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March 01, 2019
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Businesses are looking for more effective ways to communicate with their stakeholders. Discover how a robust corporate governance framework helps align shareholder, director and management interests, and fosters an environment of trust.
Corporate governance, the policies and practices by which an organization is directed and controlled, is all about balance. It requires an organization to consider the interests of all stakeholders — shareholders, regulators, employees, customers and the broader community — in its decisions-making process. In today’s volatile business climate, governance is more critical than ever. Adopting a strong governance framework can help a company navigate difficult markets.
Advantages of Strong Governance
Whether your firm is a multinational organization or a small- to medium-sized enterprise (SME), the benefits of a strong corporate governance strategy are far reaching. Companies can gain certain competitive advantages as a result of the enhanced transparency an effective corporate governance framework communicates to its stakeholders.
Organizations may be able to tap into capital markets at lower overall cost of capital as creditors are more willing to provide funds to companies with a well-defined purpose and effective business policies. Additional capital resources lower the risk of financial distress by improving the stability and predictability of operations while strengthening the legitimacy of the organization to potential future stakeholders. Other advantages of a strong corporate governance framework include improved social and labor relations, a more diverse and ethical culture and increased confidence to stand by organizational decisions.
Establishing a Governance Framework
An effective corporate governance framework would have: supervision and enforcement mechanisms; capacity for self-monitoring of compliance; a well-balanced board of directors; and timely and accurate disclosure of critical information. Fundamentally, corporate governance frameworks adhere to the following principles:
1. Fairness
Ensures the fair treatment of all shareholders, including minority and foreign shareholders. This means recognizing that all have a part in the company proportionate to their ownership. Properly listing the company on a public register is a way of promoting this principle.
2. Inclusiveness
Recognizes the rights of stakeholders established by law or through mutual agreements by involving all parties in business decisions. Inclusivity encourages active cooperation between corporations and their stakeholders in creating wealth, jobs, and keeping company finances sustainable. This may take the form of developing a communication plan or investing in the customer experience.
3. Transparency
Ensures the timely and accurate disclosure of all material matters regarding the corporation. This includes the financial situation, performance, ownership, and governance of the company. Senior managers and board members must disclose and properly address conflicts of interest. Good transparency practices should come naturally to those who run their business with integrity. Keeping all stakeholders up to date through a company website is an effective way to demonstrate this principle.
4. Accountability
Protects and facilitates the exercise of shareholders’ rights, which ensures that recourse will be available in a timely manner. In short, this means keeping the proper books and records. Hiring external audit firms and creating a culture of compliance around rules and regulations ensures the company is operating in good faith.
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5. Leadership
Encourages the strategic guidance of the company and promotes its longevity. This entails the effective monitoring of management by the board and ensuring both are held accountable to the employees, shareholders and stakeholders. Organizations with strong leadership policies should develop a fair and honest succession plan that will help deliver the next generation of executive leaders.
Companies risk future communication breakdowns with their stakeholders if they do not adequately plan and develop a corporate governance framework.
Additional Considerations
Adopting a strong set of corporate governance policies help organizations to formalize business processes, increase market participation and efficiently allocate resources. However, to truly be effective, these practices must be realized while balancing the needs of all stakeholders, not just shareholders. There is no one-size-fits-all approach, but the rewards of establishing a strong corporate governance policy often coincide with being a good global citizen.
Indeed, a strong corporate governance framework is like an engine. It starts with a sturdy foundation, built of policies and practices that seek to satisfy all parties involved. It requires inspection, maintenance and ongoing revision in order to adapt to today’s ever-changing business landscape.
About The Journal
The FTI Journal publication offers deep and engaging insights to contextualize the issues that matter, and explores topics that will impact the risks your business faces and its reputation.
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Published
March 01, 2019
Key Contacts
Tilcia Toledo, M.B.A., CFE, CAMS
Senior Managing Director