What is good corporate governance? 9 characteristics (with examples)
Governance is the process by which corporations establish their rules and policies and implement and monitor them. Yet, it’s good corporate governance specifically that’s become the watchword in the business landscape. Groups and individuals that hold positions of power must have a sense of accountability and a means of carrying out checks and balances if they want to govern successfully.
Good governance typically leads corporations to achieve their goals ethically and in compliance with regulatory expectations and best practices. In successfully fulfilling their mission and plans through corporate governance, corporations will enhance their prosperity and find favor in the eyes of their shareholders.
For this reason, good governance underpins successful businesses today, where expectations around ESG (environmental, social and governance) issues like sustainability and diversity are ever-growing. Focusing on such matters encourages a mature governance framework, helping organizations make the right decisions at the right time.
This article will help you take the essential first steps on your organization’s journey to good governance by explaining:
- What good governance is
- The nine characteristics of good corporate governance
- Examples of good governance in action
- A proven process for ensuring good corporate governance
- The role of technologies, such as board management solutions, in solidifying your organization’s commitment to good governance
What is good corporate governance?
UNESCAP (the UN’s Economic and Social Commission for Asia and the Pacific) summarizes good governance as “participatory, consensus oriented, accountable, transparent, responsive, effective and efficient, equitable and inclusive and follows the rule of law.”
As a result, good governance:
- Minimizes the potential for corruption
- Increases inclusion and the ability to benefit from diverse thinking
- Reacts to the needs of society, both now and in the future
The Good Governance Institute believes that “Good governance is not about ownership, it is about stewardship” — that is, it’s about taking responsibility for an organization’s ESG and related principles, like corporate social responsibility and governance for a set time, ultimately leaving the organization in better shape than it was when you were at the helm.
In a corporate context, good governance sets the tone and environment for all individuals or stakeholders to have a voice. A commitment to good corporate governance means:
- Embedding diversity and inclusion from the top of the organization
- Putting in place a governance framework that covers all the characteristics of good governance to ensure you capture every aspect of the task
- Demanding good board practices
As in other areas of business, the role of the board of directors is a central one when it comes to ensuring your approach embraces all elements of good governance.
9 principles of good governance
Good governance has nine major principles or characteristics:
1. Participation
Good governance’s “participatory” nature requires that boards and organizations become more equitable and diverse. Moreover, these diverse board members and employees cannot be silent partners; they need an active voice in corporate decision-making. The board may play a key role in driving diversity, but equally, diversity within the board itself drives better thinking. But beware of tokenism; the importance of transparency in good governance cannot be overstated. Strong, well-composed boards both include and value the views of people with various skills, talents, abilities, experiences and perspectives.
Boards should expect all of their members to participate in board meetings, and a commitment to good corporate governance practices demands that board chairs facilitate meetings in ways that draw out the perspectives of all board directors.
2. Consensus-oriented
The boardroom is an appropriate forum for hosting robust discussions and debates. In fact, it’s expected. Some of the most heated debates result in the best decisions, as representatives from many different walks of life come together with varying perspectives.
Good corporate governance means securing agreement from these discussions. Consensus-oriented decision-making has to take on board this diverse group’s different needs and perspectives to deliver a broad consensus that will serve the best interests of communities and companies.
3. Accountability
Accountability is a crucial characteristic of good governance, just as it is in many other areas of business and societal life. Boards of directors are accountable to groups and individuals affected by their decisions, including their shareholders, stakeholders, vendors, employees and the general public.
Transparency and the rule of law go hand-in-hand with accountability; transparency is one of the core values of good governance, and it both drives and evidences accountability.
4. Transparency
Good corporate governance requires that records and processes are transparent and available to shareholders and stakeholders. Financial records should not be inflated or exaggerated. You should present reporting to shareholders and stakeholders in ways that enable them to understand and interpret the findings.
Transparency means stakeholders should be informed of key corporate contacts and told who can answer questions and explain reports, if necessary. Corporations should provide enough information in their reports to give readers a complete view of the issues.
5. Responsiveness
All too often, crises and controversies can overtake the corporate world’s focus. A timely response to the unexpected is crucial, with corporations that practice good governance usually able to prioritize swift and honest communication with shareholders and stakeholders.
