How do you rate for good governance?

August 1st, 2012

A governance review will help assess the way your company is run and explore ways that governance & management impact on future decisions & ultimately the profitability of your company. Some people think that good governance is for those larger businesses, but the reality is that good governance can & should be put across an organisation that is looking for excellence & that relates to most SME businesses.

There are five areas that I assess when looking at the governance of a company with the aim to get an overall & clear view of what is happening & more importantly what will happen. You can put these against your existing organisation & see where you fit.

5 areas of governance for review

1. Structure
2. Strategy & direction
3. Portfolios & policies
4. Communication
5. Performance

Structure is taking a critical look at the existing shareholders & directors. Sometimes people fall into these roles by default, so a board (or organisation looking at a board structure) should ask itself if it has the right people on board to start with. Just because someone is a shareholder doesn’t mean they need to be a director & vice versa, or if they were at the start of the organisation are they the right person now?

Once there are the right people on board from within the organisation, is there the need for an independent person, be that an independent director or someone in an independent advisory capacity? This is where someone in a non executive position is able to provide thought & experience from an independent view.    Part of a board’s role is to look to the future, so also consider what requirements there may be from a succession perspective.

Strategy & direction
Is there clear direction by the board around the areas of strategy & direction? The board should develop strategy & management should implement. On some occasions if there is not an effective board structure in place, management by default end up making decisions that should be made at a board level. In the typical SME it’s not uncommon for the same parties may wear multiple hats but to achieve excellence & look at the organisation from a governance perspective it is important to consider each of the roles separately.

If the board does direct strategy, what is their process to engage with others in the organisation & to leverage off their knowledge? Just because the board makes the final decision in respect of strategy it doesn’t mean they shouldn’t take other stakeholders’ views into consideration. In fact if an organisation wants complete buy-in from its people, it’s vital to include them where relevant when strategy & direction is been discussed.

Portfolios & policies
Once there are the right people in place, there needs to be an assessment on who does what. Who chairs the board, what are the various roles & then is there a charter, governance policies & shareholder agreements in place that guide direction & decision making.

What practices need to be put in place to manage risk, ensure the company remains solvent, viable & maintains high levels of compliance?

So you’ve set the direction, have the right people involved, now you need to think about how you communicate to those various stakeholders. They might be shareholders, management, staff, suppliers, clients, sponsors, advisors, bankers, the board, the list can go on. How often do you communicate with them, what do you need to communicate & how do you do it? How do they communicate with you if there is an issue that is having an impact on the relationship, & importantly can it be dealt with before it becomes an issue?

What are the key drivers that need to be measured, how does the board know that it is on track & how does management know if they are delivering what is expected of them? As I mentioned earlier, sometimes the manager may in fact be a director but it is important to have a clear understanding of what is required. In an ideal world there would be a complete separation of board & management duties, but in the reality of the SME that is not always the case due to the people involved. Even if the people are the same though, it’s vital to consider the roles separately & have a clear separation of duties.

What process does the board have to review its activity against the direction set? Is the board thinking about the long term sustainability of the organisation or are they pulled more towards shorter term management thinking?

Good governance doesn’t happen by chance & at times the governance practices evolve with the organisation, so if you have looked at the above & don’t ‘tick too many boxes’ don’t become too concerned, at least you’re thinking about.

The Institute of Directors in their Four Pillars of Governance sum up the value good governance can bring. Adding value depends on an entity’s purpose, structure & goals. Whatever these are the board is always a key agent of good governance.

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