The importance of corporate governance in today’s progressive and aggressive business environment cannot be denied. According to the Financial Times, it’s “crucial to the achievement of a new frontier of competitive advantage and profitability.”
With so much attention focusing on this business practice, it may be time to ask: What is corporate governance exactly, and what makes it so imperative to a company’s success?
What Is Corporate Governance, and Why Is It Important?
There is a direct link between corporate governance and better performance. In its January 2017 Quarterly Board Matters report, Ernst & Young (EY)’s Center for Board Matters examined corporate governance trends at Russell 2000 and S&P 500 companies. While it found that corporate governance is a “topic of increasing interest to policymakers, investors and other stakeholders,” the way it’s enacted by businesses isn’t always consistent.
Some organisations concentrate on independent board leadership, EY says. Others have shifted from staggered to annual elections. Just as no two business strategies are alike, implementing good corporate governance and a corporate governance policy is likely to vary from one company to the next.
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The inner workings of corporate governance strategies may differ, but the business practices they comprise are generally more uniform. ICSA: The Governance Institute defines corporate governance as “the way in which companies are governed and to what purpose.” To elaborate, corporate governance impacts all aspects of an organisation, from communication to leadership and strategic decision-making, but it primarily involves the board of directors, how the board conducts itself and how it governs the company.
Business advisory firm PricewaterhouseCoopers (PwC) calls corporate governance “a performance issue,” because it provides a framework for how the company operates. According to PwC, corporate governance 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 the extent to which 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.
But simply implementing a corporate governance strategy isn’t the same as achieving success. Most examples of good corporate governance have something in common, too: they’re built on a foundation of transparency, accountability and trust.
Time and time again, these three terms enter into the corporate governance discourse. They have immense value, whether a business is family-run, a nonprofit or a publicly traded company. That’s one of the reasons why corporate governance is top of mind for so many business professionals. Above all, the role of corporate governance in modern organisations is to demonstrate these key principles to shareholders, stakeholders and the public.
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The Role of Corporate Governance in Modern Organisations
Let’s take a closer look at two of these principles: transparency and trust. Businesses today are held to incredibly high standards by investors and customers alike — consider that 66 percent of global consumers told research firm Nielsen they would be willing to pay more for products from a company that demonstrates corporate social good. Being honest and open about process and operations counts a great deal. Both shareholders and consumers want to see companies operating with integrity.
Corporate governance allows companies to put their positive traits on display. With their intentions made 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.
This is especially crucial now that trust in businesses is on the decline. Communications and marketing firm Edelman’s annual Edelman Trust Barometer, a global survey that measures consumers’ trust in business, the media, the government and nongovernmental organisations, found that trust in all four is down for the first time in 17 years.
The credibility of CEOs is at an all-time low too, with 63 percent of survey respondents saying CEOs are somewhat credible or not credible at all. “Just 52 percent of respondents to our survey said they trust business to do what is right,” reports Matthew Harrington, global chief operating officer of Edelman, in an overview of the survey published by the Harvard Business Review. But when trust is waning, corporate governance can lift it up again.
Corporate Governance and Displaying Social Responsibility
In an attempt to minimise the risk of distrust, companies go out of their way to emphasise their social responsibility in their corporate governance materials. Organizations of all kinds, including Royal Bank of Canada and Hong Kong’s Link Real Estate Investment Trust, choose to make their corporate governance frameworks public. Doing so can go a long way toward putting shareholders’ and customers’ minds at ease.
Importance of Corporate Governance and Business Ethics
The Corporate Governance and Ethics section of Microsoft’s website, meanwhile, stresses that the business strives to “build and maintain trust through a shared commitment to ethical behavior and to act with integrity in everything we do.” Making — and keeping — this kind of promise can have a considerable impact on an organisation’s reputation and success. As explained in a recent PRWeek magazine article, corporate governance “affects and dictates the internal functioning and morale of a company, and it also projects externally to the public.”
In essence, companies must make a choice: embrace corporate governance and its implied conventions, or reject them. And as expressed by Claudia Gioia, president and CEO of Hill+Knowlton Latin America, those who “turn away from the policies of honesty and transparency lose credibility and competitive advantages.”
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Considering Company Culture
Business priorities aside, another explanation for different corporate governance strategies comes down to different company cultures. A company’s unique culture permeates everything from vision to values, organisational structure, work environment and hiring practices, so it stands to reason that it should affect corporate governance, too.
According to EY, “Corporate culture is emerging as an important consideration for boards and audit committees, touching as it does every aspect of a company, from strategy to compliance.” Culture is cropping up in the corporate governance policies of companies like Bank of America and Nestlé. The more involved boards become in corporate governance, the more they influence company culture — and vice versa. For example, on its website, Nestlé writes:
“Our Board of Directors sets our long-term strategy and provides oversight on the basis of strong principles and an appropriate tone from the top. It ensures the long-term success of our company based on a clear strategy and good corporate governance. Its focus on corporate culture helps us align the interests between our business, our wider stakeholders and society.”
In other words, corporate governance has value beyond demonstrating a company’s social responsibility efforts and overall principles. It can also shape a company’s culture, which, in turn, shapes the way an organisation’s leaders lead, the way its workers work and how customers perceive the businesses with which they choose to engage.
Given that good corporate governance is linked to transparency, accountability and trust, the issue of security warrants special attention. Communication may be just one facet of corporate governance, but the fact that it includes the internal and external exchange of invaluable data and information makes prioritizing cybersecurity a key part of company policy.
Drafting a board communications plan is a good way to ensure all parties are on the same page about communication best practices. In its study of trends in board portal adoption, online resource Corporate Secretary wrote, “Other methods of digital document distribution cannot match the controlled collaboration environment offered by board portal technology.”
Control is the word to note here. Aside from communication, gaining and maintaining control over an organisation’s security has a positive effect on many other areas of corporate governance policy, including risk management, financial reporting, board performance and how the company chooses to conduct itself.
The Financial Times writes, “Good corporate governance is a competitive advantage.” Without it, a company cannot reach its potential, and that makes corporate governance indispensable.
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