Governance

What are the main characteristics of good governance?

Good governance is accountable

Accountability is a fundamental requirement of good governance. Boards and management committees have an obligation to report, explain and be answerable for the consequences of decisions they have made on behalf of the community they represent.

Good governance is transparent

People should be able to follow and understand the decision-making process. This means that they will be able to clearly see how and why a decision was made – what information, advice and consultation council considered, and which legislative requirements (when relevant) council followed.

Good governance follows the rule of law

This means that decisions are consistent with relevant legislation or common law and are within the powers of council.

Good governance is responsive

Boards and management committees should always try to serve the needs of the entire community while balancing competing interests in a timely, appropriate and responsive manner.

Good governance is equitable and inclusive

A community’s wellbeing results from all of its members feeling their interests have been considered by council in the decision-making process. This means that all groups, particularly the most vulnerable, should have opportunities to participate in the process.

Good governance is effective and efficient

Boards and management committees should implement decisions and follow processes that make the best use of the available people, resources and time to ensure the best possible results for their community.

Good governance is participatory

Anyone affected by or interested in a decision should have the opportunity to participate in the process for making that decision. This can happen in several ways – community members may be provided with information, asked for their opinion, given the opportunity to make recommendations or, in some cases, be part of the actual decision-making process.

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Based on the  Good Governance Guide

The seven characteristics of highly effective boards

A board plays a vital role in the reputation of an organisation, its culture, growth, failures and success, but members need to understand how good governance principles and practices manifest at a board level.  So, what is the role of a board? What behaviours, attitudes and responsibilities should board members model if they are to be considered a dynamic, strategic group? Read on, as Governance Matters CEO Kate Costello looks at the seven characteristics of successful boards.

1. Create the vision: A strategic direction of an organisation is vital as there needs to be a clear understanding of what it will look like in five years from now. For example, will it operate in state-based, national or global markets and what products or services will it be offering are questions to think about. Once a vision is established, it’s up to the board to make sure the strategies are planned out to achieve that vision.

2. Learn from the best: A common mistake many organisations make is they stay within the comfort zone of a specific sector. Learning from other leading industries can help produce outstanding results. An IT company, for example, can learn effective management skills from companies within the hospitality industry.

3. Lead by example:   The culture of an organisation starts at the very top and it is important for every member of a board to recognise that the way they communicate and act plays a significant role in the operational running of a business. Boards need to walk the talk, and demonstrate their absolute commitment to the direction of the business.

4. Power to the people: Long gone are the days where control equaled power. It’s now more important than ever to empower staff and management teams. Let them play an active role in the way the business operates and influence what successes are achieved along the way. For example, employees of the Ritz-Carlton are given ‘ownership’ of their roles and that has led to a marked increase in job satisfaction and performance as a result.

5. The measure of success:   It’s crucial to understand what a good organisational result looks like, and positive financial performance can only be part of the overall success story. A board needs to remember customer satisfaction equals future growth and similarly, staff satisfaction must also be a key indicator and must not be left as purely a management responsibility.

6. Challenge the status quo:   Think outside the box! The best organisations are those that are constantly evolving, changing and improving the way things are done in today’s changing environment. A board is perfectly positioned to encourage an approach that strives to self-improve from the highest echelons of a business to those working in the front line or supporting roles.

7. Listen to clients and customers: As the saying goes – the customer is always right. Anyone who has ever operated in a retail environment understands that you are only as good as the last sale. It is critical for a board to keep a finger on the pulse when it comes to client and customer satisfaction. Having a range of measures to capture and track performance indicators on trends, issues, compliments and complaints are as part of the broader organisational performance review.

Seven Key Concepts of Good Governance

Any company can develop good corporate governance practices. The key is to understand the foundations of good governance and how these will apply to your company.

Delegation of authority

In any company, the origin of authority is ownership. However, the company may soon reach a point in its development where the main shareholder is no longer able to fulfil the roles of shareholder, executive director and manager simultaneously.

The owner and/or the board should develop a systematic approach to delegate authority and should formalise this in writing. A schedule of matters reserved for the board and for executive management should be established.

Delegated authorities should be reviewed periodically to ensure that they remain appropriate given the structure, size, scope and complexity of the company.

Checks and balances

A basic principle of good governance is that no one individual should have unfettered power over decision-making. Aside from the practical difficulties involved in a single person making all the decisions, a lack of appropriate checks and balances exposes the enterprise to human weakness. Even the most capable of individuals can sometimes make mistakes or lose their ability to analyse issues in an objective manner. To minimise these risks, it is important to establish governance procedures that subject all decision-making to some kind of third party scrutiny.

Specific examples of checks and balances within the corporate structure include separating the role of executive management from that of the chairman of the board, the requirement of a “four eyes” principle when signing contracts or making important commitments on behalf of the company and the involvement of independent directors on the board.

Professional decision-making

The focus of collective decision-making in most companies is the board of directors. However, simply placing competent people of goodwill around a boardroom table will not necessarily result in an effectively functioning board. Building an effective board takes time and patience on the part of board members and benefits from a professional approach to boardroom procedure.

The chair has a particular responsibility in moulding a group of capable individuals into an effective board team. The chair has to find a way to reach a consensus between diverging views on the company and its future. An atmosphere of open discussion should be encouraged. Perspectives and viewpoints should be properly documented in the minutes, allowing dissenting voices to be recorded. There should also be a clear formulation of decisions, so that the decision-making process is followed by decisive action.

