Businesses thrive or collapse based on the rules established to serve the needs of everyone involved, from shareholders and stakeholders to managers and customers. These policies and guidelines make up corporate governance. While corporate governance has evolved with new expectations and technologies, it remains the business’ driving force. It dictates how a company’s board of directors helps drive success in meeting short- and long-term goals. Board members with the right tools for communication and corporate monitoring have a profound impact on their organizations.
The Foundation of Corporate Governance
The board of directors oversees critical decisions that impact shareholders’ interests. But they do far more than simply provide oversight. They also ensure that a corporation has adequate resources and an effective strategy to thrive. As such, corporate governance deals with:
- Policies for hiring and firing senior executives
- Oversight of business activities to ensure compliance with laws and ethics
- Ensuring transparency for shareholders and other interested parties
- Corporate strategy, compensation and risk management
Serving the many interests of a corporation requires using the best strategies and tools available to your organization. Operations and, ultimately, a company’s profitability come into question when policies break down or are poorly implemented.
The 4 Principles of Corporate Governance
Four principles lie at the heart of good corporate governance. Accountability, transparency, fairness and responsibility all impact the decisions board members make. Each principle requires the right data and the right level of interaction to be effective.
Being able to explain every action you make in your business is vital in building confidence among your stakeholders and shareholders.
Accountability is about more than simply understanding where blame or praise lies once something happens. Proactively taking steps to own your decisions means discovering risks and creating solid internal control systems.
A balanced and understandable assessment of your company’s position within its market and prospects helps you decide on a risk management strategy and make decisions you can take pride in. You must also determine the best systems for keeping your corporation accountable to shareholders in a fair, balanced, and understandable way through proper reporting.
Understanding and taking ownership of risks is crucial for the success and future of your organization.
Transparency, like accountability, engenders confidence. It lets others know that you have nothing to hide while improving accountability for the company’s actions.
The company’s willingness to provide clear information to all shareholders and stakeholders regarding its performance plays a significant role in any decision. Informed decision-making is only possible with systems that provide accurate and reliable information.
In this way, transparent processes allow you to make informed and powerful decisions promptly. In today’s data-driven world, technologies can collect and support data visualization from almost any source. This data helps form the bedrock for strategies to tackle current and future challenges.
Good corporate governance requires equal treatment of all shareholders within each share class. Many countries such as the United States and the United Kingdomrequire this.
Fairness is as much about ethics as good business sense. Unequal treatment leads to a lack of support and interest in your company. No one wants to invest in a company that treats some better than others.
In total, these principles require wielding your power responsibly. It’s difficult to display favoritism, take unnecessary risks, and act unethically or against the best interest of shareholders and stakeholders when your company is transparent, fair, and accountable.
You’re responsible and accountable for your actions. Poor performance has consequences. This is reflected in everything from the media to share prices. Failing to lead in an informed and reasonable manner hurts your corporation at every level.
The Consequences of Bad Corporate Governance
Failing to follow the four principles of corporate governance adversely impacts any business. Time and again, corporations have shown just how damaging improper governance is. In a world of fast-paced news and instant information, any misstep or unethical practice can ruin a business in a heartbeat. Take these notorious examples:
The 2008 Financial Crisis
The 2008 financial crisis is an example of a complete failure of corporate governance. Greed permeated every level of multiple industries, creating an unnecessary and uncontrolled amount of risk, even as foreclosure data continued to raise alarms. Banks issued bad loans to numerous individuals and companies, despite the lessons of the past.
The result was a debt trap comparable to the credit crisis of the 1920s and one of the worst recessions in world history. Proper risk analysis and accountability were never implemented. Shareholders and companies fell to bad governance.
The Enron Scandal
Some of the worst outcomes occur when there’s no governance at all. The Enron scandal represents a failure of corporate governance at nearly every level.
