What is a Board Corporate Governance Model?
The primary purpose of boards of directors is to make decisions. To do this efficiently, there must be a decision-making process and a determination of who proposes a decision, who must discuss it and who finally decides it. It is not enough for the board to issue policies; there must be a means to implement them. An effective corporate governance model defines the process by which decisions are made, and how they are implemented. As Deloitte points out, in practice, a governance model should:
- Organise operational, financial, risk management and reporting processes such that the board receives the information it requires to effect good governance and management and the business units can conduct their activities in ways that comply with regulations and serve strategic ends;
- Bring the organisation’s governance framework down to the level of roles, responsibilities, reporting lines and communications to bridge the gap between the governance framework (discussed in the following section) and operational realities;
- Help people to answer such questions as, “Why are we doing this?” “Is this okay?” “Whose call is this?” and “Who do we need to tell about this?” and to know when to ask such questions;
- Sustain governance by creating a feedback loop in which the board and management can identify and respond to new business, operational, competitive and regulatory needs.
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The Board Corporate Governance Model
Stage 1: The Governance Framework
With these objectives in mind, we can start to develop a corporate governance model. The first component is the framework: “This articulates the various elements of the governance program, clarifies the governance roles of the board and management, and illustrates an appropriate relationship between governance, risk management, and organisational culture,” as Deloitte explains.
A clear, comprehensive organisational structure includes the people and groups involved in decision-making – for example, the board itself, the chairman, the committees and any external advisors. Risk management responsibilities should be divided among the board itself, management and committees. Responsibilities for financial reporting fall to the board, the general counsel, the company secretary and any external advisors. There should also be a plan of action for crisis preparedness and response.
Again, this takes place at the level of responsibility, not of processes, which are defined separately. The issues are accountability and collaborative. The board governance framework will also define which internal executives and employees must be involved in fulfilling their respective responsibilities.
Stage 2: Management’s Role
At this level, management’s responsibilities should be defined and separated from those of the board. There should be a clear division of power, control and action: Management should have the power to run the company on a day-to-day basis, and to be involved in formulating strategy, but it should not have a defining voice with regard to strategy, which is unquestionably the purview of the board.
Management’s role in hiring and firing employees, fixing operational goals and the means of actualising operations should be perfectly clear. They should report to committees and be held accountable to the board.
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Stage 3: Establishing Policies
With responsibilities allocated, policies should be established to implement effective governance. For example, there should be written policies on executive compensation, performance benchmarks, conflict of interest, training, business operating principles, ethics and talent development. These are just examples: All areas in which there may be conflict or controversy should be covered by written policies – an example is cybersecurity, in which executives and employees should commit to the correct and secure use of electronic devices.
Leadership succession is one area in which a written policy and plan are critical. There should be defined actions for replacing a board member or executive from the moment that person takes office. Work should begin immediately to find candidates for replacement of key executives and all board members, with adjustments made to the board matrix, searches and even discussions with potential candidates.
Stage 4: Culture
Culture fills in the gaps between the previously cited Governance Model components. Culture, in business terms, means how an organization thinks. What is its appetite for risk? What aspects of performance are the most important?
Culture aligns the business’s strategy with its operations, providing principles to guide actions. From the board’s point of view, culture should articulate core beliefs and provide the foundation for all activities.
Stage 5: Procedures
This final component of the Governance Model establishes the ‘how’ of all that has gone before. Here we define how all the determinations made above are implemented in practice. Some of this involves the assignment of individuals to undertake the work. But this also involves the selection of the appropriate technologies to accomplish the designated purposes. For example, in terms of implementing policy on conflicts of interest, board management software provides an application that enables the efficient, comprehensive and secure management of this issue.
Regardless of the components chosen in building a corporate governance model, implementing the governance model involves measuring success using standards and metrics. The model should tie governance requirements, organisational functions and business requirements together and allocate resources accordingly. Implementation should include a schedule of how often the board reviews the governance operating model and may suggest that a third party participate in reviewing the plan. The review process should include the components, the plan and the implementation.
Diligent Governance Cloud Enables the Design of est-practice Governance Models
With so much at stake and so much to oversee, boards need the assistance of electronic board management systems to help them address the issue of improving good corporate governance practices. Diligent Boards and the integrated suite of data governance tools in Governance Cloud is the perfect solution for boards working on their governance models.
Diligent’s Governance Cloud boasts high-level security in each of its programmes, including the board portal, secure messaging tool, mprogram, board evaluations, D&O questionnaires and entity management software programs. Having a fully integrated Enterprise Governance Management system will aid board directors in developing governance frameworks that work for the benefit of the board, managers, shareholders and stakeholders.
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.
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