If you’re a Director of a business, you’re already in the governance game, like it or not. Here is how to make it work in your favour!
Governance – or rather, terrible governance – has been in the news recently, with Australia’s banks, the ABC and Cricket Australia all taking a battering for their egregious failures in this regard. But governance is more than just avoiding damage: I hope to demonstrate that, done well, it is a real source of strength, commercial and competitive advantage to your business.
Governance Is Far More Than Compliance
First, though, let’s consider what we mean by governance. Here’s a definition: governance is the system of rules, policies, practices and accountability that connects the most important relationships in an organisationL:The relationships between owners, managers, employees, customers and stakeholders (investors, lenders, regulators and the community.
As you can see from this definition, every business in Australia, including yours, from a single Director company all the way up to a large multinational corporation, is already in the governance game, if only to comply with the law.
Well-run organisations, however, use it for far more than this: they use it to make clear their purpose, their understanding of risk and reward and to take accountability for performance. Not surprisingly, having such clarity of purpose and appreciation of risk results in substantial benefits.
The 7 Benefits You Cannot Afford To Miss
1. Good governance builds trust between owners, managers, employees, customers and stakeholders
Governance requires you to talk about what is important and to explain why. Every business has a background of chatter and speculation about what is happening – that’s inevitable. Governance enables you to control that conversation and use it to your business’s advantage.
Good governance emphasises discussion of strategy, the respectful challenge of ideas and communication about decisions. Openness builds trust as you inform staff about what the business is doing and why that is important. And, when you think about it, most of us trust people who are willing to be open about their motives and reasons – even when we disagree with them.
2. Sound governance encourages strategic thinking
Your governance framework reflects the type of business or organisation that you want and the reasons you are in business. It incorporates your goals and the culture you want to create; it also includes the customer experience and the wealth and rewards you will generate. As you think about the future of your organisation and how you will achieve it, you will use this to frame and explore your strategy.
3. Good governance develops resilience and sustainability
At some stage every organisation faces a crisis – whether it’s an IT failure, logistics, product, staff, fire, fraud or theft. Without a plan, you make uninformed decisions, issue confusing orders, and generate chaos. Staff become stressed and angry, customers become frustrated, timeframes blow out, and costs escalate until the crisis is over or the business fails.
Your governance framework requires you to think about risk and opportunity. While a crisis is always stressful, a well-governed business has a well-rehearsed plan to manage a crisis and quickly put the organisation into recovery mode. Staff, customers and stakeholders can be confident from the start that the organisation will recover. Your planning will identify critical risks and consider how to reduce or manage them; it will scan for opportunities and plan to seize them.
4. Applying good principles of governance encourages positive behaviours
Staff, customers and others take their lead from the top. Good governance means taking responsibility for your decisions, even the bad ones. Great organisations hold people accountable for performance, at all levels up to and including leadership. If you’re not accountable within your business, why on earth would you expect your employees to be accountable?
Your behaviour, and the behaviour you tolerate, becomes the standard. Well-governed organisations have clear rules of conduct modelled from the top down.
And even if you’re not persuaded by the benefits so far, these final three should really get your attention…
5. It also lowers the cost of capital
Absolutely! When you think about it, your cost of capital reflects the level of confidence your investors and lenders have in your business.
A good governance framework reduces the risk components of your strategy and business plans. Investors and lenders can be confident that
- you have a viable strategy,
- your leaders are confident and competent,
- you understand the risks and opportunities,
- and your business is structured to perform.
I don’t know about you, but that sounds like the kind of business I’d be willing to invest in!
6. Good governance reduces waste and poor management
Waste and poor management are complex symptoms of an organisation that is not functioning healthily. Good governance encourages thinking about critical performance, monitors performance and quickly catches and responds to problems. Understanding what is essential gives your business the opportunity to reduce and eliminate wasteful or non-critical activities.
7. Good governance reduces non-compliance, fraud and corruption
When we have a shared sense of purpose, where decisions are transparent and accountability is required, it is harder to ignore the actions of those who take shortcuts and who are unethical and dishonest. It just does not fit with the way we do business. A good governance framework includes means of detecting and reporting this behaviour, reducing the risk of it breaking out in the first place and increasing the likelihood that poor practice is quickly exposed before serious damage can be done.
Convinced? Curious? What now?
Are you convinced – or at least curious about how governance could serve your commercial interests? Getting started is easier than you’d think, and the benefits can very quickly become apparent.
But your business is unique, so get some free advice with a no-commitment contact Anthony Callinan