By Peter Gates, Principal, the Mercury Centre and ACCORD Associate

Good governance

There is no single model that can encompass everything that exists under the heading for good governance. However, there are some essential ingredients for effective corporate governance.

The law entrusts the board with the role of running the organisation. For example, the prime Act dealing with corporate bodies in Australia, the Corporations Act, says "The business of a company is to be managed by or under the direction of the directors". Corporate governance is the regime put in place to make this happen.

Good corporate governance is built by the leadership team, that is, the group of people that sit around the board table and are involved in the decision making process. It will usually include the most senior manager in the organisation and may, dependant on size, include the managers from the level below the most senior. The process is, however, clearly owned by the board.

It is in the interests of the professional manager to promote good corporate governance, even though by leading the board to take their place in the structure, it subsequently leads to a loss of power for the manager. A strong manager values a strong board.

The corporate governance approach adopted by organisations should be developed on an individual basis catering for the specific needs of the organisation. No 'off the shelf' model can offer you all you need. Such models should act as stimuli for greater discussion, and may even set the framework for your policy approach but no model should be seen as having all the solutions.

Foundations

Solid foundations are vital with all long-lasting structures. Effective corporate governance starts with a commitment to a quality resourced corporate governance process, and with information and knowledge.

A decision is needed to agree to and commit to building a corporate governance regime that serves the organisation well, now and into the future. This commitment is to take the time and effort to work through each and every component; produce clear, comprehensive, consistent, and agreed documents that have ownership and commitment from the leadership; and that key individuals or committees will take responsibility to drive and manage the process, and ensure that all essential elements will be dealt with.

From an external perspective, there should be a clear shared understanding among the leadership team as to what is corporate governance, what are the legal responsibilities of the board, what is the role of the board, and what is the role of a director.

From an internal perspective, there must be a deep understanding and agreement about who you are, why you exist, what you do and what are your values. The answers to these questions will set the agenda and direction for the organisation, and will form the basis of the strategic planning process. Also important is to understand the stage of development of the organisation and the role of the board in the organisation. Influencing factors will be such things as maturity of the organisation, number of staff, and size of operations.

Corporate Governance Framework

The elements of the corporate governance framework do not exist in isolation but are interrelated and compliment each other.

• Strategic Planning

The first key component of a corporate governance framework is strategic planning. It takes the answers to the foundation questions of who you are, why you exist, what you do, what are you values, what is your development stage and what is the role of your board. Strategic planning should develop these into your vision, your mission statement and your values. An analysis of your environment, your organisation and your key stakeholders will add to the information base from which you develop strategic goals and strategies to meet them.

If no effective corporate governance regime exists, it should appear as a strategy.

• Policy Development

While policy development might be seen as bureaucratic, in its simplest form it is the documentation of decisions of the board in a structured and predicable way. When each issue comes to the board, the outcome or view of the board is written down so that the issue need not be revisited except for a change of substance. Each policy becomes a touchstone as to the way the organisation carries out its work.

Each of the other elements of the framework will involve policy development. Whether the issue is stakeholder reporting or board development, when a decision has been reached, it should be documented in a consistent manner. Plain English, consistency and clarity are the hallmarks of good policy.

• Reputation Assurance

Reputation assurance is a positive approach to reputation and has two streams, business assurance and values assurance.

Business assurance is based on internal controls and internal and compliance audits. It includes business continuity planning. Effective internal controls provide a control environment, risk assessment, control activities, information & communication, and monitoring. It is about understanding what can go wrong, the resultant effects and the implementation of mitigation strategies.

Values assurance is based on values accountabilities systems and behaviours audits. It is about ensuring that our values are translated into actions through the correct behaviours throughout the organisation.

• Board Development

Given that the board is the governing body of the organisation, it is appropriate that development of the board rates highly when considering how the organisation is controlled via its corporate governance. Development is used in the sense of both developing the individuals currently on the board and developing the board for the future.

When answering the foundation questions and during the strategic planning deliberations, a clear picture of the organisation and its stage of development should emerge, as well as a clear direction for the future. This will enable consideration of the mix of skills, attributes and knowledge for the board for the period 0 to 5 years. Combined with well-defined role descriptions, the board and individual directors can then be evaluated with a view to improvement or replacement, and appropriate strategies can be developed for the next generation of directors.

The next layer of the framework contains the enabling mechanisms where policy is converted into action. These are

Guiding Principles

• Accountability

The economic rationalists would have us believe that we live in an economy rather than a society. From this perspective, a corporate body can do what it likes, when it likes, as long it is not actually illegal. This builds an attitude that pushes the boundaries of ethical practice.

When organisations are incorporated, they gain a licence to operate from society, and the licence comes with responsibilities and obligations. Organisations and their boards are accountable to society for ensuring such things as creating a safe and healthy workplace, adopting practices that are environmentally sound, and providing products that are safe, useful, have value and are label honestly and descriptively.

• Transparency

Hand in hand with accountability is the concept of transparency, an attitude of openness rather than that of secrecy. It is important that decisions and processes are transparent to all stakeholders. If there is nothing to hide, why not make it publicly available? There will always be commercially sensitive information that will need to be withheld, but the predominant culture should be one of disclosure.

Conclusion - a sustainable enterprise

The prime question with which all strategic planning and thinking should commence for any organisation is should we continue? Would our owners and stakeholders be better off if we liquidated the enterprise and applied the capital to another venture? If the answer is that it is worthwhile for the organisation to continue, then actions are needed to ensure it is sustainable.

Sustainable enterprises are organisations that have business strategies, activities, and products & services that meet the needs of the enterprise and its stakeholders today, while protecting, sustaining and enhancing the human and natural resources that will be needed in the future.

An enterprise must be economically viable, have clear direction, understand its financial, human and social capital needs, and be aware of the strengths and weaknesses of the organisation. Environmental thinking and social responsiveness are integrated proactively into core business processes, systems, and strategies. And above all, an enterprise must be accountable to the communities in which it operates for the actions of the enterprise.

The multiple benefits of a sustainable business include reduced costs and improved productivity; competitive advantage; increased revenue, enhanced brand image and reputation; improved relations with key stakeholders; lowered risks and liabilities; enhanced innovation; long-term profitability and increased shareholder and stakeholder value; and improved environmental performance and reduced environmental impact.

Good corporate governance is about creating a robust organisation with a strong reason for being and enhanced longevity for the enterprise. This will lead to reducing the dependency on individuals, a focus on achieving the goals of the organisation, engagement with stakeholders and retain.