What exactly is 'Governance'?

“Governance is the system that provides a framework for managing organisations. It identifies who can make decisions, who has the authority to act on behalf of the organisation and who is accountable for how an organisation and its people behave and perform.”

The most cited definition of corporate governance is that proffered by the UK Cadbury Report of 1992 as follows:

“Corporate governance is the system by which companies are directed and controlled.”

Both definitions speak to the fact that governance enables the board and management team to run organisations legally, ethically, sustainably, and successfully, for the benefit of shareholders, staff, clients and customers and – ideally - for the good of wider society.

While these definitions appear straightforward, they imply governance is concerned with the structure and processes for decision making, accountability, control and behaviour in a business.  

In practice, corporate governance involves balancing the interests of all the stakeholders in a business, such as shareholders, senior management executives, customers, suppliers, financiers, government and the community.

Understanding the definition of governance is one thing, but there are two other questions:

• What is good governance?
• Who is responsible for governance?

What is good governance? One description suggests good corporate governance is “about effectively supervising the management of a company to uphold the company’s integrity, achieve more open and rigorous procedures, ensure legal compliance, and promote good relations with stakeholders, including shareholders and employees.”

Therefore, governance is more than conformance to a set of rules and processes. Governance is not a checklist process that is both bureaucratic and administrative in nature.

Instead, governance is integral to the operations, performance and longevity of a business.

The purpose of corporate governance is to make sure an organisation and its leaders are held accountable in fulfilling their fiduciary duties – i.e., investors know they can trust the business with their funds; customers know they can rely on the business to provide worthwhile services, and internal stakeholders can be confident that funds will be managed fairly and honestly.

Organisations that have good governance use clear decision-making processes, behave openly by reporting on their activities, actively engage with their stakeholders, effectively manage the risks they face, and take responsibility for controlling and protecting their assets.

Governance activity contributes to an organisation’s success. Solid governance makes your company more reliable, stable and less prone to liability. All these factors create a sound basis for long-term growth, sets organisational standards and maintains the board's focus and the management team in delivering them.

Who is responsible for governance? The embodiment of governance should be from those persons who lead, control and direct the business – those who are ultimately accountable to its shareholders and other stakeholders. In most cases this will be the board of directors.

As a result, it is easier to consider governance as a set of key ideals which are known and understood by the business, applied throughout its structure, embodied by the board and have the flexibility to evolve with the business over time.

The directors are responsible for the business, how it is run, its successes and failures, and its future. The processes of governance help the board to ensure its decisions flow down throughout the business structure while allowing them to look forward to strategize the business’s future.

Your Takeaways from Week 1 of the Governance White Paper:

• Corporate governance is the system by which companies are directed and controlled
• The purpose of corporate governance is to make sure an organisation and its leaders are held accountable for their decisions and in fulfilling their duties
• It is the directors and/or leaders of a business that are responsible for ensuring governance rules and principles have been appropriately implemented and liable should the business be found wanting
• Good governance contributes to an organisation’s long term success

See you next week for some more on this topic from our Governance Whitepaper!