The importance of good corporate governance

13 July 2022
Good corporate governance ensures that an organisation’s board of directors meet regularly, retain control over the business and have clearly defined responsibilities. It also ensures a robust risk management system. Corporate governance is one of the cornerstones of any good business.

Corporate governance encourages robust and effective decision-making through processes, practices and policies. Moreover, it provides the first line of defence against any allegation of malpractice or dereliction of corporate duty.

It can encompass many tasks, and systems of governance vary by company. To take one high-level description, the Oxford University Press Business English Dictionary defines corporate governance as the “way in which directors and managers control a company and make decisions, especially decisions that have an important effect on the shareholders.”

As we’ll see, good corporate governance has never been more essential to running a successful company.

New urgency

Corporate corruption and scandals are nothing new, from the fall of the Medici in the fifteenth century to Volkswagen’s false emissions claims in the 2010s. Rogue directors, sloppy controls and corporate implosion feature regularly in the business world. But the rise of ESG, the expectations and responsibilities placed on directors, and the ease with which corporate shortcomings can be exposed by company insiders and others on digital media are — or should be — focusing the minds of corporate decision-makers like never before.

Given these pressures and the competitive global economy, corporate governance is becoming an increasingly important part of corporate strategies. Employing good corporate governance not only lowers the risk of non-compliance with statutory and regulatory obligations, it helps a company discourage or counter charges or assumptions that it’s not progressive or open-minded. Sound corporate governance policies and practices can lead to corporate diversity, green credentials, fair supply chains and other outcomes that today’s investors value. As a result, corporate governance can be a significant business differentiator.

Some hallmarks of good governance

The board should meet regularly to maintain effective oversight and control over the business. Meeting minutes should be thorough and show constructive challenge, or debate, from a diverse board with an appropriate balance of executive and non-executive directors. The chair should be a facilitator, not a dictator.

Senior managers, particularly directors, should have thorough inductions into their roles and understand the culture of the business. Once in place, managers should receive ongoing training and assessments and be monitored so the board can understand how the company is functioning. Likewise, boards and board committees should be subject to regular evaluations to ensure they are operating effectively.

Senior leaders should communicate effectively and regularly with the board and maintain corporate records and board papers. Corporate policies that promote regulatory compliance and ethical behaviour must also be developed and implemented across the entire corporate group.

Roles and responsibilities

The whole board is collectively responsible for developing, implementing and maintaining a sound corporate governance system. It is the chair’s job (supported by the company secretary) to ensure the board remains focused on governance. He or she should ensure the company’s governance code and procedures are adopted by the entire board and indeed by the entire corporate group, with local variations based on regulations, cultures and other factors.

While ultimate responsibility lies with the chair and board, it is shared by multiple departments within an organisation. Human resources, finance, procurement, and of course legal counsel and compliance typically have major roles in supporting corporate governance.

Good governance promotes well-managed and accountable decision-making at all levels of a business. Each new joiner should understand his or her responsibilities in this area, including what is expected and forbidden, and how to do the right thing — or know whom to contact — when confronted with an ethical dilemma.

The importance of reporting

Corporate governance reporting takes many forms, including regulatory returns, meeting minutes, audit and accounting outputs, and reports for investors. Generating and retaining these reports across all countries of operation represents a significant administrative burden and often requires an entity management system (EMS).

Despite these costs, the return on investment for establishing and maintaining good corporate governance reporting is realised in many situations. Lenders and investors, commercial partners, state funding bodies and others expect high standards of corporate governance and related documentation when entering into agreements.

A list of considerations for companies

The list below outlines some important considerations for companies looking to improve their corporate governance frameworks. For more information, see our article Corporate governance explained.

  • A corporate governance framework should:
    • Ensure accountability and transparency for company officers and the wider organisation.
    • Specify and document in terms of reference the responsibilities of the board and its committees.
    • Specify those matters which are reserved solely for the board’s decision and those which can be delegated to committees and management through a delegated-authorities structure.
    • Where appropriate, ensure that boards are comprised of an appropriate balance of independent non-executive and executive directors.
    • Account for regulatory and cultural differences between countries.
    • Include a process for keeping abreast of and complying with corporate governance regulations in each jurisdiction of operation.
    • Clarify the duties of every company officer.
    • Encourage officers to keep their duties in mind when making company decisions.
    • Protect company members, officers and management.
    • Ensure appropriate recordkeeping and that the company’s statutory registers are kept up to date.
    • Maintain an evidence-trail of board decisions through comprehensive board and committee minutes.
    • Ensure regular governance and compliance audits.
    • Ensure that the company’s ESG-related strategies are carried out and documented.
    • Where appropriate, include an entity management system to act as a single repository for corporate entity information across all jurisdictions.
  • The board should:
    • Set the strategic direction of the company and monitor performance against strategy.
    • Have access to timely and clear management information, including financial and non-financial KPIs where appropriate.
    • Meet sufficiently regularly to maintain control over the business and monitor its performance.
    • Ensure the company secretary keeps board minutes and action lists.
    • Monitor those in management to understand how the company is functioning.
  • The company secretary should:
    • Facilitate the smooth running of the board and ensure good information flows.
    • Ensure board procedures are followed.
    • Take comprehensive minutes which record the board’s key decisions and discussions.
    • Ensure pertinent rules and regulations, including the company’s constitution, are observed.
    • Ensure the organisation keeps the local register of companies up to date with any necessary filings.
    • Prepare annual reports and filings.
    • Maintain the company’s corporate records.
    • Ensure the correct administration of the company’s annual general meeting (AGM), where it holds one.
    • Ensure the company adheres not only to local company law but other legislation which may be applicable, such as local stock exchange listing rules, insider dealing rules, and any prevailing corporate governance or regulatory codes which may apply. 
    • Provide domiciliation services, such as locally compliant registered office addresses and mail-forwarding.

Corporate governance has earned its place as an essential tool in the management and growth of companies, and will continue to grow in importance as investor and regulator demands for transparency increase. Virtually all companies can benefit by taking steps to increase the quality of their corporate governance systems.

This is an updated version of a previously published article.

For more information, watch our webinar Corporate governance now: Protecting your reputation and growing your bottom line