Governance
What is Governance?
Governance is the structure and supporting processes defining responsibility and accountability for decision making, control and behaviour throughout an organization. Effective governance is critical in determining how an organizations objectives are set and achieved, how risks are identified and managed, and is essential in achieving optimal performance.
Proper governance starts at the top of the organization with the Board and Executive Management and filters down through the organization according to defined delegation of authority.
Benefits
Value add
Strong governance is essential to strengthen both internal and external stakeholder confidence that the organization is well positioned for high performance, has the right framework for planning, implementation, compliance, and monitoring of performance, and the ability to respond to a changing external environment. As a client put it, sound governance is
“Managing the company in a way that is attractive to potential investors”.
Challenges
Most organizations don’t recognize the value of strong governance structures due to inexperience, lack of expertise, rapid growth, unwillingness or inability to dedicate resources.
Board structure, independence from management and roles of directors and officers are not clearly defined or adhered to.
“Eyes in, hands off”. Roles lack details and do not effectively articulate the span of control and delegation of authorities at each level and accountability (policy-based governance versus operational oversight).
Executive structure and the roles of the executive lack clarity and definition. Interaction with board members is often inappropriate or mismanaged.
Special advisors to the Board – legal, financial, technological, regulatory compliance, audit, patent agents... Failure to recognize when, why and how to engage these services and definition of scope.
Organizations do not typically allocate resources or have the foresight to effectively manage key processes.
Board member selection – typically “friends or family” with little if any independence, and often a failure to match skills with organizational needs.
Record keeping infrastructure and management – poorly executed, ad hoc approach, no formal records management process or back-ups. Makeshift processes to coordinate and distribute board material and retrieve past discussions, decisions and or resolutions. Documents lacking clarity or direction.
Weak or ineffective monitoring mechanisms reporting to the board to ensure compliance with laws, regulations and standards.
Lacking discipline or expertise to manage board and committee meetings efficiently, follow proper protocol and the organizations decision-making delegation of authority.
The Board
Role
The board's key purpose "is to ensure the company's prosperity by collectively directing the company's affairs, while meeting the appropriate interests of its shareholders and relevant stakeholders". - Standards for the Board, Institute of Directors- (IoD).
This definition is for the most part true for all organizations - not for profit, Startups, small cap and large cap. Having said that, the governance structure is not a one size fits all proposition. There are different and unique challenges for each industry, category and size of an organization and therefore the governance structure should be developed with that in mind.
As per the IoD, the following are the key tasks of the board
- establishing the vision, mission and values
- setting strategy and structure
- delegating to management
- exercising accountability to shareholders and being responsible to relevant stakeholders
with these factors critical to effectiveness
- determining board composition and organisation
- clarifying board and management responsibilities
- planning and managing board and board committee meetings
- developing the effectiveness of the board
Note the factors critical to effectiveness are itemized and detailed in the challenges section.
Board Structure
Roles and Responsibilities
Again this is not a one size fits all proposition. All factors considered, a board starts with a Chair, Vice Chair and other board members. Size and composition (skill sets, expertise, experience) are once again unique to the organization although some areas of expertise are beneficial to all boards - finance, legal.
Boards typically delegate the work amongst members by setting up committees to assist in the efficiency and effectiveness of the board. The most common are; Governance, Executive, and Audit/Finance.
Governance Committee - Duties of the governance committee include recommending action to the board for structural changes to ensure the company is in compliance with its legal and fiduciary duties. The governance committee is accountable for the board's and the company's governance guidelines and policies.*
Typical responsibilities assigned to governance committees include;**
- Overseeing all aspects of the organization’s functions on behalf of the board
- Making recommendations to the board on governance policies, practices and procedures related to nonprofit organizations
- Monitoring compliance with nonprofit governance regulations and, accordingly, providing prudent and timely guidance to the board
- Monitoring and assessing the relationship between the board and managers and making recommendations to the board to ensure that the board continues to function independently from the management
- Reviewing and approving changes recommended by management, including issues regarding disclosures, policies and ethical considerations
Executive Committee - a standing committee that often acts as a steering committee for the full board. Functioning as a steering committee, the executive committee prioritizes issues for the full board to address. Although the executive committee comprises senior-level leaders, the committee members report to the board.***
Audit Committee - the primary purpose of a company's audit committee is to provide oversight of the financial reporting process, the audit process, the company's system of internal controls and compliance with laws and regulations. Audit committee oversight extends to IT security, risk management and operational matters. The role of the audit committee includes such responsibilities as appointing and overseeing the work of the auditor and managing the auditor’s compensation.
* Diligent
** BoardEffect
***Diligent
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