Measuring the impact of good governance
It goes without saying in today’s business environment, where it’s not just expected but also an essential enabler of operations, that good corporate governance should be a priority for all organizations. If you want to remain in good standing with jurisdictional regulation and able to continue operations, good governance is key.
The Organisation for Economic Co-operation and Development – better known as the OECD, a group of 36 member countries founded in 1961 to stimulate economic progress and world trade – introduced some principles of corporate governance to guide regulators, stock exchanges, investors and corporations in assessing what good governance looks like. It centers around the rights of shareholders and fair treatment of them, as well as corporate transparency and accountability. This is just one organization’s view, and while many follow this, each jurisdiction develops its own principles.
Yet, how do we know what good governance looks like? And how can we measure the impact of good governance?
How to measure the impact of good governance
While there is no single accepted way of measuring the impact of good governance across an organization, there are certainly some accepted exercises and metrics that can be used to infer how a company is performing in the governance arena.
As the people at the top, those who set the organizational agenda, the effectiveness of the Board is directly responsible for the success of the organization. Some jurisdictions require boards to perform self-evaluations as part of the compliance code in that market, and certainly a board evaluation is considered best practice in most places.
Board effectiveness can be judged by assessing issues like roles, competencies, board meeting productivity, communication and recruitment. Some technologies – such as Diligent Evaluations – can walk the Board through this assessment process, aiming to streamline the process of board assessments to measure the impact of good governance and improve Board performance.
By understanding how effectively the board is running, corporate secretaries and compliance managers can infer that there is strong governance at the top, and then move to track how well that culture permeates the whole organization.
Ideally an organization would be measuring the impact of good governance long before it gets to this point, but any run-ins with regulators are a good way to highlight issues in the governance process.
If a specific entity, or indeed a wider structure, has a history of facing sanctions from regulators in various jurisdictions and so is on a mission to instill good governance practices, then tracking any dealings with those regulators will help to see the impact of any moves taken. Ensuring all internal and external stakeholders are aware of their regulatory obligations, communicating compliance deadlines and responsibilities, and then ensuring filings are made and data is stored effectively, will help to ensure those sanctions don’t come up again.
Of course, if the entity continues to run afoul of regulators, then governance managers will need to go back through the whole workflow to identify the issues and start again.
Staff turnover and talent attraction
One of the side effects of good governance is an organizational culture that people want to be a part of. It leads to a well-defined and well-communicated mission and vision for the organization, with those involved at every level understanding exactly where they fit in and how they play a role in executing the strategy.
This can lead to better levels of staff retention and can even have a positive impact on talent attraction – the organization becomes a desirable place to be. Measures such as staff turnover, the length of time to fill vacancies and the number of applications for open positions can help to measure the impact of good governance.
Fluctuations in share price and investor/stakeholder interest
Bad governance practices will have wider impacts on an organization – far beyond the monetary impact. Issues with compliance and governance can impact a company’s share price, which can ultimately shake investor confidence and cause stakeholders to ask probing questions of the board. They may feel misled about the company’s structure and strategy, and may begin to sell stock to avoid potential losses.
Tracking share price and investor interest, then, can be a good way to measure the impact of good governance. Once sound governance practices are ingrained in an organization, good governance becomes the way things are done. This ensures the board can answer any investor or stakeholder questions promptly and fully, based on robust entity data, as well as showing the market that this is an organization that is both transparent and efficient in upholding the spirit of good governance.
Poor governance practices generally indicate an organization that is not running efficiently. Bad governance tends to lead to poor record-keeping, which in turn impacts the ability to make effective decisions, and ultimately leads to an organization that is just not running at optimal efficiency.
It follows, then, that if an organization is not running efficiently, it will have higher operating costs. So, measuring both operational efficiency and the cost of operations and tracking trends in those metrics can help to measure the impact of good governance. Take an operational benchmark and then embark on a campaign of instilling the principles of good governance across the organization; ideally, this campaign should lead to a more efficient and effective operation, which will in turn drive operational costs down – a tangible metric for good governance.
Risk management and mitigation
Non-compliance with corporate governance could lead to a lack of risk management within a corporation, and risk management is closely aligned with good corporate governance. It goes without saying, then, that measuring risk management and mitigation are good indicators of adherence to good governance practices.
By keeping a close eye on the risk taken by the company – both in terms of the investments and the market choices it makes, and in terms of operational practices – one can infer the impact of good governance. Calculated risks backed up by sound thinking can indicate good governance practices, whereas risky behavior and a lack of regard for both regulators and consequences can indicate poor governance practices, either being led from the top or creeping into the lower levels of the business.
Track the impact of good governance by harnessing technology
Writing for INSEAD, Dr. Yilmaz Argȕden talks of good governance as being “CRAFTED” – that good governance is a culture and a climate of Consistency, Responsibility, Accountability, Fairness, Transparency and Effectiveness that is Deployed throughout the organization.
This, of course, starts at the top with the board, but must permeate the whole organization in order to be considered truly good governance – and that means the practice of measuring the impact of good governance is essential to keeping good practices going, as well as to the efficient running of the organization.
Entity management software can help to instill that consistency, transparency and accountability that Dr. Argȕden writes about, as it helps to create a single source of truth for the corporate record. By helping to ensure robust and accurate entity data and efficient and secure storing of important papers, entity management software can help governance reporting – after all, entity management sits at the epicenter of several necessary business processes that help legal, tax, finance and treasury to maintain compliance.
But entity management software plays just one part in good governance and robust reporting. Diligent Entities seamlessly integrates with Diligent Boards and a secure file-sharing platform to create the Governance Cloud, a one-stop portal for all governance and compliance reporting. The efficiencies held here – and the risk mitigation found in one integrated system – can have a tangible impact on measuring the impact of good governance.
Get in touch and schedule a demo to see how Diligent’s Governance Cloud can help your organization to measure the impact of good governance.