Whether the board is drafting its first governance framework, or re-evaluating its governance processes as the business evolves – five important questions should be considered to establish good governance:
- What is or was the purpose of the process?
- Why is it required?
- How should it be implemented, improved or amended to make it appropriate for this business?
- How frequently should it be reviewed?
- Who will be responsible and ultimately accountable for it?
By asking these questions, the board will not just examine the governance process itself, but also how it will fit into the business as a whole and its relevance for the future.
Taking this approach to each element of governance ensures the present and future strategy of the business is taken into consideration, rather than making isolated decisions which could disrupt client operations unnecessarily. Further it creates responsibility and accountability for the process to ensure relevance and future review.
As a positive culture of governance develops within a business, the questions above will become automatic. The board will not only look forward to potential matters they may need to incorporate into their framework but will also consider which processes are now redundant and can be removed. This will lead to more efficiencies, agile forms of work and a greater understanding of flexibilities in the business. It will also highlight weak points which need improvement or areas which have developed increased risk. As a board gets a greater understanding of the value of governance, it moves away from being an agenda item towards being fully embedded in the way the board thinks, operates and makes decisions.
Governance in the Goldilocks zone
No governance is bad governance. Too much governance is bad governance!
‘Appropriate’ is a key principle for good governance. Some of the worst examples of governance come from the wholesale import of another businesses governance framework which is completely inappropriate for the size and type of business using it. For example, if a fifteen-person business were to use the governance framework for a NYSE listed company, it would not only cripple their productivity, it would demonstrate an absolute failing of the board to understand appropriate governance for their business.
While this example may seem extreme it is commonplace for businesses who do not understand governance to use this approach – it is the danger of a quick find on a Google search.
Rather than being a slave to an abstract set of processes which do not suit the business, the board should take time and care to understand what the governance framework for their business will look like. It does not have to be a long and laborious process. However, it does take dedicated time and effort to achieve.
Build on the Three Tenets of Governance
In Chapter 2, we described the three tenets of governance: accountability, integrity and transparency. The board should embrace and demonstrate these tenets not just to one another but to the business as a whole and onward to its stakeholders. Further, the board should encourage and hire staff on the basis of the tenets to ensure the business works together as a whole and for the same aims.
It is easier said than done to fully incorporate each tenet all of the time, especially for new board members where it could be overwhelming. Often in the case of accountability, the full responsibility of being a director of a company can cripple decision making through fear of mistake. Equally, the subjective nature of each tenet has the potential to stifle dynamic business strategies, honesty around the board table or (in extreme cases) create cover-up’s where something has gone wrong.
Therefore it is the task of the board to embrace the 3 tenets with common sense and a human approach – everyone is fallible and mistakes will be made. Where a risk, error or issue is found it is for the board to work together using the 3 tenets to find a solutions in the best interests of the business and its stakeholders. By doing this, the 3 tenets will flow down into the operations of the business and form the base of future strategies.
Positive Deviation
The creation and establishment of a governance framework, does not mean the board may never deviate from it. There are many reasons the board may choose to ignore a specific process or take on an additional risk, for example:
- There is an immediate threat to the business which requires a process to be ignored
- The process has become redundant and needs to be changed, replaced or repealed
- An opportunity has presented itself which requires a higher risk appetite
- An external environmental change requires the deviation
Where a deviation from the governance framework is required, those decision makers should try to understand why they need to deviate on this occasion, record the reason, and seek authority from those who are ultimately accountable. By doing this the decision will be transparent, the decision maker will consider why the deviation was required (and potentially whether the overall process needs revision), and responsibility and accountability will be recorded and understood.
A business with good governance will have a deep understanding of why its rules and procedures are in place – and therefore understand how and why a deviation may be required, and how quickly this can be escalated to the board if necessary.
An ideal progression of this is that, as the governance framework matures, it will extend throughout the authority framework of the business. Managers will understand why processes or mechanisms under their remit are in place, they will understand the risks of deviation and associated implications of accountability – and they can be empowered either to take a decision or escalate it to the board.
As a business grows in size, the need for education on why a governance framework exists is increasingly important. Knowledge of governance mechanisms will be required in different degrees of detail – and linked with this is the responsibility and accountability for the integrity of the framework. In a large business, the board will not have detailed familiarity with all individual processes within its operating teams – this is the responsibility of the managers and team leaders. However, the managers are responsible for understanding why and how deviation can impact their business areas and are to report these to the board which is ultimately accountable for the overall framework. The lines of communication between operational managers and the board are essential for discussion on changes and deviations as the framework develops with the business (micro-operations view v macro board view).
There is no perfect governance framework.
There is no such thing as a perfect corporate governance framework.
Each framework is different as each business is different. As a business evolves some parts of its framework will become dated and require improvement, or in some cases, wholescale change.
New board members will provide insights to their governance experiences – good and bad – which the board may wish to adapt. New business and strategy theories will highlight areas of weakness or vulnerability within an existing framework. New laws and rules will require higher standards and processes. Entering new markets and jurisdictions will require framework adaption and changes. It never ends and therefore will never be perfect.
Good governance stems from continual improvement and development as the business evolves and the external environment changes. It incorporates the 3 principles and the rational of why are we doing this, how will it affect the business and who will it impact.
Chapter 7 takeaways:
- Governance is fluid – it should evolve not just with a business, but also with environmental changes outside of the business
- Governance should be appropriate for the size and life stage of a business
- Educating team members and team leaders about the governance framework and discussing improvements or problems allows the board to get better feedback
- Deviations from the framework happen and they should be recorded and understood to ensure analysis can take place
- There is no such thing as a perfect governance framework!
If you wish to catch up on Weeks 1 to 7 from the Governance Whitepaper, click here