Accountability

It is important that each employee, manager and board member understands expectations about the nature and scope of his or her responsibilities. As the company expands in size and complexity, explicit business conduct rules including ethical principles will need to be formalised.

Once responsibilities have been defined, the efficient functioning of the system depends on proper oversight.

Transparency

Directors, managers and employees are likely to give greater thought to their conduct if they perceive that they are being observed.

A key stage in opening up the company to external scrutiny is taken by the appointment of independent non-executive directors. This signals a company’s willingness to become more open and accountable in respect of its decision-making and performance assessment. The replacing of the owner-manager or founding entrepreneur by external management can also be perceived as an important step in this direction.

At some stage, the SME must make choices about the extent of its disclosure to external stakeholders. This is important if the company is seeking external capital or contemplating a future listing.

Conflicts of interest

Especially in small companies, it is important to recognise that the company is not an extension of the personal property of the majority owner.

The principle may be difficult for owner-managers or large shareholders of SMEs to accept or understand. They may view the company’s interests as synonymous with their own. This may lead to a self-interested bias in their decision-making. At worst, it could lead to them seeking ways of expropriating the assets of the company at the expense of minority shareholders or stakeholders.

A robust governance framework needs to define credible mechanisms by which potential conflict of interest issues can be managed or resolved. Directors should always declare potential conflicts of interest to the rest of the board and abstain from influencing such decisions.

Aligning incentives

The directors and employees are primarily incentivised by the SME’s remuneration policy. SMEs benefit from the fact that they are not subject to the same degree of public scrutiny and mandatory transparency regarding remuneration as publicly listed companies. However, SMEs have the same need to ensure that the remuneration policy is incentivising behaviour from directors, managers and employees in a way that is consistent with the long-term interests of the company.

Furthermore, a credible and transparent remuneration policy can help win the commitment and loyalty of company stakeholders to the company’s objectives.

CONCLUSION – GOOD GOVERNANCE IS FOR EVERYONE

Remember, good corporate governance is not just for large publicly listed entities. All companies, regardless of their size or extent of their operations can achieve tangible benefits from implementing strong governance systems.

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Alistair Jaque
SWAAB

As noted in all three definitions above, governance means the method by which an organisation is run or governed, over and above its basic legal obligations. It can be argued to have four essential elements:

• Transparency — being clear and unambiguous about the company’s structure, operations and performance, both externally and internally, and maintaining a genuine dialogue with, and providing insight to, legitimate stakeholders and the market generally
• Corporate accountability — ensuring that there is clarity of decision-making within the company, with processes in place to ensure that the right people have the right authority for the company to make effective and efficient decisions, with appropriate consequences delivered for failures to follow those processes
• Stewardship — developing and maintaining a company-wide recognition that the company is managed for the benefit of its members, taking reasonable account of the interests of other legitimate stakeholders
• Integrity — developing and maintaining a corporate culture committed to ethical behaviour and compliance with the law.

(Chartered Secretaries Australia)

Why Crisis Management is a Boardroom Responsibility

The single most important recent development in crisis management is the growing recognition that responsibility for this critical function lies absolutely with the board and top executives.

While there surely is no shortage of agenda items jostling for board attention, there is ample evidence that leaders who ignore the new crisis management best practice are placing their organisation at serious risk.

Most importantly, potential damage from a crisis applies to organisations of all types and all sizes. Indeed, not-for-profits and charities may in fact be at even greater risk, given their special reliance on reputation and public confidence … READ MORE

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Tony Jaques
Better Boards

The Role of the Nonprofit CEO in Creating Culture

The 5 Conscious CEO Practices for Developing Culture

Culture is a term that is often used to describe the underlying working environment of an organization,
yet there is much mystique and misidentification of what actually makes up “culture” and how it is created. The culture of an organization is routinely created from the verbal and nonverbal messages expressed by the CEO and leadership team about how people are expected to behave, what is important, what is valued, and what people have to do to fit in and be rewarded.

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Conscious Governance

Stewardship

A Good Governance Guide based on information from resources provided by the Governance Institute of Australia  (Number 3 of 4)

The concept of stewardship recognises the responsibility of those who control not-for-profit organisations to develop and maintain an enterprise-wide recognition that the organisation is managed for the benefit of the purpose for which it has been established (which often is for its members), taking reasonable account of the interests of other legitimate stakeholders.

Separation of Authority

A Good Governance Guide based on information from resources provided by the Governance Institute of Australia  (Number 3 of 4)

It is considered good governance for a not-for-profit (NFP) organisation to have clear guidelines determining the boundaries between the duties of the board and the managers of day-to-day activities of the organisation.

Conflicts of Interest

A Good Governance Guide based on information from resources provided by the Governance Institute of Australia  (Number 2 of 4)

Directors have a duty under common law and under the Corporations Act to act in the best interests of the not-for-profit (NFP) organisation that they serve. Directors should not seek to benefit from the NFP, and should not be influenced by their wider interests when making decisions affecting the NFP.

Board Structure

A Good Governance Guide based on information from resources provided by the Governance Institute of Australia  (Number 1 of 4)

It is considered good governance for a not-for-profit (NFP) organisation to structure its board (read ‘council’, ‘management committee’ etc as applicable) to ensure achievement of its purpose while meeting its ethical, legal and financial obligations.

Governance versus Management

No matter how big or small the company, a director’s primary role is not management of the business at an operational level. Though directors of SMEs may have to “wear two hats”, a director’s primary role is a governance one: setting the strategic direction and goals for the company, and acting as a guardian of the interests of the company’s shareholders.