Corporate governance is a theme which should be an integral part of every business, pervading every process, action and review from the bottom right up to the very top.
Not everyone understands what the term means but in simple terms, it just means the controls and practices you have in place to ensure your company is compliant and any risks are mitigated.
Unfortunately, despite the fact that the ground-breaking Cadbury report was first published over two decades ago, some companies have yet to take the subject of corporate governance seriously. This is somewhat incredible considering the fact that research consistently shows that companies which have excellent corporate governance outperform their peers right across the board.
We take a closer look at how a company Board's effectiveness can be properly evaluated via the conducting of a corporate governance review.
Corporate governance is an area which still isn't being properly implemented by many companies, some of a considerable size. This is possibly due in part to the decision to allow businesses to simply explain why they don't have robust corporate governance in place.
One study which looked at all FTSE 350 companies for the 12 months ending in April 2012 found that only half were complying with the Corporate Governance Code. Even more significantly, two out of three companies who had failed to comply for the second year in a row gave the same explanation for their stance.
Evaluating in a fair way how your board is performing is important
Image source: http://farm2.staticflickr.com/1188/5170398224_3e28b896a5.jpg
Unfortunately, even some of those who were compliant with the Code don't really take it as seriously as it deserves, viewing it as a box ticking exercise in order to keep everyone happy.
In reality, corporate governance offers a very big opportunity to scrutinise how the company is performing, including at a senior level, which in turn could lead to improved results.
Although conducting a review may not be the most comfortable experience, it's important to ascertain exactly how the company is performing and this means starting at the top.
It's not uncommon for some Board members to be cynical or dismissive about the benefits of a corporate governance review. One way to circumvent this difficulty is to get the members of the Board to design their own review process.
There are three main options which can shape the nature of the review; these are detailed below:
Internal review
This is perhaps the least challenging of all the options and certainly the most comfortable for Board members to face. Typically an internal review is comprised of questions put together by the chairman and company secretary and often delivered in the form of a questionnaire.
The Code requires effectiveness reviews to be both rigorous and formal and unfortunately this kind of review meets neither criteria. In many cases, the questionnaire lacks the right kind of questions and the business lacks the necessary know-how to conduct a more probing – and ultimately useful – effectiveness review.
External review
Moving to the opposite end of the spectrum, an external review is carried out by experts in the industry and can take one of many different forms, or more frequently a combination of several. Possibilities include targeted questionnaires, one-to-one interviews, observation, focus groups, simulated scenarios and the assessment of key documentation.
A far more robust process, in order to be properly effective, the consultant should have an in-depth knowledge about all aspects of corporate governance. They will also need diplomatic yet incisive feedback skills and the ability to draw the group together to decide how to make improvements.
The hybrid approach
A cheaper version that the full consultant-led review, a hybrid approach takes some of the best features from an external assessment and implements that in a manner more akin to an internal review.
This might mean specifically drafted questionnaires, and the assessment of additional commentary made by Board members.
Ensure that everybody gets their fair say
Image source: http://farm9.staticflickr.com/8170/8051939468_2ba58dd7b1.jpg
It should be emphasised that none of the above is intended to be a punishing exercise and in some cases, such as hybrid and internal reviews anonymity can be provided in order to reach a more honest conclusion.
Good leadership comes from the top so it is vital that the Board understand what excellent governance looks like and how to identify any failings which may occur.
Whilst the review is not a fault-seeking exercise, it will be necessary to identify individual needs and development areas in addition to looking at the Board as a group entity.
A number of different areas should be considered, namely depth of contribution, breadth of contribution, strategic contribution and challenge contribution. Each of these points covers a range of factors in more detail, very generally speaking it means that each person should contribute in areas both in and outside of their expertise, have an understanding of the breadth of the business, be forward-facing and mindful of opportunities plus being able to identify the times where it is appropriate to challenge where the subject is materially relevant.
The Code stipulates that all Board members of listed companies must hold their own development plan; continued professional development is the ultimate aim for all directors.
Carrying out an effectiveness review via corporate governance is the ideal time to spot gaps in company policy and procedures as well as ensuring that everyone is moving in the same direction and contributing fairly. By using the services of a company secretarial specialist, you can be certain that your expert will have the knowledge, skills and experience to deliver exactly what is best for the future of your firm.
Image credits: Michigan Municipal League (MML) and National Garden Clubs
Before performing a corporate governance review always take appropriate professional and/or legal advice. This article is supplied as information only and can’t be relied on entirely without appropriate qualified advice.
