Corporate governance has been catapulted into astute Board thinking, partly due to the symbiotic relationship it enjoys with corporate culture – the latter having hardly been mentioned in corporate policy in 2008. Having enjoyed a meteoric rise, it became one of five main principles of the UK Corporate Governance Code just 10 years later.
Unfortunately, however, many boards perform extremely poorly at a corporate governance level. Many of the biggest business failures are the result of poor corporate governance but everyday business insolvencies are also often down to ineffective implementation internal controls.
Many businesses simply fail to recognise that corporate governance is the rock on which their corporate sustainability needs to be built. Whilst focusing on outputs, such as profit, revenue and costs, their eyes are distracted from the vital inputs that can help a company react positively in the event of a corporate crisis and avoid financial failure, should the worst occur. They often underestimate the huge cost that accompanies damage to their public reputation – one of the almost inevitable consequences of bad corporate governance.
The most important goal for corporate governance programmes should be trust – winning and retaining the trust of all stakeholders who can help bolster a business in its hour of need, if an unanticipated issue that could threaten its future existence should occur. Earning and continually building the trust that employees, customers, shareholders and other stakeholders have in the corporate entity is vital but can only be assured if corporate governance is taken seriously. If it is, it can provide a bank of goodwill that can be leveraged, should that become necessary – typically, when a business encounters a situation that has not been caused by its own internal failures to uphold its stated rules and processes but more through global situations or an incident that it could not realistically have prevented.
Good corporate governance is actually synonymous with strong crisis management. However, the trust of stakeholders cannot be taken for granted or simply demanded. Trust is an outcome of determined effort and a serious commitment to honest and integrity-filled actions, all supportive of corporate strategies with which stakeholders are happy to align themselves, because they share the same vision.
What is corporate governance?
Corporate governance requires a company to create a system of rules, practices and processes that are supportive of corporate strategy but which also balance the interest of all stakeholders, both internal and external.
Having established the ways in which they promise the company will operate, the board of directors needs to become accountable and ensure that all of the stated rules, practices and processes are monitored and controlled and actually implemented on a day-to-day basis.
Companies often fail because of a lack of risk management within corporate governance, as was the case with Credit Suisse earlier this year. With nobody monitoring how closely a business is delivering on its stated corporate governance systems, various issues can emerge, including financial recklessness, internal fraud, poor employment practices and data breaches. All can quickly erode trust and quickly lead the business down a road towards business failure.
What does good corporate governance look like?
Whilst determining the right rules, practices and processes that can ‘govern’ the company is the basis of corporate governance, it is also imperative these dovetail with corporate culture and that thought and hard work goes into building the right culture. That means putting every effort into forging a strong and meaningful dialogue with stakeholders and ensuring everyone is on the same page, both attitudinally and in practical terms, when carrying out their roles within the delivery of the strategy.
The board need to learn to listen, embrace feedback and encourage suggestions from those who are most likely to help steer it in the right direction, should corporate governance slip or corporate culture be out of sync with the strategy.
To achieve strong corporate governance, Boards need to focus on every single one of their stakeholders. They need to ensure all stakeholders hear the desired things within the messages coming out from the organisation – ultimately led by the Board – and, most importantly view these messages as honest and authentic.
To achieve that, actions must match words. The company cannot say one thing and do another. Actions from the top need to have a transparency and honestness and openness should be the distinguishing qualities of the organisation.
In addition, all employees need to fully understand the values, vision and purpose of the company and be able to embrace them, translating their essence and absorbing this into their daily roles. Having strong managers in place, to help them achieve that, is fundamental.
What do Boards need to do, to get corporate governance right?
The Board must determinedly establish and define the company purpose, the company values or principles and the strategy that will allow the business to achieve its goals. The principles have to be fully embedded, with no clashes. For instance, a board cannot preach diversity and yet not have diversity and inclusion evidenced within its recruitment record. The board cannot say it upholds worker rights and then be exposed and shown to be forcing employees to work in poor conditions, or on exploitative zero-hour contracts.
Integrity also needs to be radiated down from the top, because the Board ultimately sets the tone and is the reference point for all who work in the company. Board members need to lead by example.
When there is true authenticity, the conditions can be set for the nurturing of stakeholder trust. This is fundamental to company performance. 88% of customers return to buy from a brand they trust.[i] 79% of employees, who trust their employer, feel more motivated to work for them. Trust is overwhelmingly created by the Board and how they manage corporate governance is fundamental – avoiding ‘banked’ trust being eroded in value over time.
What are the benefits of corporate governance?
Good corporate governance is not just a saviour of a company and the creator of sustainability for it, but also a value-adder. Society has growing expectations of companies and an ever-increasing opportunity to scrutinise organisations and pass judgement on them. With corporate regulation ever-present, they have the power to draw regulator attention to anything that does not seem right. However, if all is well-handled, those who can be the downfall of a business equally have the power to be a mainstay of its continued success.
ESG (Environmental, Social and Governance) strategies are all-important for top-performing organisations in 2023, enabling the business to address and manage risks in each of the three areas within the acronym. Customers want to see companies doing the right thing by the environment, by society and by those impacted by the company’s activities, be that through protecting customer data, promoting wellbeing in the workplace or supporting local communities. A full third of global assets under management today are screened for ESG considerations, according to McKinsey.[ii]
Ensuring that the governance element stands up to scrutiny is a means to ensure that ESG strategies deliver on expectations. The respected authority, McKinsey, has actually identified five links between a strong ESG proposition and improved business performance and long-term value. The power of good corporate governance to shape a business’s future is tangible.
How can Boards create the conditions for good corporate governance?
Boards have a major role to play in ensuring that their corporate governance is bulletproof and leveraging the power of a thriving corporate culture. To do that, however, Board directors may well require additional skills and training themselves and also need to invest in the professional development of managers beneath them.
Board members must also honestly assess their situation and question whether they have the right knowledge, teams and operational systems in place to manage all the risks that can negatively impact on good corporate governance.
Very often, there will be mentoring and training required. Here at Space2BE, we have a suite of executive and leadership effectiveness programmes and a team of hugely respected experts who can assist you, delivering bespoke management insight and enrichment that will help your corporate governance become both robust and resilient.
Whether you need Board Effectiveness support, executive mentoring, or specific help with corporate culture change, we are here to assist. Just contact us on 0208 720 6991 and let us suggest how we can together establish the corporate governance that your business requires.
[i] https://www2.deloitte.com/uk/en/insights/topics/leadership/build-nurture-measure-stakeholder-trust.html
[ii] https://www.mckinsey.com/capabilities/strategy-and-corporate-finance/our-insights/the-boards-role-in-embedding-corporate-purpose-five-actions-directors-can-take-today
