11 effective corporate governance best practices to implement now
Every corporation should follow corporate governance best practices, as they apply equally to new corporations as they do to well-established ones. Best practices for corporate governance apply to large companies, small companies, public companies and private companies. They even apply to nonprofit organizations and other entities.
Following the principles of effective corporate governance takes a bit of effort. However, while corporations can expect to invest some of their corporate dollars in governance, taking steps toward best practices doesn't have to be expensive.
To help you implement best practices in corporate governance, this blog will explain:
- The benefits of corporate governance best practices
- Critical best practices you can start following now
- Additional resources to support effective governance
Why are best practices important for effective corporate governance?
The benefits of following corporate governance best practices are many, and the potential impact is boundless. Here are a few ways they lead to more effective corporate governance:
- Improves overall performance and promotes trust among shareholders and other stakeholders.
- Provides for sound strategic planning and better risk management.
- Corporations that embrace best practices in corporate governance continually move toward long-term sustainability.
Good governance prevents litigiousness and provides far-reaching legal protections for corporations.
11 effective corporate governance best practices
Best practices incorporate many different aspects of board work. They entail taking a critical look at the qualities and characteristics of board directors, who they are as people and how they approach governing an organization. Effective corporate governance can incorporate many different practices.
Specifically, some of the primary corporate governance best practices include:
- Recruiting and building a competent board
- Aligning strategies with goals
- Exercising accountability
- Having a high level of ethics and integrity
- Defining roles and responsibilities
- Managing risk effectively
1. Recruit effective and diverse board directors
A prominent way for boards to do their collective best pertains to board refreshment. As the economic climate has changed, the composition of boards has needed to change with it. Achieving board effectiveness in corporate governance starts with taking a fresh look at their nominating and recruitment procedures.
A good first step is to develop recruitment packets with honest information about the organization. The establishment of nominating and governance committees is becoming the norm. Approach board director nominees with clear expectations for their time and talents. Board recruiters should vet candidates for their skills and abilities, potential conflicts of interest and their unique backgrounds.
Corporate governance best practices imply that not only should individual directors be qualified and independent, but collectively, you want directors who bring diversity to the table and decision-making. Boards may have traditionally vetted candidates based on their skills, governance experience and industry-related expertise. Ideal candidates would possess CEO or senior management experience.
But if you’re truly committed to effective corporate governance best practices, you should continuously work toward developing a more diverse, equitable and inclusive organization. Diversity goes beyond gender; it may include age, ethnicity, tenure on your board and more. This is especially important given that there were fewer board appointments in 2022 than in years past, which heavily impacted directors who are women and people of color.
2. Establish board composition
Effective corporate governance today has a new focus on board diversity and independence. This is because boards are responsible for dealing with highly complex and often technical issues. Many perspectives around the board table make for good decision-making.
That is one reason why board composition is so important. Consequently, most governance experts favor the notion of boards having a majority of independent directors.
Boards should have a composition incorporating all the necessary skills and abilities to make sound corporate decisions. Board directors must have implicit trust in each other to make board discussions productive, even when debates are long and wrought with many strong opinions.
Board directors, board committees and the whole board should participate in annual self-evaluations to identify their strengths and weaknesses.
3. Onboard all directors
Board directors put their best foot forward when well-prepared for their first board meeting. Corporate governance best practices support corporations having a formalized process for board director orientation.
Orientations can be formal or informal. Information should include the organization’s history, key accomplishments and a review of the board's organizational policies and procedures. New board directors should be aware of their legal and fiduciary responsibilities and receive a copy of their board director duties and responsibilities.
It's helpful for new board directors to receive the most recent copies of financial statements, meeting minutes and the annual strategic plan.
4. Foster effective presentations
Boards oversee more than they did even a few years ago. From the SEC’s proposed ESG requirements to enhanced cybersecurity rules, boards have intense workloads — and ballooning board agendas to go with them.
As board agendas grow, functional leaders and directors must deliver effective presentations to ensure no reporting or oversight goes awry. Boards can help these leaders make the most of their time by implementing corporate governance best practices related to boardroom presentations.
5. Align strategies with goals
Another effective corporate governance best practice refers to boards that align their strategies and risk management activities with the company's goals. Boards should use all of their human resources and other tools to identify and assess all forms of risk. The board needs to work together to develop the company's risk tolerance and risk profile. Additionally, they need to ensure that the company has the proper framework and controls in place so they can monitor risk and mitigate it when necessary.
Corporate governance best practices require board directors to look at risk and strategy on a short and long-term basis. It will engage in routine oversight of risk management/enterprise risk management (ERM), whether that takes the form of a risk register, heat map or other framework. The board will oversee recommended risk mitigations and ensure that the organization has appropriate controls and resources in place.
