What is organizational governance?
Organizational governance is so important to modern business practices that it even has its own ISO definition — the international standard on social responsibility, ISO 26000, defines organizational governance as “a system by which an organization makes and implements decisions in pursuit of its objectives.” In other words, organizational governance drives the modern organization.
That being the case, organizations need strong and robust entity data on which to base those decisions. Well-governed organizations provide their leaders with good quality information to help them ask the right questions and take the right decisions. That good quality information needs to come from somewhere, and increasingly modern governance is driven by entity and board management software that creates a central repository for governance data, ensuring that there’s a single source of truth for those making decisions — both the big strategic ones and the smaller day-to-day operational ones.
But while, yes, leaders need the best information to make the right decisions, they also need to know what they are accountable for. This is a world of increasing legislation around individual accountability in business, and those in senior leadership positions who are making the decisions must understand the role they play in the organization and what is being asked of them, lest they find themselves penalized — or worse, facing a custodial sentence.
You could, then, add to that original ISO definition: organizational governance is the system by which an organization makes and implements decisions in pursuit of its objectives, and the way in which it empowers its leadership to take accountability for those decisions.
The Era of Personal Responsibility for Directors Demands Robust Entity Data
We live in a world of increasing legislation around individual accountability. When signing up for a directorship, an individual is taking on a whole load of director responsibilities, from responsibilities for internal governance, for administration and for a company’s activity, through the role they play in transactions, financial difficulties and investigations. If they breach any of those responsibilities, directors are subject to a variety of sanctions depending on the jurisdiction in which the decision was made — note, that’s the jurisdiction in which the decision was made, not where the director is based, as this can be an important distinction.
For example, in the UK, as in many jurisdictions based on English law, directors must:
- Follow the company’s constitution and its articles of association
- Act in the company’s best interests to promote its success
- Use independent judgment to make decisions
- Exercise reasonable care, skill and diligence
- Avoid conflicts of interest
- Not accept benefits from a third party that are offered because of their position
- Inform the board if the director may personally benefit from a transaction the company makes
Good organizational governance, therefore, needs a process to record any potential conflicts of interest for every director. It needs to ensure that all directors have access to and have read and agreed to the constitution and articles of association — and that access is ongoing, so they always consult the most recent versions. It needs to record any gifts made to directors in a central log so that compliance teams can check the motives behind these gifts. Organizational governance crosses these and many more areas, and it’s only going to get more robust as regulation gets increasingly nuanced.
For example, the UK’s Prudential and Financial Regulation Authorities (PRA and FCA) introduced a new set of regulations into the UK banking sector in March 2016. Designed to increase the focus on corporate accountability and raise standards of professional behavior, the SMCR, or Senior Managers and Certification Regime, has been seen by many as the most significant piece of regulation in the financial industry for a generation. The SMCR means that most senior people performing key roles in any financial organization in the UK need FCA approval before starting their roles. In addition, any employee whose role means it’s possible for them to cause significant harm to the firm or customers must also be checked at least once a year to certify that they are fit and proper to perform their role.
The SMCR is just one regulation, but it means an addition to organizational governance processes to ensure the FCA is aware of director changes, for example, and that the internal compliance and risk management teams understand the roles of every employee who could “cause significant harm.” Likewise, those in these positions in financial services need to be aware of their responsibilities and accountabilities, as they may need to look into their personal affairs.
It is increasingly important that those in leadership positions in any organization know the roles they are performing in which groups, what the accountabilities of those roles are, and therefore what is expected of them. If there is personal risk and accountability, and they get things wrong, they face fines or jail terms for themselves personally. This is why directors and senior leaders can’t just leave organizational governance to the general counsel or company secretary — they should be taking a personal interest in compliance.
How Technology Helps Drive Strategic Organizational Governance
Organizational governance, then, is driven by day-to-day operational processes and by regulatory requirements, but it can actually help drive strategic business decisions, too. Both senior leaders and the compliance, governance and legal operations teams need access to up-to-date data to ensure all responsibilities and requirements are in hand at any given moment. A single lapse can spell disaster — not only for the organization, but for its leadership as well.
That’s why the ISO brings organizational governance into its definitions, and why the British Standards Institute went so far as creating its own British Standard for governance, the BS 13500, which focuses on effective structures, relationships and accountability, as well as providing guidance on how organizations can illustrate good governance.
The best way to illustrate good governance today, and to ensure an organization can take a strategic approach to organizational governance, is to harness technology. Modern governance platforms can provide that essential central repository for governance information while enabling different levels of access depending on the information an individual needs to see.
Notifications, dashboards, reports and more support this strategic approach to organizational governance, as they give the right information in the right format to leaders at the right time. Alerts for deadlines, status reports, even entity diagramming can help business and governance leaders get the data they need at the time they need it for making decisions.
Diligent’s entity management software enables organizations to define their corporate governance structure and ensure they have the right people in the right roles at the right time to provide confidence that their activities are being effectively governed. Get in touch and schedule a demo to see how Diligent can help drive strategic organizational governance.
