Top five corporate governance best practices
As a corporate secretary or other governance professional, your approach to board undertakings is likely grounded in best practices. You also commit to formal and informal ongoing professional development to ensure you're well positioned to support your board and organization; that's doubtless why you're reading this article right now.
If you were to attend an event with counterparts from different organizations, and someone asked a group of you to identify the top five corporate governance best practices, how would that conversation unfold? Do you think that all of you would land on the same five best practices? Might some people need a bit of time to reflect, focused as they may be on delivering on best practices rather than articulating them? Or would some governance professionals refrain from contributing to that particular conversation on the basis that they exercise their governance expertise within a public institution, a not-for-profit (NFP) or a private company?
The fact is, corporate governance best practices apply across (forgive me) the board. They aren't restricted to those entities that are legally structured as corporations, nor should an organization's size be a consideration. Whether you identify the nature of your role as corporate governance or board governance, the principles are consistent.
Such principles encompass standards and a framework within which an organization's leaders do more than execute effectively on well-developed strategic plans. These standards establish expectations that those at the helm shall also be not only effective, but responsible, in meeting stakeholders' needs. Different organizations will have some unique internal and external stakeholder groups, which may include shareholders, employees, clients, students, patients, the government, the public or other bodies.
An organization's readiness to apply corporate governance best practices can impact more than strategic planning and short-term performance. Adherence to best practices in corporate governance is in itself a form of risk management that can also pre-empt unwanted legal issues.
Best Practices in Corporate Governance
Best practices reflect our times ' and the evolution of governance itself. With this perspective in mind, what would you identify as the top five best practices in corporate governance? Terms and activities such as disclosure, transparency, independence, integrity, diversity, strategy, evaluation, refreshment, and effective risk management/enterprise risk management (ERM) may spring to mind. Each of these characteristics or processes neatly finds its place within an umbrella, or overarching set, of five best practices:
- Development and Maintenance of a Competent and Diverse Board
- Commitment to Integrous and Ethical Behavior
- Defined Roles and Responsibilities
- Alignment of Strategies and Goals
It may have been some time since your board first began using a competencies matrix to support succession planning. Matrices that made sense even four or five years ago may benefit from some refreshment themselves, and so you and your Nominating/Governance Committee will want to periodically review the matrix itself to assess whether it reflects current standards.
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 to decision-making. Boards may have traditionally vetted candidates on the basis of their skills, governance experience and industry-related expertise. Ideal candidates would possess CEO or senior management experience. Some candidates might be selected on the basis of financial literacy and audit experience, or HR and compensation expertise. Other criteria could include experience in government, public policy, real estate, or international or regulatory environments. In recent years, risk management and technology expertise have also made their way onto matrices.
If your board is committed to best practices, though, your matrix may also reflect diversity that extends beyond gender; it may include age, ethnicity, tenure on your board and more. You can explore numerous matrix samples published online. If you'd like to reassess (or create) your own board's matrix, you may want to have a look at the sample published in 2017 by the New York City Pension Funds (NYC Funds) as part of its Boardroom Accountability Project 2.0.
New York City Comptroller Scott Stringer and the New York City Pension Funds (NYC Funds) oversee almost $200 billion in civic employees' pension funds and launched the Project in 2014. The second phase of the project reflects shareholder activism focused on board independence, diversity and climate expertise.
When it comes to building and maintaining a competent board, you can add further value through your recommendations on onboarding and board education. Ongoing board development can enhance even a skilled group of directors' performance ' and it can be based in part on the results of regular self-evaluations. This is another area in which a governance professional can impact board culture, through the design of, or recommendations on, regular board evaluations that also support board refreshment determinations.
Commitment to Integrous, Ethical Behavior
When your organization has directors of integrity and high ethical standards in place, you, in turn, want to ensure that there's a clear conflict of interest policy to guide them. Directors need ready access to the policy, as well as a solid understanding of practices for identifying and declaring all conflicts of interest. Policies may stipulate practices associated with potential or perceived conflicts of interest. Once a director has identified a conflict of interest, that individual will refrain from voting on the matter. The individual may also refrain from debate associated with the matter at hand.
Best practices in corporate governance imply that your board will institute additional policies. There may be a code of conduct for the organization as a whole, including directors. Your board may have already instituted a whistleblower policy, with clear processes for reporting noncompliance. Has it also established a separate sexual harassment policy? If not, you would do well to put this on your board's radar. There's more to this than simply instituting or reviewing policies, though. The board's attention to oversight of organizational practices, education and monitoring associated with each of these policies will have an impact on organizational culture.
Defined Roles and Responsibilities
Do individual directors and senior executives understand the delineations between their respective roles? Best practices in corporate governance include separation of the roles of Board Chair and CEO. Directors and management alike need to respect the distinction between governance and management roles. Boards and directors should have their '''noses in and fingers out''' (that is, the board has an obligation to stick its nose in a company's governance matters, but to keep its fingers out of the management of the company), while management should understand that directors have a responsibility to ask questions and to respectfully challenge management's assumptions.
How do you get there? As a governance professional, you can draft or review and recommend updates to job descriptions associated with various board roles: the board itself, its Chair, Vice Chair(s), committees, committee Chairs, individual directors and your own role. Whether you structure these documents as charters, terms of reference (TOR), or in another format, they can outline responsibilities as well as delegation and limitations of authority. In the case of TOR for the board and its committees, you can append work plans/annual calendars.
Alignment of Strategies and Goals
Alignment of strategies with goals is another corporate best practice. Board directors oversee strategy and execution of both short- and long-term bases, and this includes attention to risk.
As part of this best practice, a board will work with management to determine the organization's risk tolerance. 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.
With roles and responsibilities clearly defined, your individual directors, committees, the board and management will understand their respective accountabilities. You may prepare disclosure reports on meeting attendance and board compensation, and the extent of additional filings, compliance and disclosure reports can vary from one sector to another.
Best practices extend beyond such regulatory requirements, of course. Have the board and management agreed upon quantifiable performance metrics/key performance indicators (KPIs), and how are they reported? Have a look at your board's disclosure practices, and how transparent the board is in its communications ' both internally and with stakeholders.
Enterprise Governance Management (EGM) Solutions
With your board's attention to best practices, you may also have an eye on resources that support effective governance operations. Enterprise Governance Management (EGM) is the application of technical tools and resources to meet your board's needs. Diligent Boards'Ѣ positions you to leverage technology, and it goes far beyond providing secure access to meeting materials. Whether it's efficiency-driven Director & Officer (D&O) questionnaires, board evaluations, automated process chains that support compliance or access to policies, risk and other reports, or communicating and sharing documents securely in real time with Diligent Messenger, these EGM tools support governance best practices.
Your Board's Top Five Governance Best Practices
Thinking back to onboarding and education practices in place for your board, how would a discussion of best practices unfold in your boardroom? If you were to ask individuals around the table to name the top five corporate governance best practices, would you find directors and management approaching governance through a common lens?