Cooking the books, suspending the code of ethics, deceptive business practices, and outright lying all brought down Enron, a corporation Fortune deemed “America’s Most Innovative Company” — not once, but six years in a row. It turns out that their profits were nothing more than a figment of the imagination.
Enron may have started as a legitimate venture. However, mixing the board of directors with bad actors and self-interested parties soon saw a disaster in the making. A lack of oversight allowed former CEO and COO Jeffrey Skilling and former chairman and CEO Kenneth Lay to take advantage of their positions in a highly unethical and illegal way.
The company eventually collapsed under the weight of its own deceit, leaving damage to the California power grid that continues to resonate to this day. Shares tumbled from $90.75 to a meager $0.26, and congress enacted the Sarbanes-Oxley Act to prevent similar fraudulent financial reporting and manipulation of financial laws.
Assessing Corporate Governance
Monitoring governance standards is a crucial task alongside environmental and social criteria. This is the essence of ESG, which stands for Environmental, Social and Governance.
These three factors play an essential role in the choices investors make. Many mutual funds and brokers use them to help their clients pick stocks. They also directly impact your bottom line. ESG criteria are interrelated. They all impact your company’s risk management and business strategies.
Social criteria relate directly to your business relationships. Critical choices in how the company treats surrounding communities and acts on social issues reflect its quality and revenue. Shown to increase the available talent pool by 25% and even raise sales by as much as 20%, social responsibility and transparency are now firmly entrenched in the corporate landscape.
ESG criteria should be reflected in every decision a company makes. They reveal just how open, accountable, and responsible your organization is.
How to Ensure Good Corporate Governance
It may not seem easy to implement good governance, but the right technologies can help. Modern platforms collect and analyze a large swath of information related to your business activities.
You can get a good idea of how well you perform on these criteria by analyzing investor sentiment, news articles, public opinion and your own policies.
The average organization generates a lot of data. Companies collect nearly 7.5 septillion gigabytes of data every day.
This data includes information on products, goals, customer sentiment and almost every other business activity. The right data management and visualization tools can transform these facts into useful information to monitor ESG criteria.
Diligent organizes data into powerful dashboards that filter and present essential information from a wide variety of sources. News, your own data and stakeholder surveys all combine in a single suite of tools to create a powerful feedback loop for monitoring every decision your company makes.
Keep Up With News and Public Opinion
For every action, there’s a reaction. Each decision you make plays out over the long run. Irresponsible activities that eventually hurt shareholders and stakeholders usually start as a small ripple that turns into a tidal wave.
If your company decides to reduce costs by cutting quality, the grumbling of customers will eventually impact your bottom line — and those customers will find another place to go.
News and public opinion are terrific and underutilized sources of information. Many organizations fail to realize customer and stakeholder perceptions until it’s too late.
Know Where Your Organization Stands
All of this information helps you to understand your risk and where you stand within your industry. Are you a leader in the field, or is there room for improvement?
Your data helps you create gaps and SWOT analysis reports. These are the basis from which to generate risk and other corporate strategies.
Establish Informed Policies and Strategies
With a complete understanding of your business environment, including how you meet ESG criteria to risks and opportunities, you can create a strategy to mitigate risk.
Data-driven decision-making is not just a trend, it’s a necessity. Companies that strategize based on accurate data and key performance indicators capitalize on their markets. Establish policies and guide your organization using the four principles of data governance.
Be Transparent, Accountable, Fair and Responsible
Planning and data are worthless without the drive to deploy them correctly. It’s up to you to act with the right data-based strategies in hand.
Present and own your decisions. Act on the insights you gain responsibly. Avoid the pitfalls of bad data governance.
What Is Good Corporate Governance?
Good corporate governance often uses a data-driven approach to setting the rules and policies that guide an organization. The board of directors must act following the four principles of governance — accountability, transparency, fairness and responsibility — for the best interest of stakeholders, shareholders and the business as a whole.
Equipping your organization with the right tools, such as Diligent’s governance software, enables you to implement good corporate governance, leading to effective decision-making and a thriving company.