Corporate governance principles: identification, application and revision

February 2020  |  FEATURE  |  BOARDROOM INTELLIGENCE

Financier Worldwide Magazine

February 2020 Issue

Whatever the sector or industry, there is an expectation for companies to have a robust corporate governance framework in place, to reassure and demonstrate that the business is operating effectively.

That said, the identification, application and revision of ‘best practice’ increasingly demanded by shareholders, creditors, auditors, regulators and other stakeholders can be challenging.

“Corporate governance is crucial if a company wishes to meet the needs of all its stakeholders, from shareholders and clients to employees, and drive sustainable growth,” says Sheryl Cuisia, managing director and founder of Boudicca Proxy. “Where companies are able to build healthy relationships across this wide range of interests, they will achieve long-term success.”

Indeed, in Ms Cuisia’s experience, strong corporate governance forms the basis of all good business practices. “It works to mitigate risk and solidify compliance mechanisms, increase transparency and provide clarity of vision throughout the hierarchy, ultimately leading to a more effective and accountable executive,” she contends. “Where governance principles are found to be lacking within any area, business performance and reputation are likely to suffer as a consequence.”

Thus, for all companies, acquiring a solid understanding of both the design and structuring of corporate governance principles, as well as their practical implementation in the modern corporate environment, is an increasingly stringent requirement.

Principles

According to the Institute of Chartered Accountants in England and Wales (ICAEW) report ‘What are the overarching principles of corporate governance?’, there are five overarching principles, listed below, that should underpin a corporate governance framework.

Leadership. An effective board should head each company, steering the company to meet its business purpose in both the short and long term.

Capability. The board should have an appropriate mix of skills, experience and independence to enable its members to discharge their duties and responsibilities effectively.

Accountability. The board should communicate to the company’s shareholders and other stakeholders at regular intervals, a fair, balanced and understandable assessment of how the company is achieving its business purpose and meeting its other responsibilities.

Sustainability. The board should guide the business to create value and allocate it fairly and sustainably to reinvestment and distributions to stakeholders, including shareholders, directors, employees and customers.

Integrity. The board should lead the company to conduct its business in a fair and transparent manner that can withstand scrutiny by stakeholders.

That said, governance practitioners are keen to stress that the ICAEW principles are not a panacea and companies should steadfastly avoid complacency. “A tick-box approach to corporate governance will never drive sustainable results,” concurs Ms Cuisia. “Boards should act proactively to identify the key principles that apply to their particular business. What may be good practice for a FTSE-100 multinational organisation is unlikely to suit or be practical for a smaller company.

“Transparency is also fundamental to an effective corporate governance strategy,” she continues. “Companies should explain their principles, detail what steps they have taken to achieve them fully and the impact they are hoping for. This will allow for meaningful feedback from investors, advisers and employees which in turn will allow boards to revise and perfect their strategy. Thus, a positive cycle of implementation and revision can be set in motion.”

Room for improvement

Oversight of the rules, practices and processes that define a corporate governance framework, particularly those pertaining to environmental sustainability, is now a core component in the management of a modern enterprise. However, there is always room for improvement.

“Corporate governance is becoming more significant year-on-year as we are seeing investors becoming increasingly proactive in holding boards to account,” says Ms Cuisia. “Shareholder engagement will be crucial – by listening to concerns and taking meaningful action to address them at an early stage, companies will avoid the need for firefighting around their annual general meetings (AGMs).

“This will also deter activists who are growing in prominence as they are now backed up with greater support from investors,” she continues. “Concentrating on environmental matters will only grow in its importance to shareholders, while diversity will remain another integral focus until greater equality within the boardroom is achieved.”

© Financier Worldwide

BY

Fraser Tennant