Governance: More Than Staying Out of Jail
Jan 24, 2019
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 the 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.
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 policymaking, the CEO should be seen as a full partner with the board.
- The board shouldl focus on monitoring performance rather than formulating policies.
- The CEO shouldl attend all board meetings and participate fully in all discussions.
- In large organizations, the board should monitor performance through standing committees, including an audit body.
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.
- Ensuring that all committee members are non-management in order to ensure that decision making is impartial.
- Conducting some board meetings without management present, ensuring open and candid discussions.
- Promoting stock ownership so that directors have a stake in the long-term success of the organization.
- Promoting the concept of pay-for-performance rather than stock options for senior executives.
- 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.
- 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 or herself and each other.
- When shortcomings are identified, have each person develop a plan for improvement. Any director refusing to improve should be removed.