In the light of an alarming number of high-profile cases of theft, greed, and misuse of corporate assets, directors and senior corporate leaders have been pushed into drastically changing the way organizational assets are taken care of. This process is known as governance.
Governance is about the influence of stakeholders in the affairs and direction of an organization. It reflects their interests, how their views are included in decisions, how decisions are made, and how the decision makers are held accountable.
Governance is not about restrictions. It is more about creating democratic processes in organizations to enable and encourage freedom of initiative and enterprise. This freedom is designed to build trust among all the stakeholders so that they can focus on their goals, create world-class products and services, and optimize financial benefits for shareholders and employees.
Improving governance requires that we strengthen and change the relationship that the board has with the corporation. It requires that the board uses increased power to ensure compliance of the officers of the organization to all standards set by government and other outside regulatory bodies.
Legislation alone will not lead to significant improvements in governance. The attitude of senior management is key.
✓ Good governance is the responsibility of all executives as well as the board. Good governance will enhance the performance of an organization if the executive team:
• takes a longer-term focus on financial performance, beyond quarterly
results
• supports a strong board that is independent of those running the
daily affairs of the organization
• establishes methods for listening to the shareholders and responding
to their needs
• ensures that it does not become ensnarled in defensive activities that
detract from management’s ability to take risks
• promotes strategic planning and the execution of those plans
• emphasizes and promotes success instead of avoiding failure
✓ At the heart of good governance is accountability. The benefits of increased accountability include:
• Increased employee confidence in the organization.
• More effective use of assets.
• Greater debate within an organization as to how better to allocate
resources to competing priorities. The creativity that flows from this
debate will lead to improved performance.
• Increased participation by investors willing to contribute knowledge
capital, as well as financial capital, in order to boost shareholder
value.
✓ Good governance is characterized by these factors:
• Involvement. All members are capable of being heard.
• Transparency. Information is available to all.
• Consensus Decisions. Attempts are made, when practical, to achieve
broad agreement to decisions.
• Equity. All people, no matter what race, age, color, creed, gender,
or sexual orientation, have an equal ability to participate.
• Effectiveness. The organization’s resources are utilized effectively.
• Accountability. Decision makers are responsible for their behavior.
• Strategic Vision. There is agreement about the general direction
and influence of the organization.
✓ Good governance requires that the board and the CEO become independent of one another so as to prevent collusion. Ideally:
• The chairperson and CEO roles should be occupied by different
people.
• The CEO should be nonvoting.
• In strategy formulation and policy making, the CEO will be seen as
a full partner with the board.
• The board will focus on monitoring performance rather than formulating
policies.
• The CEO will attend all board meetings and participate fully in all
discussions.
• In large organizations, the board will monitor performance through
standing committees, including an audit body.
✓ The board does not involve itself in the day-to-day running of the organization—that is the task of the CEO and his or her management team. The primary tasks of the board are to:
• create a strategic plan, which sets the course for the organization
• regularly update the strategic plan as circumstances change
• set the organization’s direction, ensuring that it has a compelling
mission
• develop clear objectives stemming from the mission
• create a set of values to ensure that the corporation operates effectively
and professionally
• ensure that the assets of the corporation are being effectively utilized
.
✓ Good governance often means change. Here are some specific actions that may demonstrate your organization’s good intentions.
• Increasing the number of independent directors to the point where
they form a majority on the board. Size matters, depending on the
nature of the organization and the complexity of its operations. As
a general guide, however, the board should be made up of between
five and seven members.
• Ensuring that all committee members are nonmanagement in order
to ensure that decision making is impartial.
• Conducting some board meetings without management present, ensuring
open and candid discussions.
• Promoting stock ownership (in the case of for-profit companies) so
that directors have a stake in the long-term success of the organization.
• Seeking shareholder approval for significant change in systems of
compensation for senior executives.
• Promoting the concept of pay-for-performance rather than stock
options. Rather, bonuses and ‘‘performance share units’’ should be
linked to specific performance objectives—cash flow, profits, or customer
satisfaction—rather than stock price.
• Seeking third-party professional advice when reviewing and evaluating
compensation practices.
• Separating the role of chairperson of the board from those of president
and CEO. The chairperson should be seen as the chief governance
officer.
• Separating the audit and risk-management committees to recognize
the importance and contribution of each. These committees should
be viewed as committees of the board, not autonomous entities.
• Designing compensation plans for executives who are aligned with
corporate strategy rather than with short-term share value increases.
• Enhancing the competence of directors by creating position descriptions
for the chairs of each committee and the chairperson of the
board. Then—scary as this may be—have each director assess himself and each other. When shortcomings are identified, have each
person develop a plan for improvement. Any director refusing to
improve should be removed.