Good governance is good business, poor governance is risky business as we have seen again and again. When boards fail, it makes the headlines. ‘Sandpapergate’ plunged Cricket Australia into crisis and resulted in the resignation of its CEO, James Sutherland; AMP’s admissions of failure at the Banking Royal Commission resulted in the resignation of its CEO, Chair and board members; and Justin Milne resigned as Chair of the ABC after his controversial defence of the sacking of its Managing Director, Michelle Guthrie.
That’s the bad news. For good news…
For good news about good governance, consider this: a 2019 report by the Diligent Institute states that “Companies with strong corporate governance (the top 20%) outperformed the bottom 20% by 15% in the most recent two-year period.” In other words, yes, good governance is good business!
So good governance is smart and poor governance increases risk, but what – apart from managing legal compliance – does good governance look like for your business? How well are you following good business practices?
Here are eight tips to get the best from your board.
1. DEFINE A PURPOSE for your board meetings that is more than just managing the business
A board is legally accountable for the actions of an organisation. Directors, when meeting as a board, are responsible for the health of the organisation; and they have a duty of care and diligence. One way of looking at this is that “operating” is a manager’s domain, while directors must oversee the business and set the direction and strategy.
That is not to say that directors should not take an active interest in operations, nor that managers should not develop the strategy. What is essential is that the board and management understand their respective roles and work together. The board must spend sufficient time developing and overseeing the execution of strategy. At the same time it cannot neglecting its role in developing policy, managing risk and overseeing operations.
2. Make sure your directors have the SKILLS AND CAPACITY to add value to the business
A board is not a retirement home, but an opportunity to contribute expertise and experience to the development of the business. Directors should review their collective contributions; they should identify skill gaps in their ranks; and they should recruit people with the required knowledge to add value to the company. Ideally, this will include succession planning to enable directors to move on and bring in new talent and ideas.
3. Use your board to establish the CULTURE of your business
Since directors have a unique view of the whole of the business, they have a significant influence on the culture of an organisation: they set the tone by the questions they ask, and the way they ask them. They choose and guide the CEO. A positive culture at the board encourages staff to recreate that culture within the business.
4. Make sure the reports your board sees give you proper INSIGHTS into the business
Ensure the reports you discuss with your directors provide a sound basis for decision-making. Are you generating the cash you need? What about the critical initiatives in your budget? Can you tell whether your main product or services are profitable? Is your business growing? Are your marketers and salespeople generating the opportunities you need? Insightful reports are a vital element of good business practices.
5. COMMUNICATE what goes on in your board meetings
Tell people what your board has decided and even why. If people don’t know they will make it up. Sure, not everything can be disclosed, but your team deserves to know what is happening.
6. RESPECT THE RIGHTS of owners and members, staff and other stakeholders.
Directors must balance the interests of shareholders (including themselves in many instances), investors, lenders, staff, customers and the community, including regulators. Striking the right balance is not easy, but favouring one of these groups at the expense of the others is risky.
7. Develop and use a RISK MANAGEMENT SYSTEM
The board is responsible for the decisions the company makes, so directors need to understand the risks associated with those decisions. Directors carry liability in areas such as employment, health, safety and environmental impact. Board time spent on understanding risk and opportunities enables better decision-making; and it can reduce the time, cost and effort involved in responding to the disruption caused by a threat that becomes an incident.
8. RECOGNISE THE CONTRIBUTIONS of your directors and staff
Your directors and staff contribute time, effort and expertise to make your organisation successful. A strategic board spends time to consider how it attracts and retains talent that builds the organisation. The board must balance the need to satisfy customers, create wealth for investors and pay lenders; and at the same time it must motivate and develop the capacity of its people. Your board is in a unique position to consider all these issues and create policies that recognise each person’s contribution to your success.
You may recognise these tips as adaptations of the ASX Corporate Governance Principles. While it’s true that the ASX is primarily concerned with listed companies, the Principles represent the best of contemporary governance theory and practice. They are practical and adaptable and are an excellent starting point for businesses of all sizes – including yours!
For a review of your operations and to identify opportunities to build good business practices contact the author of this post, Anthony Callinan, directly or here contact Anthony here through The NCP