Meghan Day

Principal Solution Designer

A comprehensive guide to developing a strong corporate governance policy

Establishing a corporate governance policy ensures accountability and enables the business to have a strong and open relationship with stakeholders, shareholders, employees, customers and the wider community.

Not only this, but a corporate governance policy allows business leaders to manage risks, make better decisions and ensure long-term sustainability. It’s also the foundation for what the company expects when it comes to ethical behavior, regulatory compliance and efficient management processes. These also contribute to stakeholder and public perceptions of your organization.

In this guide, we’ll explore the key elements needed to develop a strong corporate governance policy. We’ll cover:

• What corporate governance policies are
• How to develop a strong corporate governance policy
• The benefits of a strong corporate governance policy
• Best practices to keep your corporate governance policies current

What is a corporate governance policy?

What are corporate governance policies, and why is it important that your business has one in place?

In simple terms, your corporate governance policy is the guidelines that outline how your organization operates to make sure the business has a strong and open relationship with everyone involved, from stakeholders to employees. It also protects the interests of shareholders and helps mitigate risk. A policy impacts your entire business and has four main pillars:

1. Accountability – This ensures the business and its members own their actions and decisions.
2. Transparency – This ensures all information shared is honest, accurate and timely.
3. Responsibility – This ensures the business complies with all moral and legal obligations.
4. Fairness – This ensures equality.

For more information, read our guide outlining what constitutes good governance.

Components of a corporate governance policy

There are several components of policies that are key and should always form the backbone of how your business operates. Here are some corporate governance policy examples:

• Board structure: This component deals with the composition and setup of the board of directors, which is crucial in providing strategic guidance and oversight. It includes the division of roles between the chairperson and CEO, the mix of executive and non-executive directors, and the establishment of various committees (such as audit, risk, and compensation committees) that support the board’s function.
• Roles and responsibilities: Clear delineation of roles and responsibilities is essential to avoid conflicts and ensure that each part of the governance structure understands its duties and powers. This includes defining the roles of board members, executives, management, and other stakeholders.
• Ethical guidelines: These are the standards of behavior expected within the company. Ethical guidelines are important for fostering a culture of integrity and respect, guiding decision-making, and ensuring compliance with legal and regulatory requirements.
• Compliance: This component ensures that the company adheres to all relevant laws, regulations, and standards. Compliance mechanisms protect the organization from fines and penalties and help maintain its reputation and integrity.
• Risk management: A risk management framework should be robust and identify all the potential risks to the business from a financial and operational perspective. It should also encourage employees to report unethical and illegal practices without fear of any kind of retaliation.
• Executive compensation: The policy should outline what compensation executives will receive based on the company’s long-term performance. Bonuses should be linked to measurable and well-defined financial and operational goals.
• Disclosure and reporting: This component outlines the importance of disclosing financial and operational information in a timely and accurate manner. Communication with stakeholders, shareholders and employees should be done so often and proactively, and cover performance, decisions and risks.
• Shareholder rights: This component details the treatment of shareholders to ensure fairness and equality. It also ensures they have voting rights in all major decisions. As part of this, there should be clear and simple ways for shareholders to feedback and engage the board, ensuring accountability.

How to develop a strong corporate governance policy

While having a corporate governance policy in place isn’t a legal requirement, it’s certainly one you need if you want to adhere to legal and moral governance requirements. It’s also unlikely that your business will succeed without one, as it determines many processes and guidelines your organization and people will follow.

Here are the steps you should follow to create your company’s corporate governance policy.

1. Assess current practices

Board directors, general counsel and company secretaries should assess the existing practices and structures to identify opportunities to improve. This should include processes, laws and regulations, compliance and documentation.

2. Define the objectives of your policy

You should outline the objectives that developing a governance policy will set out to achieve. Board directors will want to ensure the policy aligns with the company’s vision and mission and helps with long-term strategies and stability. It should also reflect the best interests of shareholders and stakeholders.

The company secretary will want to make sure the objectives are realistic and measurable and can be implemented well.

3. Engage stakeholders

Ensure stakeholders are engaged in the process from an early stage. This will help stakeholders understand why developing a corporate governance policy is important and what they can do to influence and impact it. Directors and company secretaries should encourage stakeholders, shareholders and employees to offer input and feedback so they have a wide range of perspectives.

