What is a governance framework?
A governance framework, also called a governance structure, is essential for modern governance and legal operations. Governance frameworks direct how people interact with the organization, regulators and stakeholders to guide and monitor operations closely.
A governance framework is a supporting structure for entity management and compliance, providing the trunk from which the various branches of compliant operations can grow. Along with entity management technology, governance helps companies and other organizations stay on the right side of regulators regarding filing requirements and aspects such as company culture, remuneration methods and transparency of operations.
A corporate governance framework helps to center an organization’s approach around common themes, including who has a voice, who makes decisions and who has accountability. The governance framework acts as an essential supporting structure, a framework of rules and practices by which the board ensures accountability, fairness and transparency in how the company runs and communicates with its stakeholders.
Here, we’ll explain the key concepts that underpin corporate governance frameworks, including:
- Governance framework vs. governance structure
- The elements of a strong corporate governance framework
- Five benefits of an effective corporate governance framework
- Why governance frameworks are important
- How to build your framework
- Software that can strengthen your governance approach
Governance framework vs. governance structure
The terms ‘governance framework’ and ‘governance structure’ are interchangeable. They both describe the system of an organization’s governance, particularly the rules, procedures and roles of responsibility that influence the organization.
These frameworks or structures most often govern people in positions of authority, such as executives and the board of directors. They dictate how they will complete the activities that drive the organization forward.
Governance structure examples
Good corporate governance structures can make organizations more competitive. With good governance, organizations ensure all their activities are consistent and up to regulatory standards, assuring the board that their rules and systems improve the business.
Examples of strong governance structures include:
- Integrating board activities: Boards — and their organizations along with them — can easily slip into silos. These silos are not only inefficient, but they also leave the board vulnerable to costly oversights. Good governance structures will integrate all board activities, most often through entity management software.
- Strategic internal audit: Boards need data to make effective decisions. This makes the internal audit function indispensable. A strong governance structure will prioritize regular and ongoing internal audits to ensure they catch risks and keep the board up-to-date.
- Industry and regulatory standards: Compliance is integral to all board and organizational activities. It ensures all processes and procedures follow critical regulations, such as ISO certification. Meeting these types of standards is foundational to any good governance structure.
What makes a strong corporate governance framework?
A strong corporate governance framework organizes operational, risk management, reporting and financial processes to ensure the board is continually updated. Rules and systems create a robust framework for governance, and the framework provides the structure that drives the strategic plan. A strong governance structure can:
- Help boards make considered data-based decisions
- Expose gaps or weaknesses within the board or management
- Support the company in numerous ways to effectively connect leadership with operations
- Serve as an essential tool for effective board oversight; the process of building the framework is often just as important and meaningful as the result
- Bring authority and accountability while enabling effective decision-making in an organization
5 benefits of an effective corporate governance framework
A sound governance framework can have a far-reaching impact. Though governance is most commonly a topic in the boardroom, it has a ripple effect internally and externally. Organizations that successfully execute a governance framework can expect:
- Effective risk management: A robust governance framework includes processes for identifying, assessing, and managing risks, contributing to better risk management practices. Robust compliance mechanisms, ethical guidelines and risk management practices can steer companies away from regulatory violations and litigation and toward sound performance.
- Enhanced transparency and accountability: A corporate governance framework promotes transparency by offering stakeholders clear insight into the company’s operations, finances and decision-making. Transparency builds trust, which in turn engenders loyalty to the organization.
- Better decision-making: Organizations with a sound governance framework define the roles, responsibilities and processes that guide informed decision-making. Timely board decision-making leads to a better allocation of resources and long-term sustainability.
- Protection of stakeholder interests: Stakeholders are central to corporate governance frameworks, particularly the stakeholder model. Organizations can prioritize stakeholder interests, ensure ethical treatment, and build trust with an effective framework.
- Stronger financial performance: For investors and consumers, corporate governance is a calling card for a well-managed, ethical company. That reputation benefit makes it easier for organizations to attract capital and loyal customers, boosting their long-term performance.
The importance of governance frameworks and structures
Corporate governance structures are essential in today’s progressive and aggressive business environment. Corporate governance allows companies to put their positive traits firmly on display. With these intentions 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.
Businesses today are held to incredibly high standards by investors and customers alike; honesty and openness about processes and operations count for a great deal. Both shareholders and consumers want to see companies operating with integrity and transparency.
What are the key components of a governance structure?
Business advisory firm PwC calls corporate governance “a performance issue” as it provides a framework for how the company operates, stating that corporate governance frameworks 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 how 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.
How to start building your own corporate governance framework
Governance frameworks exist to ensure that a company remains in compliance and operates within legal boundaries, meaning that any governance structure must consider the local regulations wherever the organization has entities. The governance framework then dictates the governance operating model appropriate to the organization's aims.
