Corporate Governance is basically about enabling organisations to achieve their primary goals while assuring compliance at the same time. In today’s times, this is considered the cornerstone of establishing long support relationships with the clients. Governance circumscribes a set of rules which set the ground for a defining relationship between the upper management, shareholders and the stakeholders involved. These rules are used by the organisation to make formal decisions and also to run the company smoothly.
All companies are encouraged to make decisions that have a positive impact on all employees, suppliers as well as the entire community at large. This encompasses good corporate ethical principles of governance to get successful results.
Here are a few reasons to showcase how Corporate Governance can be your road to success –
- Increases accountability
With day to day operations occupying most of the time of business owners, strategy is often put on the backfoot. With a Governance board in place to regularly keep track of progress for all agreed upon actions, business work stays on the right track to achieve goals.
Another addition to the above detail is that with a proper framework in place, a business is given a push in the right direction to think more holistically and be more accountable towards these decisions.
- Risk management
A solid corporate governance framework is very useful in easily identifying risks – including legal, financial, operational, environmental and reputational ones.“The best way to manage risk is to attempt to spot it and plan accordingly before it happens”, according to David Rowland, head of marketing at Engage EHS. This is why risk management is now so important to a business. With proper risk assessment, you can make plans, spot potential risks, and then do everything you can to minimize their impact.
Some of the tasks in which governance services can be of help –
- The Board of Directors are assigned the responsibility for analysing the performance implications from long and short term goals – whether current or future.
- Establishing the company’s risk tolerance level and defining clear accountability to manage risk.
- Taking into account the sufficiency of the current system to assess it’s adequacy while reporting.
- Reduction in the cost of capital
With good governance practices in place, the company’s cost of capital is significantly reduced. How you may ask ? Well, an organisation is able to mitigate potential risks with a governance framework in place and is perceived as reliable, secure and able to mitigate potential risks.
Think about it this way, if your company can mitigate potential risks and want a loan from a bank – they see a strong likelihood of return of principal and may allow the company to borrow funds at a lower interest rate than ones with weak or no corporate governance. These companies soon realise that investors are ready to pay a premium to work with them due to their strong governance framework as a backbone.
- Decrease in conflict of interest
With senior positions in an organisation comes higher responsibility which eventually results in conflict of interest. Corporate governance brings in shareholder activists who are highly effective in changing management styles and compensation structures, leading to an increase in incentive compensation as rewards.
These critical factors enable the director to focus on important factors and avoid clashes due to conflict of interest.
- Attract better talent due to skill set enhancement
The right competence and expertise are extremely important for a job in any organisation. Not only that, strong ethics, integrity and a diversified background with skill sets also brings around better talent to grow.
Here are some of the major factors relevant to this in Corporate governance-
- With directors given independent status, decisions can be made without bias.
- Identifying gaps in knowledge for the current higher management team and utilising their skills where they are better suited. This also paves the path to attract better talent to guide the Board of Directors.
- Encourage question rounds to let them feel included and challenge others to reach their maximum potential.
- Preventing behaviour in the pattern of being a “Yes Boss”.
- Provide new training to Board members regularly for overall growth.
- Promotes strategic planning
With better channels of communication with the upper management, they are able formulate better strategies and assist in –
- Identifying the interests of all stakeholders and managing them reasonably well with planning
- Using the right tools to leverage information from the point of view of communication, production as well as distribution.
In today’s times, implementing corporate governance for your organisation may very well lead it on the road to success. The above mentioned reasons give a fairly broad perspective on why that is so. Compliance and transparency are added benefits which motivates the Board of Directors to take best actions and open channels for interaction with all stakeholders.