Not everyone understands what the term means but in simple terms, it just means the controls and practices you have in place to ensure your company is compliant and any risks are mitigated.
Unfortunately, despite the fact that the ground-breaking Cadbury report was first published over two decades ago, some companies have yet to take the subject of corporate governance seriously. This is somewhat incredible considering the fact that research consistently shows that companies which have excellent corporate governance outperform their peers right across the board.
We take a closer look at how a company Board's effectiveness can be properly evaluated via the conducting of a corporate governance review.
Not just lip service
Corporate governance is an area which still isn't being properly implemented by many companies, some of a considerable size. This is possibly due in part to the decision to allow businesses to simply explain why they don't have robust corporate governance in place.
One study which looked at all FTSE 350 companies for the 12 months ending in April 2012 found that only half were complying with the Corporate Governance Code. Even more significantly, two out of three companies who had failed to comply for the second year in a row gave the same explanation for their stance.
Evaluating in a fair way how your board is performing is important
Image source: http://farm2.staticflickr.com/1188/5170398224_3e28b896a5.jpg
Unfortunately, even some of those who were compliant with the Code don't really take it as seriously as it deserves, viewing it as a box ticking exercise in order to keep everyone happy.
In reality, corporate governance offers a very big opportunity to scrutinise how the company is performing, including at a senior level, which in turn could lead to improved results.
Evaluating the Board
Although conducting a review may not be the most comfortable experience, it's important to ascertain exactly how the company is performing and this means starting at the top.
It's not uncommon for some Board members to be cynical or dismissive about the benefits of a corporate governance review. One way to circumvent this difficulty is to get the members of the Board to design their own review process.
There are three main options which can shape the nature of the review; these are detailed below:
Internal review
This is perhaps the least challenging of all the options and certainly the most comfortable for Board members to face. Typically an internal review is comprised of questions put together by the chairman and company secretary and often delivered in the form of a questionnaire.
The Code requires effectiveness reviews to be both rigorous and formal and unfortunately this kind of review meets neither criteria. In many cases, the questionnaire lacks the right kind of questions and the business lacks the necessary know-how to conduct a more probing – and ultimately useful – effectiveness review.
External review
Moving to the opposite end of the spectrum, an external review is carried out by experts in the industry and can take one of many different forms, or more frequently a combination of several. Possibilities include targeted questionnaires, one-to-one interviews, observation, focus groups, simulated scenarios and the assessment of key documentation.
A far more robust process, in order to be properly effective, the consultant should have an in-depth knowledge about all aspects of corporate governance. They will also need diplomatic yet incisive feedback skills and the ability to draw the group together to decide how to make improvements.
The hybrid approach
A cheaper version that the full consultant-led review, a hybrid approach takes some of the best features from an external assessment and implements that in a manner more akin to an internal review.
This might mean specifically drafted questionnaires, and the assessment of additional commentary made by Board members.
Ensure that everybody gets their fair say
Image source: http://farm9.staticflickr.com/8170/8051939468_2ba58dd7b1.jpg
It should be emphasised that none of the above is intended to be a punishing exercise and in some cases, such as hybrid and internal reviews anonymity can be provided in order to reach a more honest conclusion.
The outcome
Good leadership comes from the top so it is vital that the Board understand what excellent governance looks like and how to identify any failings which may occur.
Whilst the review is not a fault-seeking exercise, it will be necessary to identify individual needs and development areas in addition to looking at the Board as a group entity.
A number of different areas should be considered, namely depth of contribution, breadth of contribution, strategic contribution and challenge contribution. Each of these points covers a range of factors in more detail, very generally speaking it means that each person should contribute in areas both in and outside of their expertise, have an understanding of the breadth of the business, be forward-facing and mindful of opportunities plus being able to identify the times where it is appropriate to challenge where the subject is materially relevant.
The Code stipulates that all Board members of listed companies must hold their own development plan; continued professional development is the ultimate aim for all directors.
Carrying out an effectiveness review via corporate governance is the ideal time to spot gaps in company policy and procedures as well as ensuring that everyone is moving in the same direction and contributing fairly. By using the services of a company secretarial specialist, you can be certain that your expert will have the knowledge, skills and experience to deliver exactly what is best for the future of your firm.
Image credits: Michigan Municipal League (MML) and National Garden Clubs
Before performing a corporate governance review always take appropriate professional and/or legal advice. This article is supplied as information only and can’t be relied on entirely without appropriate qualified advice.