To start building your own governance framework, aim to answer these questions:
- Who are the people with authority in your organization?
- What information do those people need to access, and when?
- What does the organizational structure look like?
- How does the structure influence how decisions are made?
- What are the organization’s reporting obligations?
- How does information need to flow around the business?
- What is the relationship between entities — and does this present any challenges in terms of accountability, authority or responsibility?
- What is the relationship between departments and stakeholders?
- Where does the organization have entities based — and does that influence obligations?
- How does the organization manage compliance risk?
Governance structure for portfolio companies
A robust governance framework guides an organization in achieving accountability, authority and sound decision-making. By contrast, a weak corporate governance framework will cause a breakdown in the stages of the investment process and affect overall economic growth. For portfolio companies, a governance structure should ensure that all shareholders can vote on governance matters. All shareholders should have a voice and foundational rights.
Portfolio companies should conduct business concerning both the shareholders’ interests and the capital entrusted to them. A portfolio company’s governance structure should take the following into account and demonstrate:
- The company’s ability to create value — and yield long-term profits — in response to demand
- The ability to facilitate investors’ predicted earnings as a result of accurate and timely disclosure
- A commitment to ethical conduct as a member of society
- A commitment to fulfilling corporate social responsibilities including, but not limited to, the organization’s environmental impact
A portfolio company’s governance structure should ensure adherence to the above commitments as the organization carries out its responsibilities as a market participant.
Governance structure for subsidiaries
It’s natural for corporations to seek to establish new entities to fuel business growth and deal with increasingly complex regulations — but with each new entity comes a heightened need for entity management and robust subsidiary governance.
Globalization raises legal and corporate governance issues at the subsidiary level that need constant attention. To deal with this, many company secretaries and legal operations professionals turn to a subsidiary governance framework template to help get things under control.
Corporate governance framework templates provide guidelines and ideas to ensure both downstream and upstream corporate governance flows are robust and compliance-proof.
A subsidiary governance framework template can help to align processes while allowing wriggle room for local action. It provides the framework to allow those responsible for subsidiary governance and entity management the space to figure out what works best for them and their needs while ensuring the policies and practices generally conform to what the parent company expects.
This means that the parent company can focus on group-level requirements and issues, work to grow the business further and devise long-term strategies. At the same time, the subsidiaries can work out the part they need to play and how that works at a jurisdictional level.
It’s not practical to assume the parent will take care of every subsidiary’s regulatory and compliance needs; any subsidiary governance framework template must lay out the roles and responsibilities of both the parent and each subsidiary. The Chartered Governance Institute (CGI) has developed an “at a glance” subsidiary governance framework template checklist to help corporations operating across multiple jurisdictions and business areas.
Governance structure for public entities
Once an organization decides to list and go public, its compliance and governance burden increases significantly. Now, it’s no longer just a company’s stakeholders and potentially the local authorities keeping an eye on how the organization is running; once it is listed, that organization becomes public property. It’s opened itself up to intense scrutiny.
Market fluctuations will impact its share price, but scrutiny can also impact price. The movements and decisions of the board will be publicly available for access by anyone with a genuine interest, and investors will have the opportunity to ask questions and express concern about business operations. This is why public entities need robust and sound governance practices.
Strong governance structures can help mitigate some of those risks, ensuring that everyone in the business — as well as the market and investors — knows the organization’s steps. It means transparency around compliance and operations is supported by clear communications, and a paper trail can lead back to the reasons for any decisions and the ultimate consequences.
A public entity must report to the market regularly. A schedule of reporting on board meetings and accounts, management changes, security breaches, and more will be expected, as will a detailed annual report. If they don’t get filed with the exchange, then the public entity, and potentially its parent, will face sanctions and fines.
As public entities develop and monitor their governance structures, they are, in essence:
- Ensuring there are assigned roles and responsibilities
- Seeing that the above responsibilities are carried out in the right way at the right time by the right people
- Taking care that the appropriate record is filed to keep track of what has happened
And, of course, any corporate governance framework should be subject to regular audits to ensure it’s still fit for purpose, providing the proper checks and balances.
Strengthen your corporate governance framework with entity management software
Entity management software supports the governance framework by bringing stakeholder information and entity data to a central repository that’s easily accessed from anywhere in the world. This is critical because more board members, executives and employees work remotely, meaning that they need to be able to follow the governance structure no matter where they’re logging on from. Boards not only require ways to digitize their governance systems, but they also need software that can turn their governance structure into a competitive advantage.
Diligent’s Entity Management software, part of the Diligent One Platform, allows boards to keep up with today’s fast-paced climate, facilitating the swift, data-based decisions that modern business requires. Request a demo to see how software can future-proof your governance framework.