6. Hold directors accountable
The many scandals that have made headlines demonstrate why accountability has such a strong position in best practices for corporate governance. Boards need to develop strong internal controls and monitor them often.
Having reporting systems that are accurate and transparent and that have a system of adequate checks and balances is considered an important part of corporate governance best practices. Have the board and management agreed upon quantifiable performance metrics/key performance indicators (KPIs), and how are they reported? Look at your board's disclosure practices and how transparent the board is in its communications internally and with stakeholders.
Accountability in effective corporate governance also includes deciding the correlation between attracting the most talented board nominees and offering them enough compensation to make board work worthwhile without creating a conflict of interest. It's generally preferred for board committees to manage and oversee board director remuneration.
7. Emphasize a high level of ethics and integrity
Board directors stand as the voice of the corporation. As such, they frequently receive requests to make public presentations. Effective corporate governance pushes board directors to consider their fiduciary duties whenever they speak for the corporation. The best nominees are people with a high level of ethics, honesty and integrity in their speech, their works and their relationships with people.
Best practices in corporate governance require boards to create and cultivate a culture that holds honesty, integrity and ethical dealings in the highest regard. Boards should carefully write three important policies to support integrity and ethical dealings, a conflict of interest policy, a code of business conduct and a whistleblower policy.
Boards should have a clearly stated conflict of interest policy and ensure that board directors declare all conflicts of interest and refrain from voting on such matters. Boards should also institute policies for whistleblowing and reporting noncompliance.
8. Define roles and responsibilities
Another hallmark of corporate governance best practices is to separate the roles of the board Chair and the CEO and to have distinct roles for each of them.
All board directors should have job descriptions and an outline that describes their duties and responsibilities. Boards almost always need to delegate some of their responsibilities to committees, such as the nominating or governance committee, audit committee, compensation committee and other special committees, as needed. This makes collaboration especially important.
9. Produce accurate financial reports
Thorough financial reporting is not only a legal mandate but also essential to effective corporate governance. While regulations like SOX require comprehensive internal controls over financial reporting, ongoing financial reports are also how boards gain insight into the organization’s financial performance now and in the future.
It’s a corporate governance best practice to provide the board with monthly financial reports and for those reports to offer visibility into how the organization’s finances have changed — and some reasons why. The financial reports should be clear and easy to read so even those new to the board can glean actionable information.
In many cases, monthly financial reports are brief overviews. Accounting teams should be ready to deliver deeper, more specific data as requested by the board.
10. Communicate effectively with shareholders
Shareholder activism has increased in recent years, particularly as ESG remains a fixture on board agendas. Effective corporate governance doesn’t suppress these shareholders; instead, it finds ways to understand and affirm their point of view. This is especially critical ahead of proxy season, as the new universal proxy gives shareholders the tools to express themselves.
While it’s tempting to start greasing the wheels with shareholders ahead of proxy season, the governance best practice is to proactively identify and respond to shareholder concerns. Boards should work with their teams to monitor their activist investors and craft response strategies to remedy any discontent long before it’s time to issue proxy statements. This helps organizations better understand their shareholders and ultimately create a collaborative and productive environment for the annual meeting and beyond.
11. Utilize technology, including artificial intelligence
Generative AI can still be considered an emerging technology. Yet boards who want to ride that wave — not get lost in the tide — should consider how to efficiently and securely integrate AI into board and company operations.
Boards should start by working with management to arrange training sessions about generative AI and other technology.
“Educate yourself and help the board educate themselves [to effectively implement technology in governance],” says Courtney Kamlet, Vice President, Group General Counsel and Corporate Secretary for Vontier Corporation.
Rigorous training will be a key corporate governance best practice as boards adopt AI because they can’t make policies about technology they don’t understand. Topics should include both how AI works and the risks associated with it — including if AI introduces inaccuracies into company assets or incorporates language protected by copyright.
“The benefits will surely vary by industry and will undoubtedly involve changes to business processes,” John Rodi, partner at KPMG and leader of their Board Leadership Center, says. “That benefit should focus on what companies need to do so they don’t get left behind. The risks should focus on those risks that raise reputational as well as legal peril for companies.”
Effective corporate governance also depends on having clear policies and procedures for AI. Boards should consider who will be responsible for the AI model, when it should be developed and deployed, what risk management should be in place and so on.
Turn governance best practices into a resilient infrastructure
Corporate governance best practices are evolving all the time. Where once the emphasis was on the bottom line, today’s stakeholder capitalism means boards must balance the bottom line with the organization’s long-term impact.
While this can be challenging, effective corporate governance best practices help boards keep up. Learn the four steps to building a more robust governance infrastructure that can evolve with the business landscape.