x

What is Corporate Governance?

Corporate Governance can be described as a conceptual framework – that when applied to a corporate hierarchy, forms the backbone to effective enterprise risk management. By definition, ‘governance’ concerns an entity’s ability to serve the needs of its intermediaries; demonstrated by the achievement of operational objectives; candid relationships between shareholders and the board; good citizenship within the communities in which it operates; fair relationships with employees; and a compliance focused relationship with the government.

 

Common elements found in effective enterprise-wide risk management systems include:

  • Identification and evaluation of risks;
  • Timely risk reporting; and
  • Commitment to resolution.

Connected to these elements are; rules, processes, and behaviours that basically articulate how resources are managed and power is distributed. 

 

Traditionally, corporate governance aligns with an organizations corporate hierarchy, positioning shareholders at the top, board members at the second tier, and executive management at the third tier (with a transitioning CEO). From there, Executive Management connects to Senior Management and Operations – at the fourth tier.  This structure should facilitate the uninterrupted flow of information from the top of the hierarchy down to the base tiers of an organization – which can otherwise be regarded as good corporate governance.

 

Good corporate governance is achieved by the integrated efforts of the directors, the CEO and Senior Management, to attain business through high standards of ethics and responsibility. Whilst regulators and legislation play a pivotal role in enforcing ethical business dealings, an organization must strive for compliance independent of legislation – via procedures and best practice guidelines. Corporate Governance through voluntary compliance enables an organization to become more pro-active in its risk management, such that operational/ reporting gaps become opportunities for improved efficiency, rather than costly risk occurrences.

 

When this is achieved, principled goal setting, effective decision-making and monitoring of compliance/performance is done in such a way that Senior Management, the CEO and the Board can respond quickly to changing circumstances and provide enduring value to stakeholders.

 

The key values of Corporate Governance include – but are not limited to; honesty, trust, integrity, transparency, accountability, responsibility, respect, and commitment. To facilitate the successful and sustained integration of these values, roles and responsibilities of each corporate department should be defined, documented and communicated such that:

-          Tasks are completed in accordance with legislative requirements.

-          Transactions are executed in the best interests of the shareholders, stakeholders, communities and the environment, and

-          Conflicts of interest are prevented between departments or, between CEO/ Chairperson/ Board members – and the organization itself.

 

When applied as an aid to risk management, corporate governance facilitates the effective application of processes and procedures that aim to maximize on opportunities whilst avoiding adverse incidents.

 

Specifically, the quantitative analysis of trends will help to pin-point variables that deem a risk as favourable, or unfavourable. These variables comprise the organisations risk appetite, which is essentially a set of predetermined parameters (numerical or otherwise), used to gauge the fit of a new risk. If the parameters of the new risk fall within the parameters of the organisations ‘risk appetite’; the likelihood of positive gain outweighs the potential for loss. At the very least, quantitative justification for maximising on a risk can be derived. 

 

Familiarity with this practice will enable an organization to identify and adapt to changing circumstances efficiently enough, so to not only avoid material/ non-material loss, but to also take advantage of current market trends created by change. Doing so however requires compliance to internal processes and procedures in an automated, disciplined fashion – across all levels of an enterprise.  

 

The following procedures (tools) will facilitate the successful alignment of the aforementioned principals across all levels of a corporation. The intention behind these components is to influence both motivation and ability, by firstly monitoring activities, and then taking corrective action to meet organizational objectives:

 

a) Code of conduct

b) Policies and procedures

c) Internal controls framework

d) Clearly defined set of risk functions

e) Internal/ external audit

f) Disclosure and communications.

g) Measurement and accountability.

h) Government and regulatory.

I) Board performance evaluations.

 

The successful integration of these corporate governance values, principals and systems will inevitably see organisational inefficiencies reduced via mechanisms and controls that uphold accuracy, efficiency and ethics in business practices. 

 

Written by

Comments are closed.