Some important characteristics of good corporate governance
“Corporate governance” defines the practices, processes, and structures through which an organisation manages its business. An organisation, through corporate governance, works to accomplish its operational, fiscal and strategic objectives while attaining longstanding sustainability. However, there are no set practices, as there are several factors that drive an organisation towards its objectives. The practices vary depending on these factors.
Factors that set forth the RIGHT corporate governance practice
- Nature of business
- Size of the organisation
- Phase of development
- Accessibility of resources
- Expectations of shareholders
- Legal requirements.
What triggers its importance globally?
The heightened interest in and discussion about corporate governance is due to several corporate implosions, that took place over the past decade, across the world. Major failures established corporate governance as an accepted subject of discussion in academic debates, corporate meeting rooms, and for policy makers all over the world. The numerous incidents of major implosions amplified the demand for transparency and continuous improvement in the boardroom. The financial crisis of 1998 which shook the backbone of Asia, Brazil, and Russia, exposed the deficiencies in the corporate governance system that threatened the stability of the entire global economic system. Similarly, the major failures of the corporate governance system in Europe and USA lead to massive financial collapses. These events pushed policy makers to recognise and highlight the consequences of poor or weak corporate governance systems.
Does a single agenda work for all?
With the rise of Brazil, China, and India among the global economic powers, the common global framework of corporate governance ceases to apply for all. The traditional model consists of:
- monitoring and management via active investors
- informed and independent financial media
However, this model, working mainly through management decision making, fails to cover all aspects of corporate governance which includes national culture, social norms, social structure, etc. The latter is particularly country specific.
The basis of corporate governance is law. Law plays a significant role in corporate governance in terms of corporate legislation, security policies, and guidelines, decisions of the various regulators and courts. The directors of a business are bound by a duty of loyalty in service. Again, they are also bound by the fiduciary duty to be honest and act in good faith for the best interest of the business.
The champions of corporate governance believe that there lies a correlation between long-term shareholder value and good corporate governance practices. The benefits enjoyed are:
- Strong internal controls
- Better risk management
- Increased shareholder engagement
- High-performance directors
- Effectively measured and monitored performance
Top Seven Corporate Governance Best Practices:
It is imperative that a leader of a business accepts the responsibility for each decision made regarding the performance of the entire organisation. Once a leader designs a code of conduct and ethics, they must adhere to it and enable the entire organisation to observe the codes while promoting the key characteristics of good corporate governance.
- A clear strategy
The best practices of corporate governance begin with setting a clear strategy for the business. Take, for example, a boutique hotel, whose management needs to establish a clear strategy in order to make it a success. They will first need to conduct thorough research and find the niche market for their product. Once they identify the niche, they will create or modify the product as per the needs and demands of this target market. Based on these demands and needs, the management will design its marketing campaigns to reach the relevant customers. The entire flow of activities, starting from research to marketing must be pre-conceived and pre-planned in order to rule out errors and help the workforce to remain focused on the strategy.
- Organisational discipline
In order to run a business, it is vital to set policies and procedures for the organisation as a whole. However, these corporate policies are only effective if they are well-developed and thoroughly implemented in the system. The management of a business invests time and hard work in developing a strategy that they can implement in order to access the market. If the management fails to mobilize their employees to implement such strategies, the business will fail. In order to achieve success in each initiative taken by the management, and to establish good corporate governance, it is necessary to implement the policies, strategies, resolutions and, most importantly discipline and commitment, which form the foundations for all the above.
- An effective policy of risk management
One cannot guarantee that, even with the help of good policies:
- A business can stop competitors from stealing clients
- It can foresee unexpected disasters that may cripple the operations of the organisation
- It can escape the impact of economic fluctuations that may erode the purchasing power of the market
Policies cannot avoid risks. However, good corporate governance indicates that an organisation must implement measures to manage risks. An effective risk management strategy minimises an organisation’s vulnerabilities. For example, a business can diversify its operations in order to earn revenue from several different sources rather than depending on one particular source.
- Fairness in the organisation
One of the best practices of corporate governance is to be fair. To be fair within and also outside. The management must treat fair-mindedness as a priority and use this among employees and customers. The business can always push its employees to strive for the best, but not at the cost of low morale. The management must recognise the heavy workload shouldered by an employee and its long-term negative impact. Very high turnover and extremely poor employee morale is a fatal combination. Again, when it comes to customers, a business must offer equality of treatment. Being fair to customers is mandatory for a business to function ethically and to build a strong customer reputation. Unfair treatment for short-term benefits could be a major blow to the long-term prospects of the business.
- Organisational transparency
Transparency is a pillar to success. Within the corporate arena, when managers do not limit information from flowing down to employees, it unifies an organisation. Keeping one’s own counsel hurts transparency and fails to boost employee morale. When an employee is offered the freedom to understand the management strategies and observe the financial performance, it becomes easier to discern their individual role and responsibilities towards the organisation and work towards it. Transparency, as a corporate governance policy, must be implemented for the customers too. The public is averse to secretive corporations and trusts those that are more transparent.
- Self-evaluation to mitigate budding issues
It is next to impossible to avoid mistakes no matter how smartly an organisation is managed. This tendency is human and can only be managed with the help of self-evaluation. Good corporate governance advocates that regular self-evaluations and identification of developing issues within the corporation can help avoid disasters. Customer surveys and employee reviews are two highly efficient measures to collect vital feedback on the effectivity of the current organisational policies. In the same way, the use of an external consultant to analyse its operations will enable a business to easily, and impartially, identify ways to improve the performance and efficiency of the organisation as a whole.
- Corporate Social Responsibility
Social responsibility is a matter of high concern and a topic discussed in almost all board meetings. Consumers always expect their providers to be exemplary and a good member of the community. Say, for example, a business that invests in good quality packaging and also takes the initiative to recycle and reduce waste, then that will generate a very positive impression. Consumers like businesses which give something back to society. Good corporate governance practices help a business to identify the ways and techniques to improve corporate practices and promote good social behavior while reinvesting in the community.
Benefits of Good Corporate Governance
The seven pillars of good corporate governance practices have their own benefits. For the business, recognition of these ensures overall improvement and corporate success. The various benefits of best practices are:
- Strong corporate governance helps to maintain the confidence of the investor in the business resulting in the rise in capital effectively.
- Good practices ensure economic growth and corporate success and help a business to stand out among its peers and competitors.
- Efficiency, improved by good corporate governance practices helps a business to lower its capital costs.
- The boosted image of the business also has a very positive impact on the share price in the market.
- Good practices ensure that the owners and the managers are morally boosted to understand the target, identify their own responsibilities and achieve the objectives of the business collectively, that are in totally in the interest of the business and its shareholders.
- Good corporate governance helps in successful brand development
- It also minimises corruption, risks, waste, and mismanagement.
- Good corporate governance practices ensure that an organisation is managed well and is aligned to the interests of everyone related to it.