The title of my post has been a burning question for many years, but it has been even more loudly spoken since the most recent financial crisis beginning in 2008. The answer is fairly obvious, but not so easy to attain: improved governance, transparency, a return to fundamentals (e.g. information, competency, objectivity, independence, integrity, and so on), and effective stakeholder communication. Companies that operate with significant shortcomings in any of these areas would be well-advised to strive for excellence in crisis management.
Governance deals with setting the course of the business and ensuring that it is under control at all times. It provides the framework through which responsibilities are delegated, objectives and performance metrics are set, alignment of stakeholder interests and expectations are maintained, and progress toward achieving goals is monitored. Business performance management, strategy development and strategy execution all fall under governance. Furthermore, the business strategy for maximizing shareholder returns is linked to a variety of risks and is also linked to compliance during execution, when the temptation to cut corners or the pressure to meet performance objectives overwhelms the normal “living the corporate vision” behaviors.
Determining the proper governance structure
It only seems fitting to start this discussion from the top of the corporation and with those who speak with authority on governance issues – the Board of Directors. The National Association of Corporate Directors (NACD), a driving force in the on-going development of governance best practices, has set forth Key Agreed Principles that represent areas of consensus among directors, corporate management and shareholders. (Business Roundtable, an authoritative voice on corporate governance, has applauded NACD’s efforts to develop these ten principles, which are useful to Boards as they undertake the task of tailoring their governance structures and practices to meet the needs of their enterprise.)
Development of proper corporate governance must be a thoughtful exercise – definitely not a “box-ticking” exercise, by any means! The first of the ten principles places the responsibility for governance squarely on the Board’s shoulders. This entails a dozen or so responsibilities:
- Design of appropriate governance structures and practices.
- Approval of corporate vision and code of ethics.
- Advising C-Level management outside of the board room in terms of general guidance or on matters requiring attention.
- Hiring, assessing performance, and compensating C-level officers.
- Shaping strategic plans.
- Defining the risk appetite.
- Oversight of risk.
- Review and approval of business plans, goals, stock dividends/splits/buybacks, and any extraordinary transactions (e.g. M&A).
- Comparing actual results to plans.
- Ensuring proper systems and process are in place to ensure compliance with policies, laws and regulations.
- Shareholder communication when deemed appropriate.
- Regularly review and assess Board effectiveness.
In my next post, I will focus on responsibilities 5 and 6 in the list above, namely strategy and risk appetite. Why? The answer, according to the NACD Public Company Governance Survey, is that:
“Strategic planning was the number one issue for directors in 2010.”
In fact, over two-thirds of the survey respondents see strategy as the biggest issue, with corporate performance a distant second place at a little over forty percent, and risk and crisis oversight in third place, capturing a little over thirty percent.
Note: Originally published on The Principled Achiever blog. Edited for length and republished here by permission.