Corporate Governance

Corporate Governance is a hot topic at the moment, so I think it is probably an opportune time to re-post this excellent article that was written for this blog some time ago by Chris Baker, Technical Director at the Institute of Internal Auditors.  I was reading some comments on a quality management chat forum recently where people were arguing that the apparent failures across the News Corp organisation was a failure of QUALITY management. Discussions like this make me wonder whether the concept of Corporate Governance is really understood. There are some that will argue that Quality Management encompasses all processes and disciplines, but in my opinion this is incorrect and simply displays an ignorance of the complexities of other processes, professions and disciplines

GOVERNANCE PRINCIPLES

The phrase “corporate governance” is prominent in both the business world and the public sector. This is due to the increasing pressure to protect shareholder value and public money following a number of high profile financial scandals, which have received media attention

Good governance is about the effective supervision of the company, and managing risk, so that business is done competently, with integrity and due regard for the interests of all stakeholders. It is the means by which organisations can achieve their objectives and sustain performance

Investors, including banks, place a growing emphasis on how well companies manage their affairs. Those organisations that can demonstrate that relationships are managed with probity are seen as presenting a lower risk to investment, and secure an obvious competitive advantage. It should be noted at this point that demonstrating probity is not the same as being presumed innocent until proved otherwise

The benefits to be gained from applying best practice in governance include:

  • Confidence of investors – who may be more inclined to support development and growth
  • Trust of employees – with the likelihood of increased commitment and retention
  • Stakeholder & Customer confidence – leading to increased competitiveness in the market place
  • Long-term sustainability – through achievement of aims and financial strength
  • Resilience and adaptable to change – built upon a firm foundation of risk management and control

The key guidance on corporate governance is directed towards companies listed upon the stock exchange and is set out within the Combined Code, which was originally published in 1998 but has been revised in 2003 and 2006. The code is voluntary and is designed to strengthen and increase the effectiveness of the unitary Board system (one main board with a chairman and a CEO). The main principles of the code are as follows:

A. Every company should be headed by an effective board collectively responsible for the Company. Their duties should include:

oSetting the company’s strategic aims

oProviding the leadership to put strategies into effect

oSupervising the management of the business

oReporting to shareholder on their stewardship

B. Levels of remuneration should be sufficient to attract, retain and motivate directors. There should also be a transparent policy for setting executive remuneration.

C.The Board should carry out a balanced and understandable assessment of the company’s position:

oThe board should maintain a sound system of internal control to safeguard shareholder’s investment and the company’s assets

oThe board should at least annually conduct a review of the effectiveness of the system of internal control and should report to shareholders that they have done so.

oThe review should cover all material controls, including Financial, Operational and Compliance controls and Risk Management systems

D.Dialogue with shareholders based on objectives, including an AGM to encourage shareholder participation

Since the publication of the Combined Code and related guidance upon the nature of internal control issued in 1999 (Turnbull Report) there has been a great deal of debate and academic research upon what represents best practice with regard to corporate governance. There are differences of opinion but the following list, reported in Tottel’s Corporate Governance Handbook2005, is generally regarded as a useful summary

Principles of Corporate Governance, Tottel’s Handbook 2005.

1. Stakeholder involvement and control in the business
2. A strong, involved board of directors
3. Risk assessment and control
4. A strong, independent element on the board
5. A balanced board composition
6. Maximum and reliable public reporting
7. Avoidance of excessive power at the top of the business
8. Effective monitoring of management by the board
9. Competence and commitment
10. A strong audit process

While much of this may seem remote and of passing interest to small or medium size companies there are a several practical aspects that can be drawn from the detail that could provide a competitive advantage to small and medium size organisations. Consider the action you can take under the following categories to improve governance

Strategic

  • Fully document and communicate your values and business objectives to stakeholders: employees, customers, investors. Seek feedback
  • Set specific targets and objectives for the most senior managers and hold review meetings
  • Establish a simple and effective system of risk management that will prevent things from going wrong. Encourage involvement is risk
  • Find or appoint a critical friend(s) who is prepared to ask challenging questions about performance and direction of the business

Operational

  • Look at how you receive assurance that the business complies with regulations and contractual conditions, such as the Companies Act, Inland Revenue, VAT, Data Protection, and Health & Safety etc
  • Consider the need for audit processes to gain full assurance
  • Create a simple set of measures (key performance indicators) that tell you how the business is performing. Include stakeholder measures to provide a balanced scorecard
  • Set out standards of behaviour and customer expectations to emphasis the importance of customer care

Financial

  • Prepare long-term financial plans, cash flow projections and annual budgets that link directly to your business plans and objectives
  • Establish decision and authority levels for managers so that financial risks are understood and applied.
  • Set credit limits for your key customers and carefully monitor and mange your debts.
  • Ensure that there is reconciliation of your balance sheet figures to supporting records. Report and regularly review financial performance

If you would like to discuss corporate governance issues further or would like to implement risk management and audit processes within your business please contact Capable People

Chris Baker

Technical Development Manager for the Institute of Internal Auditors,

and critical friend of Capable People

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