4. Draft the new governance policy

It’s the responsibility of the general counsel to draft the policy, ensuring it covers the key points, including compliance, securities, laws and risk mitigation. The board, company secretary and senior management will also have input. This will help ensure the policy aligns with the company’s goals, objectives and securities. It also outlines roles, responsibilities, processes and operations.

5. Review and consultation

Following the initial policy draft, it then goes through several rounds of review by the general counsel, directors, and external advisors. This ensures the policy:

• Is compliant
• Aligns with the company’s goals
• Has stakeholders’ best interests in mind
• Fits with industry best practices
• Is in line with regulatory requirements

6. Approval of the policy

The board of directors will collate feedback and make revisions to the policy, then review and approve the final version.

7. Implementation of the new corporate governance policy

The new policy is implemented across the organization by first communicating it to employees and stakeholders. Updated processes and procedures are introduced by senior management. Whereas the company secretary and general counsel oversee that compliance and legal requirements are met.

It’s important that training is given to those across the organization so they have a full understanding of the new requirements.

8. Monitoring and evaluation

To ensure the policy has the desired effect, it must be constantly monitored against the goals and objectives. The company secretary can do this on an ongoing basis and through reviews. General counsel should also make sure the policy is kept up to date and in line with any regulatory changes.

9. Policy updates

As new regulations and developments are introduced and changes are identified through monitoring, your policy should be updated quickly and accurately to ensure it’s always up to date. The corporate secretary should oversee the changes, and the board of directors will need to approve the amendments.

Benefits of a strong corporate governance policy

Creating a strong corporate governance policy for your organization has plenty of benefits that impact not just your business but also stakeholders, employees and even the wider community.

Here are just some of the key benefits:

• Improved company reputation: A strong policy promotes transparency, accountability and good ethics, which builds trust with people both internally and externally.
• Ensures adherence to the four pillars: A policy ensures the business and its people adhere to the governance pillars of accountability, fairness, transparency and responsibility.
• Increased investor confidence: Investors are more likely to want to take a chance on your business if it has a sound governance policy that clearly shows your risk mitigation strategy.
• Stronger risk management: A corporate governance policy helps you identify and mitigate risks to protect the long-term future of your organization.
• Better operational efficiency: Outlining roles and responsibilities ensures better decision-making and accountability. This makes sure processes are streamlined.
• Greater compliance: A detailed policy makes sure you consistently adhere to legal and regulatory requirements, which reduces the risk of fines, penalties and disputes.
• Higher level of trust: Thorough guidelines show you have stakeholders’ and shareholders’ interests as a key focus, which builds trust and stronger relationships.
• Helps secure your company’s future: With clear processes related to responsibility, transparency and accountability, it can strengthen your company culture and help secure its future.
• Prevents unethical practices: A policy helps define roles, responsibilities and expectations, which can prevent oversight and conflicts of interest.

9 best practices to keep your corporate governance policies current

Monitoring your corporate governance policy is vital to ensure it remains up-to-date, effective and in line with your organization’s goals. Neglecting to keep it current risks non-compliance and damage to your reputation — harming your relationship with key stakeholders. Proactivity is key, so here are nine ways to ensure you keep your policy updated.

1. Continuously monitor laws, regulations, market trends and technological innovations for any changes, regardless of how small
2. Understand changes in stakeholder expectations so the organization can make shifts to make sure they’re aligned
3. Revise your risk management strategies in line with changes to governance policies to address emerging or shifting risks
4. Implement a schedule for regular reviews of your governance policies
5. Form cross-functional teams with members from different departments, including legal, compliance, HR and operations, to provide different perspectives during reviews
6. Document changes made to policies and communicate them to all stakeholders and employees
7. Utilize specialized governance software such as Diligent’s policy management solution to track policy changes, manage compliance and store historical data efficiently
8. Use data analytics to identify trends, forecast potential compliance issues and evaluate the effectiveness of governance policies
9. Keep comprehensive audit trails of governance policy changes to ensure accountability and transparency

For more information, read our guide on how to implement effective governance practices.

Streamline the development and maintenance of your organization’s governance policy

Developing a corporate governance policy can be an arduous task. It’s also vital that your policy is maintained to make sure it remains up-to-date and relevant so you continue to have the trust and confidence of your stakeholders, shareholders and employees. It’s just one of the pieces of a broader puzzle in the journey to ensuring solid corporate governance.

Download our governance maturity checklist to see how your organization stacks up. You can also learn more about Diligent’s policy management solution. It can help you streamline processes to save time, energy and money and develop a strong, well-maintained policy.