Corporate governance 101: How a simple health check can uncover hidden issues
Governance experts reveal why every organization should be carrying out a regular governance health check — and how to do it.
As Marc Hodak, Partner at Farient Advisors, said at Diligent’s user conference, “Good governance is ultimately what is right for the long-term health of the company.”
Effective governance is crucial to maintaining a healthy and sustainable business environment, but it’s not a ‘set and forget’ endeavor — it needs to be continually monitored, reviewed, and modernized for the business to see its full benefits.
As a leader in modern governance, Diligent stresses regular health checks are a vital part of good governance, helping businesses to effectively manage risk, foster diversity and inclusion, and react to the needs of shareholders and wider society.
Just like a vehicle check-up helps to identify hidden issues so you can proactively address them and drive smoothly, regular governance health checks are crucial because they can uncover potential gaps or weaknesses in the governance structure, allowing businesses to quickly adapt to changing regulatory landscapes, emerging risks, and evolving business needs.
But how do you carry out a corporate governance health check? Diligent’s experts outline how to perform a governance health check to uncover hidden issues, proactively respond to the evolving corporate landscape, and empower sustainable growth.
The key principles of corporate governance
Good corporate governance is vital to the long-term health and success of an organization — it encompasses the rules, practices, and processes that guide a company toward efficient operations and effective decision-making.
In 2023, the G20 and the Organisation for Economic Co-operation and Development (OECD) issued six principles of corporate governance to assist policymakers in evaluating and improving legal, regulatory, and institutional frameworks while also serving as a guide to help corporations innovate and adapt in a competitive world.
- An effective corporate governance framework. Just like a car requires a solid frame to remain effective over time, good corporate governance requires a strong foundation that supports efficient allocation of resources.
- The rights and equitable treatment of shareholders and key ownership functions. As the owners of a publicly traded corporation, shareholders must be allowed to participate and vote in general meetings, elect and remove members of the board, and approve or participate in fundamental corporate decisions.
- Institutional investors, stock markets, and other intermediaries. Considering those with an interest in the company is a foundational element of corporate governance; brokers, institutional investors, credit rating agencies, analysts, and proxy advisors all require oversight for fair and effective functioning.
- Disclosure and transparency. If a decision affects the material health of a publicly traded company, boards must make investors aware promptly. Corporate governance requires clear, transparent communication with all shareholders and stakeholders.
- The responsibilities of the board. It’s essential the board structure supports effective oversight and accountability so directors can exercise objective and independent judgment, oversee risk, and monitor managerial performance.
- Sustainability and resilience. To ensure a company can withstand change and thrive well into the future, sustainability frameworks, practices, policies, and incentives are integral elements of corporate governance that yield long-term success.
How to perform a governance health check
- Make the most of data. Every day, users create 2.5 million quintillion bytes of data, much of which companies collect and store. Successful corporate governance uses a data-driven approach — by incorporating insights such as customer information and stakeholder surveys into your regular health checks, you create a powerful feedback loop that feeds into every decision your company makes.
- Analyze news and public opinion. News and public opinion are powerful yet often underutilized sources of information, with many organizations failing to recognize customer and stakeholder perceptions until it’s too late. Keeping abreast of industry news and public opinion helps you better understand public sentiment to ensure your actions don’t have a negative reaction.
- Know where your business stands. It’s important as part of your governance health to understand your risk and where you stand within your industry. Are you a leader in the field, or is there room for improvement? This data you gather will help you identify gaps and create SWOT analysis reports, which are the basis from which to generate risk and other corporate strategies.
- Review sustainability frameworks. Take climate change and the transition to net zero: do you understand the potential risks of moving from fossil-fueled operations to renewable energy sources? What are the risks of not doing so, like non-compliance with evolving regulations or a poor reputation among environmentally-minded future workers? Good corporate governance enables sound management of these risks.
- Revisit your organization’s strategic plan. A strategic plan ensures boards understand where the corporation is going and how it will get there. As part of a governance health check, it’s important to revisit your strategic plan to ensure the decisions you make about the future of the business align with the organization’s overall mission, vision, and values statements.
- Assess the diversity and inclusivity of your board. Effective governance’s “participatory” nature means boards and organizations must be equitable and diverse. Moreover, these diverse board members and employees need an active voice in corporate decision-making: does your board include and value the views of people with various skills, talents, abilities, experiences, and perspectives?
Equipping your organization with the right tools, such as Diligent’s Board & Leadership Collaboration solution, enables you to implement strong governance practices and keep up with evolving stakeholder needs, allowing for more effective decision-making and empowering long-term success.
