Corporate Governance Best Practices that are Beneficial to Every Organization
Many people are with the view that only big established organizations or public companies with a long list of shareholders need to care about, or will be favored if corporate governance practices are implemented. The truth remains that every company, public and private, small and big, established or new startup, compete in a society where good governance is vital for business. There is no general size; nevertheless, a governance practice of the right size will cause a positive impact on the long-term viability and performance of every organization.
The notion stating that corporate governance is not applicable stems from the view that it’s just a theory with no impact on performance, expensive to implement, makes decision making slow, cannot suit dynamic stages of development and many more. But the reality remains that, all firms compete in a society where good corporate governance is vital for business in terms of things such as:
- Securing debt
- Meeting the sophisticated shareholders’ expectations and demands
- Recruiting and maintaining directors who are qualified and skillful
- Raising capital
- Getting set for potential exit/acquisition or next stage of growth
The Crux of Corporate Governance
There is no single definition for corporate governance. The term generally refers to the procedures, practices and laid down structures through which the affairs and businesses of a firm are managed in a bid to achieve its strategic, operational, and financial objectives and realize a long lasting sustainability.
Law – Corporate governance in general, is a matter of law with its basis on corporate legislations, policies and laws on securities, as well as court decisions and that of regulators of securities. Directors in general owe the firms they serve a duty of loyalty, while also having a fiduciary duty to act in good faith and honesty and in the best interest of the company. Sources like the media, interest groups, shareholders, and the stock exchange also influence corporate governance. The practice of corporate governance helps directors in fulfilling their duties and meeting expectations.
Relevant Factors – Promotions of strong and sustainable corporations accountable to investors are the objectives of corporate governance. Nevertheless, there is no general size for companies, uniformity, nor all-inclusive set of practices or rules: a lot of factors determine the right ones, they include:
- Resource availability
- Regulatory and legal requirements
- The type of business
- Expectations of the shareholders; and
- The size of the company, as well as level of development
Benefit – Advocates of corporate governance are with the view that a direct correlation exists between a good practice of corporate governance and a long lasting investor value. These are some of the major benefits, namely:
- A management that is accountable with firm internal controls
- Well managed risks
- Boards of directors with optimum performance
- A performance that is well supervised and measured, and
- Increased shareholders’ participation
5 Major Best Practices of Corporate Governance
Governance practices of the right size will have a positive impact on corporate performance in the long run. Nevertheless, organizations must form and carry out those that comply with both their specific needs and legal requirements. Listed are 5 major best practices of corporate governance every board of director can implement which is beneficial for every organization.
1. Form a strong team of board of directors that are qualified and measure its performance.
The board should be made of directors with the necessary expertise and knowledge for the business who also have good integrity and ethics. How to form and maintain this kind of board?
- Identify lapses in the complement of the present directors as well as the ideal characteristics and qualities. Always maintain a list of qualified candidates to fill vacancies of the board
- Most of the directors should not be dependent
- Build an interactive board
- Educate your board on vital areas
2. Responsibilities and roles should be well spelled out.
Maintain an unambiguous line of accountability among the management, Executive Officers, Chair and Board.
- Formulate written directives for the board while stating the accountabilities and duties of each committee
- Delegate specific duties to a sub-team of directors in the form of committees
- Create a written description for various positions
3. Lay emphasis on ethical dealing and integrity.
A general norm of integrity in the business with directors avoiding conflict of interest must be in place.
- Put in place a good policy on conflict of interest
- Address negligence
4. Measure performance and establish principled remuneration decisions.
The team or board should:
- Fix an attractive fee for directors
- Establish ways of measuring target achievement
5. Implement a risk management policy that is effective.
- Point out the risk they encounter and assess them in a regular basis
- Regular review of system adequacy should be carried out by the board