The Importance of Corporate Governance

When asked how the company ended up getting into a market that had little to do with their stated strategy, the Chief Operating Officer replied, “I’m not sure. We thought it sounded really interesting so we went ahead with it. In hindsight I wish we had left it alone”

When asked how they came up with the purchase price for a set of assets, the Chief Financial Officer indicated with a bit of disdain, “That one really ticks me off. I provided a pretty thorough analysis indicating a value range. Next thing I hear we paid them ten times that! What a waste of money.”

Many individuals struggle to verbalize the concept of corporate governance. Some will mumble something about “the tone at the top” and internal controls. Their description is true, but vague. Simply put, when we talk about corporate governance we are talking about the framework put in place to ensure the above two examples do not occur.

Corporate governance is about allocating the authority to act to various individuals in the organization, defining the roles and responsibilities of the board of directors, management and staff, and making clear how decisions will be made. I tend to think about corporate governance in terms of documents and actions. 

I find it interesting that corporate governance is vital a company’s success yet not something that most companies ever think to address

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Given that corporate governance is a framework, it is nice to have it formally documented. I loosely break that documentation into that which governs the Board and its committees, that which governs management and that which spell out key policies to all staff.

First up are those documents that govern the Board and its committees (audit, compensation, etc.). I recommend that every company have written mandates that outline expectations, authority, composition, meetings, duties and responsibilities. The mandates should also clearly express the requirement to self-assess performance annually. It is amazing how something will be followed if there is a need to stand up in a room and report how you did.

For management, the key document governing its behaviour is the delegation of authority. I will write more about this document for those who are unfamiliar with it in a future post. As a starting point, think about the company as a whole. It can create new products, enter new markets, spend money, take on debt, hire and fire staff, award stock options and do a whole lot of other things.

All of the above decisions can be made by the Board of Directors. It is an overwhelming list of decisions, so the Board hires management to execute the strategy and manage the day-to-day operations of the company. The delegation of authority is the document that clearly spells out what things the Board has authorized management to do on the company’s behalf. Anything outside that authority requires Board approval.

The document reflects separately what the CEO, COO, CFO and various Vice Presidents have the authority to do. As the organization increases in size and scope, the Vice Presidents will formally delegate certain parts of their authority down to staff.

The final piece of the documented corporate governance framework is the relevant policies. These typically include a code of ethics, whistleblower policy, health and safety policy, and disclosure policy. Depending on the type of business I have certainly omitted a policy or two from my list.

The common theme of the policies is that they govern behaviour. Together they help set the culture of the organization; set the “tone at the top” if you will.

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The above documents are worthless if they are not accompanied by actions. We want the Board to fulfill its mandate and we want management to act in accordance with the authority delegated to it. We want everyone in the organization to follow the policies set forth.

To that end, an important set of actions is periodically reporting compliance with the governing documents. Management should be reporting to the board any violations or deviations from policy. They should indicate the cause, the implications and the actions taken to remediate.

As I write the above two paragraphs, I realize that we are at the mouth of the rabbit hole. I could probably write thousands of words giving example of actions that enhance corporate governance. Rather than have one extremely long rambling on the subject, it will form the primary subject of my writing.

This blog is dedicated to covering a variety of topics relating to corporate governance. Some will be topics that did not quite fit into my book, The CFO’s Guide to Good Corporate Governance. Some will be observations and new thoughts that arise out of my consulting work. All will be aimed at providing the reader simple, actionable solutions that will really help their business and ultimately make their company a better place to work.

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My consulting business originally focused on getting the documents drafted and approved by the Board of Directors. The risk was that the documents immediately were put on the shelf and forgotten.

The solution is to work with the Board subsequent to the adoption of the documents to change their behaviour. I want the Board to actively fulfill its mandate and to actively ensure management is following suit.  This is achieved in part through the monthly reporting from management and in part through the quarterly board meetings.

On the management side, I offer guidance and some tools to assist in meeting the Board’s requirements. The goal is developing new habits and hopefully having management see the benefit in working under a good governance framework. Those benefits will take time to materialize in the form of improved profits, cash flow and shareholder returns.

But enough self promotion. Enjoy the blog, buy the book and get in touch. You can find me on Twitter at https://twitter.com/JonathanGJoyce

Next up will be a post on putting together a really good Board of Directors.