Today, we expect more from governance.  We increasingly expect organisations to uphold high ethical standards, be good employers and be mindful of their environmental impact. However, governance is fluid. Many businesses may have great governance at one point, but then fail to evolve governance in step with internal changes and external events – this can create bad outcomes despite good intentions.

A lack of governance (or the lack of understanding of governance) will have long term negative outcomes for a business. Similarly, good governance can turn bad over time if it does not evolve as a business grows.

So how can a business employ governance positively for the long-term success of the business?

This week we are setting out a guiding philosophy for corporate governance and how all businesses can use these principles to create a flexible, appropriate and strong governance culture to create long term success.

The starting point to note is that setting up a governance frameworks is a marathon, not a sprint.

There is virtually no business that starts off with a full governance framework in place. It is idealistic to expect a business to establish a full governance framework during the start-up phase – unless of course this is not the founders’ first business. It will also be in the minority of businesses that the founders understand the importance of governance to create a culture of governance from the very beginning.

While it is a generalisation, in most cases businesses will recognise they require some form of governance as they start to submit accounts or make other regulatory filings. Governance may also be thought of when the first employees are taken on. The results of this are that most businesses develop governance by default rather than by design. This leads to governance evolving only to satisfy external requirements during the early stages.

As a business starts to establish itself as a viable profit-making entity, governance will become more important to the structure and future success of the business. It is at this stage the board would (ideally) understand that governance is a tool to support good decision making, future strategies and compliance with the law.

This stage of corporate development is ideal for the board to create a framework for governance that matches their business and creates a positive culture in which it can grow.

Any framework for a positive governance culture should incorporate these three principles:

Understanding: leaders need to understand the underlying principles of what governance is and why it is important to the success of a business. There are specialised training courses, however, many governance resources are available online for self-education.

Honest discussion of the purposes and principles of governance by the whole board are paramount to understanding and embracing governance for the needs of a particular business. For example, some directors may need assistance to fully understand the financial elements of the business, or to understand the risk elements of making certain strategic decisions. Governance is a continual process and changes over time, therefore education and understanding of governance must always be on the mind of the board.

Implementing: A knowledge of governance is pointless unless it is used within and in the best interest of the business. Once governance is understood it can be incorporated with the flexibility required for specific business needs – this is in contrast to the checkbox mentality of many corporates. Understanding why a certain process is required – as well as educating those following or in charge of the process – will help avoid resistance to change and encourage adherence.

Reviewing and Updating: As a business grows and its external environment changes, there is a need for continual review and adaption of governance. Governance is fluid not static, and as such a process or risk item which may have been put in place for a very good reason may no longer be relevant. The best examples of this are often seen in risks facing the business – risks change over time and the board needs to be aware not only of its current risks, but those which will increase or appear in the future.

Chapter 6 Takeaways:

• There is an underlying expectation from the layperson that businesses should automatically apply the tenets of governance (ethics, transparency and integrity) in all their dealings – scandals hit the headlines and erode public trust when they are not
• Many businesses do not start out with a governance framework; rather this develops over time and as a result of business regulatory requirements
• Boards need to consciously create a governance framework for their business as it evolves into a profit-making entity
• A successful governance framework will only work if the board understand why it is needed, implement it into their business thinking and evolve the framework as the business grows

If you wish to catch up on Weeks 1 to 6 from the Governance Whitepaper, click here