Good corporate governance has always been about organisations achieving the best possible results, but the vision of those results has changed since they were first articulated by the UK Cadbury Commission in 1991. The first principles of corporate governance were largely concerned with shareholder protection – ensuring that the interests of shareholders could be aligned as closely as possible with the actions of management.
What Are the Principles of Corporate Governance
Good corporate governance has come to have an extended vision of successful results: Today, organisations are expected to take actions that have a beneficial effect on all stakeholders, and that includes employees, stakeholders like suppliers, and the community at large.
The Organisation for Economic Co-operation and Development (OECD) registered this change when it revised its “Principles of Corporate Governance” in 2015. Here is its view today:
“Corporate governance involves a set of relationships between a company’s management, its board, its shareholders and other stakeholders. Corporate governance also provides the structure through which the objectives of the company are set, and the means of attaining those objectives and monitoring performance are determined.”
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The OECD principles also take into account the importance of good corporate governance to the economy as a whole:
“The Principles are developed with an understanding that corporate governance policies have an important role to play in achieving broader economic objectives with respect to investor confidence, capital formation and allocation. The quality of corporate governance affects the cost for corporations to access capital for growth and the confidence with which those that provide capital – directly or indirectly – can participate and share in their value-creation on fair and equitable terms. Together, the body of corporate governance rules and practices, therefore, provides a framework that helps to bridge the gap between household savings and investment in the real economy. As a consequence, good corporate governance will reassure shareholders and other stakeholders that their rights are protected and make it possible for corporations to decrease the cost of capital and to facilitate their access to the capital market.”
The principles of good corporate governance today
At the centre of good corporate governance is the organisation’s board, be it a for-profit or not-for-profit enterprise. The basic principles of corporate governance involve how the board should develop, take action and be held accountable.
As the UK Institute of Directors explains: The first principle of the Code states that: Every organisation should be headed by an effective board. The board’s effectiveness is widely regarded as a prerequisite for sustained corporate success. “The quality and effectiveness of directors determine the quality and effectiveness of the board. Formal processes for appointment, induction and development should be adopted.”
Principles of Corporate Governance:
- The role of the board.
- Division of responsibilities.
- Non-executive directors.
- Non-executive directors.
Board’s Composition and Operations
- The composition of the board.
- Appointments to the board
- Information and support.
Accounting and Reporting
- Financial and business reporting.
- Risk management and internal control.
- Audit committee and auditors.
(1.) Leadership is the first aspect addressed by the Principles of good corporate governance, the Institute points out:
- The role of the board. Every company should be headed by an effective board which is collectively responsible for the long-term success of the company.
- Division of responsibilities. There should be a clear division of responsibilities at the head of the company between the running of the board and the executive responsibility for the running of the company’s business. No one individual should have unfettered powers of decision.
- The chairman. The chairman is responsible for the leadership of the board and ensuring its effectiveness in all aspects of its role.
- Non-executive directors. As part of their role as members of a unitary board, non-executive directors should constructively challenge and help develop proposals on strategy.
(2.) With the components of leadership determined, the Principles consider the board’s composition and operations:
- The composition of the board. The board and its committees should have the appropriate balance of skills, experience, independence and knowledge of the company to enable them to discharge their respective duties and responsibilities effectively.
- Appointments to the board. There should be a formal, rigorous and transparent procedure for the appointment of new directors to the board.
- Commitment. All directors should be able to allocate sufficient time to the company to discharge their responsibilities effectively.
- Development. All directors should receive induction on joining the board and should regularly update and refresh their skills and knowledge.
- Information and support. The board should be supplied in a timely manner with information in a form and of a quality appropriate to enable it to discharge its duties.
- Evaluation. The board should undertake a formal and rigorous annual evaluation of its own performance and that of its committees and individual directors.
- Re-election. All directors should be submitted for re-election at regular intervals, subject to continued satisfactory performance.
The evaluation of the board is not the same as its accountability, but rather a hard look at its performance, and that of individual members. Are directors all developing a broad diversity of points of view? Are decisions getting made quickly and carefully, etc.?
(3.) Transparency is a key principle of good corporate governance, and so accounting and reporting are a critical part of it:
- Financial and business reporting. The board should present a fair, balanced and understandable assessment of the company’s position and prospects.
- Risk management and internal control. The board is responsible for determining the nature and extent of the principal risks it is willing to take in achieving its strategic objectives. The board should maintain sound risk management and internal control systems.
- Audit committee and auditors. The board should establish formal and transparent arrangements for considering how they should apply the corporate reporting and risk management and internal control principles and for maintaining an appropriate relationship with the company’s auditors.
Part of business reporting today includes taking account of efforts for the community as a whole; for example, Environmental, Social and Governance (ESG) reporting is now a fundamental part of a board’s reporting requirements.
All of these basic principles are subject, in the UK, to the overriding principle of ‘Comply or Explain.’ It has been a fundamental principle of good corporate governance in the UK that an organisation has a perfect right to not comply with a given tenet of corporate governance, so long as it explains why it is not complying in its reporting.
Flexibility has always been at the heart of UK corporate governance, and the ability for an organisation to choose its own path – while making clear the reasons behind its choice – has been a key element of corporate governance success in the country.
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The Governance Cloud, the only integrated enterprise governance management solution that enables organisations to achieve best-in-class governance, is an ecosystem of software tools that digitises the various activities and tasks for the board of directors. As organisations grow more complex and regulations more stringent, the scope of governance responsibilities evolves. The Governance Cloud allows boards of directors to meet the demands in the boardroom and beyond with the ability to select the products they need that help them perform their best and work within their allotted budgets.
Governance leaders, executives and board directors rely on the industry-leading Diligent platform for the most secure and intuitive solution to board material management and collaboration. Diligent Boards™ electronically stores a board’s agendas, documents, annotations and discussions within a secure board portal.
Company secretaries and board administrators can use the board portal to put together board packs in minutes. The board portal also has designated virtual rooms for committee work. Company secretaries can designate permissions for user to access various areas of the board portal to avoid unnecessary problems with confidentiality. The “Manage Meetings” feature consolidates board directors’ contacts, calendars and the logistics of meetings. The program is a secure and intuitive solution for managing board materials and collaboration.
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