Corporate governance has traditionally been viewed as that which the board of directors does when providing oversight on strategy, policy, performance and transparency matters. Governance, as defined in our Glossary of Terms, is:
“The combination of processes and structures implemented by the board to inform, direct, manage and monitor the activities of the organization toward the achievement of its objectives.”
Corporate governance integration includes the relationships between an issuer’s shareholders, board of directors, senior management, internal and external audit, and the mechanisms for holding issuers, the board and executive officers accountable.
Despite its name, corporate governance is not unique to corporations; rather, it can apply to other types of business structures and organizations that aim for consistently strong leadership and governance.
Why Corporate Governance Is Important
In today’s increasingly demanding global marketplace and the myriad corporate governance requirements established by Congress, it is imperative to address core business operations and profitability issues that organizations face daily. For this reason, being proactive as opposed to reactive will benefit a corporation over the long term. The place to begin is with the board of directors.
The Role of the Board of Directors
The board of directors should feel confident that it is acknowledging and addressing all areas of the business that matter. The board, according to its Authorization Charter, should be taking a sufficiently anticipatory, proactive and interactive stance in its oversight role. In doing so, it should have a corporate governance policy in place.
The corporate governance policy should be reviewed, at least annually, and updated, when necessary, if a shift in business practices occurs, such as a merger or acquisition, spin-off, change in management or new regulatory issues. The purpose of this policy is to set standards for board committee structures and protocols. It applies to the board of directors and any external resources hired by the board. As an example, the policy may state the following:
- The board of directors should create such standing and ad-hoc committees as necessary and appropriate to fulfill its mandate.
- The board of directors should appoint an audit committee to oversee financial and internal control processes.
- The audit committee should deal directly with the company’s external auditors in the performance of its duties.
- All board committees should have board-approved terms of reference.
A helpful way to determine what specifics should be addressed in corporate governance policies and procedures is to answer a set of questions focused on the nature and structure of one’s business. Such compliance questionnaires focus on what boards and management should do as they work to improve corporate governance. At a high level, sample questions may include the following:
- Do you have a full understanding of the governance requirements, including their implications on management?
- Are you communicating regularly on multiple fronts, internally and externally, to reinforce the company’s emphasis on quality reporting and responsible and ethical behavior?
- Are you confident that your culture supports responsible and ethical behavior? How do you know?
- Do you have an internal audit department?
Corporate Governance: Unique to Each Organization
While the above questions will be pertinent to any corporate board, a corporate governance framework is not a cookie-cutter set of metrics for all corporations to abide by. A financial services firm would have quite a different set of corporate governance issues than a pharmaceutical company or a clothing retailer. As such, each corporation and organization’s corporate governance will vary based on such characteristics as industry, jurisdiction, size, infrastructure and operations. Thus, it must be tailored to best address the specific issues faced by the company.
As an example, let’s assume a technology-focused business is looking to become the responsible technology firm of the future. Its success in the industry will require not only innovative products and services but also a deep understanding and effective management of emerging risks and heightened market expectations.
It will need to fully understand the changing landscape for the technology industry to focus on the need for tech companies to take action to restore and sustain trust in what constitutes a difficult operating environment. From there, it will need to build and manage a strong corporate governance operation, manage conduct at the top and its culture across the organization, and prepare for increased government scrutiny.
Integrating Board Committees, Shareholders and Auditors
Most boards have board committees. Thus, in corporate governance best practices, the policy should set standards for board committee structures and protocols. These standards apply to the board of directors and any external resources hired by the board. For example, the policy could state that the board of directors should create such standing and ad-hoc committees as it deems necessary and appropriate to fulfill its mandate.
The board of directors should appoint an audit committee to provide oversight on financial and internal control processes. The audit committee should deal directly with the company’s external auditors in the performance of its duties. All board committees should have board-approved terms of reference.
The policy should also address aspects of shareholder meetings by simplifying and clarifying the essential elements of the meetings. The policy applies to shareholders, the board of directors and all staff working on shareholder relations. As an example, it could state that annual shareholder meetings should be held within six months of the end of each fiscal year.
A minimum notice of 21 days should be given in writing to each shareholder of record at the end of the fiscal period under report. All proposed resolutions will be provided to shareholders along with their notice and the company’s annual report and financial statements. All shareholders will be provided with voting proxies if they cannot attend the meeting.
The policy should also establish reporting relationships for the internal auditors of a company. It applies to the board of directors, the audit committee, the management of the company and the internal auditors. As an example, the policy could state that the manager of the internal audit function should not report to the head of the finance and accounting function.
Annually, the internal audit manager should present the internal audit plan to the audit committee of the board for review. The audit committee should vary or adjust the audit plan based on its view of priority audit areas. The results of the audits conducted during the year should be provided to the audit committee for review.
Let’s assume a company goes public. Initial public offerings (IPOs) present significant opportunities to market participants, but these opportunities come with significant governance risks. Having a clearer view of the risks IPOs present allows market participants and regulators to make more informed decisions about balancing growth opportunities with investor and investment protection and ultimately helps the overall market operate more efficiently. The company going public will need to take a deeper look at the risks that IPOs pose to investors, regulators and other financial statement users.
No matter what stage an organization is in formulating and implementing its corporate governance procedures and policies, professionals in a firm can access many resources (consulting firms, websites, regulatory agencies, etc.). But it takes time and effort to seek out those sources, review them, and determine if they meet the needs and fit within the budget.
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Reaching Corporate Governance Goals
The corporate governance requirements established by the Sarbanes-Oxley Act of 2002 (SOX) permanently mandated executive certification of public reports for all registrants, albeit more requirements could be forthcoming from rating agencies and the SEC. This is a defining moment in the history of our capital markets and the economy; companies with already scrupulous governance processes are feeling pressured to take further actions.
Learn what the board of directors and management should do as they work to improve corporate governance. Be on top of all things corporate governance related and be at the top of the game. Connect with us here today and join a family of like-minded business leaders.