14 effective corporate governance best practices to implement now
Only 30% of C-suite executives rate their boards’ overall performance as excellent or good. This less-than-glowing review of board performance can often be traced back to corporate governance best practices — or lack thereof.
Every corporation should follow corporate governance best practices, which apply equally to new and well-established corporations. Best practices for corporate governance apply to large companies, small companies, public companies and private companies. They even apply to nonprofit organizations and other entities.
Following the principles of effective corporate governance takes effort. However, while corporations can expect to invest some of their corporate dollars in governance, taking steps toward best practices doesn’t have to be expensive.
To help you implement best practices in corporate governance, this blog will explain:
- The benefits of corporate governance best practices
- Critical best practices you can start following now
- Additional resources to support effective governance
Why are best practices important for effective corporate governance?
There are many benefits to following corporate governance best practices, and the potential impact is boundless. Here are a few ways they lead to more effective corporate governance:
- Improves overall performance and promotes trust among shareholders and other stakeholders.
- Provides for sound strategic planning and better risk management.
- Corporations that embrace best practices in corporate governance continually move toward long-term sustainability.
Good governance prevents litigiousness and provides far-reaching legal protections for corporations.
14 effective corporate governance best practices
Best practices incorporate many different aspects of board work. They entail critically examining board directors’ qualities and characteristics, who they are as people and how they approach governing an organization. Effective corporate governance can incorporate many different practices.
Specifically, some of the primary corporate governance best practices include:
- Recruiting and building a competent board
- Aligning strategies with goals
- Exercising accountability
- Having a high level of ethics and integrity
- Defining roles and responsibilities
- Managing risk effectively
1. Recruit effective and diverse board directors
A prominent way for boards to do their collective best pertains to board refreshments. As the economic climate has changed, the composition of boards has needed to change with it. For example, while environmental, social and governance (ESG) skills have been at the top of board wish lists in recent years, most boards now expect to focus on core skills like finances and operations in the coming year. Achieving board effectiveness in corporate governance starts with taking a fresh look at their nominating and recruitment procedures.
A good first step is to develop recruitment packets with honest information about the organization. Establishing nominating and governance committees is becoming the norm. Approach board director nominees with clear expectations for their time and talents. Board recruiters should vet candidates for their skills and abilities, potential conflicts of interest and unique backgrounds.
Corporate governance best practices imply that not only should individual directors be qualified and independent, but collectively, you want directors who bring diversity to the table and decision-making. Boards may have traditionally vetted candidates based on their skills, governance experience and industry-related expertise. Ideal candidates would possess CEO or senior management experience.
But if you’re truly committed to effective corporate governance best practices, you should continuously work toward developing a more diverse, equitable and inclusive organization. Diversity goes beyond gender; it may include age, ethnicity, tenure on your board and more. This is especially important given that there were fewer board appointments in 2022 than in years past, which heavily impacted women and people of color directors.
Culture change doesn’t happen overnight. The heart of it all is transformation. — Ivy Lumia, CEO and Founder, Best in Governance Inc.
2. Establish board composition
Effective corporate governance today has a new focus on board diversity and independence. This is because boards are responsible for dealing with highly complex and often technical issues. Many perspectives around the board table make for sound decision-making. In fact, 79% of board directors told PwC that diversity brought unique perspectives, while 68% said it enhanced board performance.
These are just a few reasons why board composition is so important. Consequently, most governance experts favor the notion of boards having a majority of independent directors.
Boards should be composed of individuals with all the necessary skills and abilities to make sound corporate decisions. Board directors must have implicit trust in each other to make board discussions productive, even when debates are long and wrought with many strong opinions.
Board directors, committees and the whole board should participate in annual self-evaluations to identify their strengths and weaknesses.
3. Onboard all directors
Board directors put their best foot forward when well-prepared for their first board meeting. Corporate governance best practices support corporations having a formalized process for board director orientation.
Orientations can be formal or informal. Information should include the organization’s history, key accomplishments and a review of the board's organizational policies and procedures. New board directors should be aware of their legal and fiduciary responsibilities and receive a copy of their board director duties and responsibilities.
