How can we improve corporate governance?
Updated: Jan 27
The term corporate governance was introduced during the 80s and 90s to describe best practices for listed companies. It followed the collapse of various high-profile company failures in the UK and elsewhere. But what does it mean and what does good look like?
Defining corporate governance:
Corporate governance is about the systems and controls within a firm. We sometimes hear reference to the four Ps relating to the management of: people, processes, performance and purpose. Basically, it’s about how a firm manages itself and the key question is: how well does a firm manage its affairs?
Corporate governance codes:
Best practices in corporate governance have evolved over time in the UK. For example, the UK Corporate Governance Code (Code) was first adopted in 1998 following the Cadbury Report in 1992.
The current Code’s purpose is described as:
The Code's purpose has changed over time. Today, the Code relates to a firm’s culture and alignment with the four Ps mentioned above. In 2016, the Code stated that governance aided ‘effective, entrepreneurial and prudent management that can deliver the long-term success of the company.’ That is still true; corporate governance aids long term success, but how?
The evolution of corporate governance reflects our changing attitude towards companies and our expectations. The bar continues to be raised and firms need to meet those challenges.
Trust and transparency:
Recently, we’ve heard of HM Treasury’s desire to build trust and encourage greater transparency. We also continue to hear the Financial Conduct Authority (FCA) emphasise the importance of systems and controls, culture and corporate governance.
As indicated above, various high profile company failures have led to a wide variety of countries developing corporate governance frameworks including the OECD-G20 Principles of Corporate Governance. These frameworks were developed in reaction to specific failures with the intention of preventing similar events. Unfortunately, failures do still occur. Some see these frameworks merely as compliance checklists rather than tapping into the underlying value and longer term benefits.
What are the benefits?
Firstly, there is no one size fits all. Firms need to look at their business structure, activities and how they conduct business to determine what will work for them.
If we consider that firms want to be successful in the long-term, then it starts with the following concepts:
This is reflected in the importance of the various accountability regimes that have been established worldwide. Following the financial crisis, regulatory focus turned towards improving the culture and individual accountability within firms. In turn, clarity over decision making aids trust and improves relationships between the board, management and all stakeholders.
These concepts need to be demonstrated and this is where governance can aid better decision making and improve long term survival of a firm.
Demonstrating governance is about ensuring that firms understand who is responsible for which activities, with clear reporting lines and escalation processes when a decision needs to be made. It also requires individuals within a firm to take ownership with appropriate challenge and debate, where necessary.
If corporate governance is about how we manage a firm, then it’s important to consider how boards operate.
Board should have:
good board practices – well-structured, appropriate composition and mix of skills, clearly defined roles
controlled environment – clear risk management framework, internal control procedures and management information systems
transparent disclosure – required disclosures made, financial statements audited, where required
good corporate citizenship – well-defined stakeholder policies such as corporate social responsibility
effective relationship with stakeholders – key stakeholders identified and balance between a firm’s interest and those of its stakeholders
When we consider how boards operate, we need to consider what information is provided to them. Boards need management information that is timely, accurate and relevant.
This requires the board to understand:
What data is required to make a specific decision as it can only be based on the information available, and
What the data means
How Ruleguard can help you:
Ruleguard is an industry-leading software platform designed to help regulated firms manage the burden of evidencing and monitoring compliance. It has a range of tools to help firms fulfil their obligations across the UK, Europe and APAC regions.
Ruleguard has the potential to revolutionise what your firm understands by compliance monitoring and deliver best-in-class governance, oversight and management of compliance risk.
Key features of the Ruleguard platform include:
Evidence and approvals are gathered in real time
Responsible individuals sign off attestations within a framework designed for your firm
Documentation reviews and updates are managed automatically
Key compliance workflows can be designed directly within the solution
Management information is available which directly provide stakeholders with an up-to-the minute overview of compliance results.
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Contact the author
Head of Client Regulation| Ruleguard