6. Effectiveness and efficiency
As planners and overseers, board directors are responsible for conducting their duties effectively and efficiently. Many corporations also consider the environmental impact as they perform their duties and responsibilities. For example, using the drive for good governance as an impetus for digital transformation, an organization may transition from manual paper processes to more environmentally friendly software solutions, such as the integrated suite of board leadership and collaboration tools.
7. Equity and inclusiveness
Each board director has an equal seat at the board table. Each director can and should use their voice to share their experiences, opinions and philosophies to enhance and broaden discussions. No one should feel left out or that their views have less meaning than others.
This same ethos should permeate the entire organization, with a culture of diversity and inclusion underpinning all of your operations. Diversity, equity and inclusion (DEI) are core elements of good governance.
8. Rule of law
The rule of law means boards should be fair and impartial in their collaborations and decision-making. Certain circumstances may require boards to seek outside counsel, guidance or expertise from external, third-party experts. Good corporate governance requires boards to act ethically, honestly and with the utmost integrity, whether making decisions themselves or working with third parties.
9. Strategic vision
One of the primary responsibilities of board directors is strategic planning, which includes the organization’s mission, vision and values statements. Strategic planning leads boards to understand where the corporation is going and how it will get there. Good corporate governance requires a robust planning process, incorporating action plans, budgets, operating plans, analysis, reporting and much more. The strategic plan holds board members accountable for their decisions and for monitoring their goals. Strategic planning also includes risk management and protecting the company’s reputation, and as such, is an opportunity for organizations to put into practice many of the good governance principles they espouse.
Examples of good governance
What does good governance look like? There are numerous examples of best practices when it comes to corporate governance. Some things you may look for:
- Is your board diverse and inclusive, with various voices able to share their views?
- Is your board managed methodically, with meetings, documents and processes captured via a board portal that facilitates strong governance?
- Do your directors lead from the front on issues of ethics and compliance?
- Can you demonstrate compliance with regulatory and reporting requirements like NIST 800-171 and SOX?
- Is your sustainability reporting up to scratch?
- Are you working towards environmental best practices on issues like Scope 1, 2 and 3 emissions and emerging contaminants?
- Are you proactive around ESG reporting, even when there is no legal imperative to report?
- Do you have sufficient — and sufficiently robust — internal controls to measure progress in all these areas?
How to ensure good corporate governance
While there is no silver bullet for good governance, technology solutions are the solid foundation for thriving governance practices. Modern platforms collect and analyze much information about your business activities, which can help optimize your processes.
1. Leverage data
The average organization generates a lot of data. Every day, users create 2.5 million quintillion bytes of data, much of which companies collect and store.
This data includes information on products, goals, customer sentiment and almost every other business activity. The proper data management and visualization tools can transform these facts into useful information to monitor the ESG criteria that inform good corporate governance.
Diligent organizes data into powerful dashboards that filter and present essential information from various sources. News, your own data, and stakeholder surveys all combine in a single suite of tools to create a powerful feedback loop that monitors every decision your company makes.
2. 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.
3. Know where your organization stands
All this information helps you 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.
4. Establish informed policies and strategies
With a complete understanding of your business environment, including how you meet ESG criteria for risks and opportunities, you can create a good corporate governance strategy to mitigate risk.
Data-driven decision-making is not just a trend; it’s a necessity. Companies with a more mature data strategy often see a 2.5 times improvement in all company outcomes. Establish policies and guide your organization using the four principles of data governance.
5. Be transparent, accountable, fair and responsible
Planning and data are only helpful with the drive to deploy them correctly. It’s up to you to act with the right data-based strategies.
Present and own your decisions. Act on the insights you gain responsibly. Avoid the pitfalls of bad data governance.
Drive value with better decision-making
Good corporate governance is multi-faceted but ultimately achievable. Yet, there is no one-size-fits-all approach to management. How quickly and effectively you achieve good corporate governance best practices depends on your organization’s maturity. The more advanced your organization is at foreseeing risk, the better your board will become at making the right decisions at critical times.
While technology is an essential piece of that puzzle, so is bringing your governance practices to maturity. Download the governance maturity checklist from Diligent to learn the most important steps you can take to propel your progress toward good corporate governance.