New board directors should receive the most recent copies of financial statements, meeting minutes and the annual strategic plan.
4. Foster effective presentations
Boards oversee more than they did even a few years ago. From the SEC’s enhanced ESG requirements to more robust cybersecurity rules, boards have intense workloads — and ballooning board agendas to go with them.
As board agendas grow, functional leaders and directors must deliver effective presentations to ensure no reporting or oversight goes awry. Boards can help these leaders make the most of their time by implementing corporate governance best practices related to boardroom presentations.
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Discover more5. Align strategies with goals
Another effective corporate governance best practice refers to boards that align their strategies and risk management activities with the company’s goals. Boards should use their human resources and other tools to identify and assess all forms of risk. The board must work together to develop the company’s risk tolerance and risk profile. Additionally, they need to ensure that the company has the proper framework and controls in place so they can monitor risk and mitigate it when necessary.
Corporate governance best practices require board directors to examine risk and strategy on a short and long-term basis. The board will engage in routine oversight of risk management/enterprise risk management (ERM), whether that takes the form of a risk register, heat map or other framework. The board will oversee recommended risk mitigations and ensure that the organization has appropriate controls and resources.
6. Hold directors accountable
The many scandals that have made headlines demonstrate why accountability has such a strong position in best practices for corporate governance. Boards need to develop strong internal controls and monitor them often.
Accurate, transparent reporting systems with adequate checks and balances are considered important parts of corporate governance best practices. Have the board and management agreed upon quantifiable performance metrics/key performance indicators (KPIs), and how are they reported? Look at your board’s disclosure practices and how transparent the board is in its internal communications and with stakeholders.
The board evaluation process is also an essential accountability tool. Self-assessments and evaluations of the broader board can proactively identify skills, security, or responsibility gaps. As such, it’s a corporate governance best practice to conduct reviews routinely and build board buy-in so those gaps don’t become costly missed opportunities.
Accountability in effective corporate governance also includes deciding the correlation between attracting the most talented board nominees and offering them enough compensation to make board work worthwhile without creating a conflict of interest. It’s generally preferred for board committees to manage and oversee board director remuneration.
7. Emphasize a high level of ethics and integrity
Board directors are the corporation’s voice. As such, they frequently receive requests to make public presentations. Effective corporate governance requires board directors to consider their fiduciary duties whenever they speak for the corporation. The best nominees are people who exhibit a high level of ethics, honesty and integrity in their speech, work and their relationships with people.
This is all the more important with the rise of artificial intelligence (AI). These emerging technologies present both unprecedented opportunities and potentially widespread threats. Directors who prioritize ethics will be well-positioned to guide ethical and responsible strategies for using AI — approaches that will be critical as AI regulations increase.
Best practices in corporate governance require boards to create and cultivate a culture that values honesty, integrity, and ethical dealings. To support integrity and ethical dealings, boards should carefully write three important policies: a conflict of interest policy, a code of business conduct policy, and a whistleblower policy.
Boards should have a clearly stated conflict of interest policy and ensure that board directors declare all conflicts of interest and refrain from voting on such matters. Boards should also institute policies for whistleblowing and reporting noncompliance.
8. Define roles and responsibilities
Another hallmark of corporate governance best practices is the separation of the board chair's and CEO's roles and the creation of distinct roles for each.
All board directors should have job descriptions and an outline that describes their duties and responsibilities. Boards almost always need to delegate some of their responsibilities to committees, such as the nominating or governance committee, audit committee, compensation committee and other special committees, as needed. This makes collaboration especially important.
9. Produce accurate financial reports
Thorough financial reporting is a legal mandate and essential to effective corporate governance. While regulations like Sarbanes-Oxley (SOX) require comprehensive internal controls over financial reporting, ongoing financial reports are also how boards gain insight into the organization’s financial performance now and in the future.
It’s a corporate governance best practice to provide the board with monthly financial reports, and those reports offer visibility into how the organization’s finances have changed — and some reasons why. The financial reports should be clear and easy to read so even those new to the board can glean actionable information.
In many cases, monthly financial reports are brief overviews. Accounting teams should be ready to deliver deeper, more specific data as requested by the board.
