governance process for portfolio companies

Governance in portfolio companies promotes the value of shareholders’ voices. As such, governance processes and procedures should facilitate shareholder participation in overseeing the companies within the portfolio. This includes numerous procedures, the most common of which are:

• Roles and responsibilities: Each shareholder should have a clear role and understand what responsibilities it entails. This ensures shareholders effectively collaborate to maximize the returns of each company in the portfolio.
• Decision-making processes: There should also be a clear path for decision-making, including how to discuss an issue, share evidence and ultimately reach a conclusion.
• Conflict resolution: Different shareholders may have different investment priorities. Strong governance processes should pair the decision-making structure with conflict resolution to make space for all opinions and perspectives.

Governance process for subsidiaries

Subsidiary companies are unique because they operate both independently and under the wing of the parent company. The most effective processes will speak to both needs, ultimately balancing the need for consistency across the corporate structure with the subsidiary’s ability to respond to unique challenges and opportunities.

To do so, subsidiaries should develop processes like:

• Distinct boards of directors: The subsidiary should have its own board. While the subsidiary board may include directors from the parent company, this group can advocate for the needs of the subsidiary while understanding how to address the goals of the corporate group.
• Clear parent-subsidiary relationship: Delineate the roles and responsibilities of both the subsidiary and the parent, including expectations, obligations and how one will support the other.
• Consistent reporting: The parent company will want to stay abreast of the subsidiary’s performance. While a centralized governance platform like Diligent One can alleviate that burden, there should still be a reporting structure for sharing financial performance, operations and other relevant challenges and opportunities.
• Strategic alignment: A subsidiary often has its own strategic plan but should always align with the broader corporate strategy. This ensures any subsidiary activities strengthen the corporate group.

Governance process for public entities

Publicly listed companies have a responsibility to shareholders and the public and a legal obligation to comply with SEC regulations. That enhances the weight of good governance. Public entities need governance processes and procedures that advance their financial performance while offering the accountability and transparency investors expect.

This can call for practices like:

• Shareholder protection: Public entities need a mechanism for facilitating shareholder participation. The annual report and annual meeting are pivotal to this mechanism, as are ongoing activities that give investors access to company information.
• Disclosures: The SEC mandates that public entities disclose certain information about their activities, including climate and diversity. Governance processes should uphold those disclosures on their own and in existing documents like annual reports and financial statements.
• Codes of conduct: The public, particularly the board of directors, will now have opinions on how employees conduct themselves. Codes of conduct outline ethical behaviors, reduce conflicts of interest and promote the board’s fiduciary duties.

Strengthen your governance framework with entity management software

Entity management software supports the governance framework by bringing stakeholder information and entity data to a central repository that’s easily accessed from anywhere in the world. This is critical because more board members, executives and employees work remotely, meaning that they need to be able to follow the governance structure no matter where they’re logging on from. Boards not only require ways to digitize their governance processes, but they also need software that can turn their governance structure into a competitive advantage.

Software like Entity Subsidiary Management, part of the Diligent One Platform, allows boards to keep up with today’s fast-paced climate, facilitating the swift, data-based decisions that modern business requires. Request a demo to see how software can future-proof your governance structure.

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