What are the core principles of corporate governance?
/by Ruth Brooks
Corporate governance refers to the framework of policies and guidelines that inform a company’s conduct, decision-making and practice. This infrastructure is built upon four key principles: accountability, transparency, fairness and responsibility.
For the board of directors, the primary force tasked to monitor and meet the most critical needs and goals of the organisation, adhering to these standards is imperative. Non-compliance is certain to damage business integrity, investment and projected profitability.
Corporate governance is the directing force of a business, encompassing:
- Ethical behaviour
- Financial reporting
- Hiring and firing policies
- Law compliance
- Corporate strategy
- Compensation
- Risk management and more
With stakeholder investment, staff engagement and public confidence at stake, the board must strive to serve all business areas and interests using the best intelligence, strategies and tools available.
Their approach should be shaped and informed by the four core principles.
Accountability
Accountability surpasses right and wrongdoing or placing blame. Businesses must be able to account for and explain every action and decision taken and are obligated to take ownership of the risks involved. This builds trust between business and stakeholders and shareholders, essential for maintaining confidence and procuring investment.
Establishing formal corporate reporting, sound risk management and internal control systems and approving sustainable corporate strategies are examples of good corporate accountability in practice.
Transparency
Transparency builds upon this trust. A corporation must exercise openness and willingness to disclose truthful, accurate and timely information regarding the company’s financial, social and political position to shareholders, stakeholders, consumers and the wider community.
A board with a comprehensive audit committee, routine external audits and informed, unbiased annual reports are practising good corporate transparency.
Fairness
Effective corporate governance strives for good business ethics. All shareholders and stakeholders should be considered and treated equally, regardless of their respective shareholdings or position on the corporate ladder. Businesses that exercise favouritism risk losing investors, suppliers, consumers and public support.
A board that strives to build an engaged and diverse organisation, actively conducts succession planning, develops a reflective and incentivised compensation policy and considers the interests of all of the company’s constituencies are exercising a good understanding of fairness.
Red flags of bad corporate fairness include nepotistic promotions, internal corruption and incompetent or a ‘closed-door’ approach to leadership.
Responsibility
As the authoritative voice, steering control of so many elements of business, it’s important for the board to wield their power responsibly. Directors must act ethically at all times and maintain the best interests of all those impacted by the business.
Examples of good corporate responsibility in practice include taking a top-down approach to ethical conduct and engaging with long-term shareholders on issues and concerns that affect the company’s long-term value creation. Warning signs of bad corporate responsibility include a board that disregards expert advice or is monopolised and controlled by an individual member voice.
What does good corporate governance look like?
Overall, good corporate governance is built upon transparent and data-driven policies, business practices and internal processes (informed by the four core principles) that demonstrate the aligned incentives and interests of shareholders, directors, senior managers, clients and consumers, suppliers, government and the wider community alike.
More specifically, an organisation that exercises effective corporate governance will:
- Balance compliance with performance
- Clarify the board’s role in determining strategic direction
- Regularly monitor organisational performance
- Understand the importance of/work to improve the board-CEO relationship
- Implement and exercise sound risk management and internal control systems
- Ensure each director has the knowledge, skills, experience and resources needed
- Appoint a competent chairperson with exceptional leadership qualities
- Continue to pursue opportunities for improvement
Inherently complex, with regulatory burdens and expectations evolving all the time, it’s not always easy to get governance right – but good data management can be crucial.
Companies that regularly analyse key performance indicators, such as customer sentiment and stakeholder surveys, whilst staying looped into wider thought leadership and public opinion have a more balanced view of where their organisation stands and can capitalise on their respective markets.
Aside from financial viability and improved business opportunities, good corporate governance aids organisations in avoiding penalties for non-compliance and has even been shown to increase employee morale.