10. Communicate effectively with shareholders
Shareholder activism has increased in recent years, particularly as ESG remains a fixture on board agendas. Effective corporate governance doesn’t suppress these shareholders; instead, it finds ways to understand and affirm their point of view. This is especially critical ahead of proxy season, as the universal proxy gives shareholders the tools to express themselves.
While it’s tempting to start greasing the wheels with shareholders ahead of proxy season, the governance best practice is to identify and respond to shareholder concerns proactively. Boards should work with their teams to monitor their activist investors and craft response strategies to remedy any discontent long before issuing proxy statements. This helps organizations better understand their shareholders and create a collaborative and productive environment for the annual meeting and beyond.
11. Embrace artificial intelligence
Generative AI can still be considered an emerging technology. Yet boards who want to ride that wave — not get lost in the tide — should consider how to efficiently and securely integrate AI into board and company operations.
Boards should start by working with management to arrange training sessions about generative AI and other technology.
“Educate yourself and help the board educate themselves [to effectively implement technology in governance],” says Courtney Kamlet, Vice President, Group General Counsel and Corporate Secretary for Vontier Corporation.
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Discover moreRigorous training will be a key corporate governance best practice as boards adopt AI because they can’t make policies about technology they don’t understand. Topics should include both how AI works and its associated risks — including if AI introduces inaccuracies into company assets or incorporates language protected by copyright.
“The benefits will surely vary by industry and will undoubtedly involve changes to business processes,” John Rodi, partner at KPMG and leader of their Board Leadership Center, says. “That benefit should focus on what companies need to do so they don’t get left behind. The risks should focus on those risks that raise reputational as well as legal peril for companies.”
Effective corporate governance also depends on having clear policies and procedures for AI. Boards should consider who will be responsible for the AI model, when it should be developed and deployed, what risk management should be in place and so on.
12. Implement a technology governance framework
In many ways, technology is inextricable from modern governance. However, technology doesn’t drive organizational goals unless accompanied by a strong IT strategy built upon accountability and risk management. This strategy starts with the board.
Boards should develop clear processes for aligning their governance platform and other technology with strategic priorities. This can maximize technology’s ROI and support business growth.
How the board uses its technology also matters. Corporate governance software can empower the board to leverage advanced analytics, AI and machine learning tools to improve decision-making and identify risks or opportunities in real time.
Technology can become a strategic enabler for organizations looking to strengthen governance and drive innovation.
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Discover more13. Establish a cybersecurity strategy
2024 marked a significant increase in cybercrime; CloudStrike reports a 75% increase in cloud intrusions. These attacks are also getting more sophisticated, as the majority are malware-free. As such, organizations committed to best practices will shore up their cybersecurity framework.
Boards should build their cybersecurity expertise through board recruitment, training or securing external advisors with expertise in emerging threats and mitigation strategies. Making cybersecurity a focus in this way can help the board develop and enforce essential security policies.
Corporate governance best practices for these policies include a reporting structure to supply the board with actionable metrics, regular cybersecurity training for key stakeholders and a robust incident response plan.
14. Centralize data governance
Data is the key to effective decision-making. However, data can only solidify our strategic advantage if it is reliable, secure and scalable. This requires a comprehensive approach to data governance.
It’s a well-known best practice for data governance to store structured and unstructured data in a centralized location. Equally important, though, is to have clear guidelines for ensuring that data remains accurate, complete, consistent and timely.
Security is also paramount. Data should be encrypted at rest and in transit to protect it from breaches and bad actors. Complying with standards like SOC II and regulations like GDPR and HIPAA, if relevant, can give your board an added layer of assurance.
To store and secure data, boards must prioritize analytics platforms. Boards need not only data but also dashboards that visualize data so it is applicable to the many challenges and opportunities boards face.
Turn governance best practices into a resilient infrastructure
Corporate governance best practices are evolving all the time. Where once the emphasis was on the bottom line, today’s stakeholder capitalism means boards must balance the bottom line with the organization’s long-term impact.
While this can be challenging, effective corporate governance best practices help boards keep up.
Keep up with stakeholder demands
Learn the four steps to building a more robust governance infrastructure that can evolve with the business landscape.
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