How to Strengthen Your Corporate Governance Framework: 9 Practical Steps

Strong corporate governance has never been more critical in this era of increased business competition. Studies show that companies governed well have a higher chance of outperforming financially and ultimately defeating their competitors. That said, you must master how to strengthen your corporate governance framework if you want to bask in its glory. 

As a company, you can strengthen your corporate governance framework by focusing on clear governance structures, ethical conduct, transparency and disclosure, and a solid risk management system. You can also not overlook strong internal controls, board effectiveness, a culture of accountability, shareholders’ engagement, and regulatory compliance. 

Ideally, poorly governed companies find it hard to build or maintain a reputation, are often sued for noncompliance or violations, and are likely to lose shareholder value. On the other hand, well-governed companies find it easy to acquire stakeholder trust, access capital investment, and increase their competitive advantage. 

The next section will discuss the nine practical steps for establishing and improving corporate governance. Let us, however, first determine the framework of effective governance and its primary constituents. Here we go!

The Framework for Effective Governance

Effective decision-making, performance management, and accountability define an effective governance framework. It helps a company sustain its goals, protect the stakeholders’ interests, provide transparency, and promote ethical behavior. 

Organizational long-term sustainability development, business improvement, and legal compliance are integral to an effective governance model. Hereunder are the essential components of a governance framework:

1. Governance Structure

Good governance starts with structures or systems determining an organization’s roles, responsibilities, and reporting lines. The most fundamental ones include:

• Board of Directors: The board is the apex of the governance hierarchy. It decides where the organization should go, ensures that management is of the highest quality, and protects the interests of the shareholders and stakeholders. The board should include independent directors so that they can make non-partisan decisions.
• Committees: Technical committees, such as Audit, Risk, Compensation, and Nominations Committees, should be established to address technical governance matters. They should have terms of reference and submit reports to the board from time to time.
• Executive Management: The executive management, which reports to the CEO, executes the strategic intents of the board and operates on a day-to-day business level. Good governance dictates that their roles are clear and they are held accountable for their decision-making.
• Organizational Hierarchy: Open lines of reporting and clear hierarchy also define a good governance framework. The organization’s power delegation should be clear, where it is specified whose role it is to make what decisions at what levels.

2. Ethical Guidance

Corporate values and corporate ethics code are the foundation of good governance. Codes form the organizational culture and direct the employee, board members, and management conduct. Clear ethical guidance assists with the following:

• Ethical Decision-Making: Ethical guidance calls for strict guidelines for the right to act, such as in conflict of interest, related-party transactions, and other sensitive matters.
• Instilling Corporate Values: Ethical guidance enables organizations to imprint values such as integrity, respect, fairness, and openness on strategic choices and day-to-day operations.
• Leadership Commitment: Through ethical guidance, management exhibits exemplary ethics publicly and leads by example.

3. Accountability and Responsibility

Accountability is holding everyone at all organizational levels responsible for what they do and don’t do. It’s integral to good governance and often involves:

• Clearly Defined Roles: There should be clearly defined roles and responsibilities at every level, from the board of directors to executive management and staff. That tells individuals what they need to do and what needs to be accomplished.
• Performance Measurement: Accountability also calls for credible measurements to quantify organizational and individual performance. That includes using Key Performance Indicators and other performance measures to track progress.
• Regular Monitoring and Reporting: Boards and committees should monitor and review organizational performance, including financial performance, efficiency of operation, and compliance with governance practices. This will help with timely detection and problem-solving within the organization.
• Whistleblowing Mechanisms: Another way for organizations to demonstrate accountability and responsibility is to create anonymous reporting mechanisms under which employees and stakeholders can report unethical behavior or governance irregularities without fear of retaliation. This promotes intra-firm employee responsibility as well as earlier error detection and correction.

4. Corporate Transparency 

Transparency is also a robust pillar of good governance. Transparency encourages stakeholders’ trust, improves compliance with the regulator, and streamlines disclosure of transparent information decisions. 

Some of the most essential aspects of transparency are:

• Financial Disclosure: The accounting statements and financial reports should reflect current accounting principles, such as IFRS or GAAP, and be timely and reliable. Early external audits and early disclosure result in financial transparency.
• Stakeholder Communication: The board should ensure timely communication with other stakeholders, shareholders, employees, and customers about the company’s governance, strategic objectives, and finances. Transparency in decision-making generates credibility and trust.
• Risk Reporting: Respective company heads should prepare a report on the risk management process. The report should address how the company identifies, analyzes, and acts upon risks. More to that, they should notify relevant stakeholders about any possible threat to the company’s sustainability.

5. Risk Management

One of the biggest aspects of governance is understanding and managing risk correctly. Correct risk management protocols should be in place to ensure the company is best positioned to deal with potential threats.

This can be done by:

• Risk Identification and Assessment: The company should develop clear risk identification and assessment processes for every area of business activity—financial, operational, regulatory, reputational, and others. It should employ risk mapping and scenario planning to evaluate the likelihood and probable impact of different risks.
• Risk Mitigation: After establishing the risks, the next stage is to try and reduce their impact. This is done through establishing contingent plans, hedging against the risk, diversifying the activity, or using innovative procedures and legislation that minimize exposure to the specific risk.

6. Regulatory Compliance 

Adherence to regulations and corporate law is a precondition for having a sound system of governance. Organizations should conform to all laws and rules on which they focus their corporate activities and stay abreast of corporate statutes that impact their business, such as labor laws, tax laws, environmental statutes, and anti-bribery laws.

Here’s what else your company should do: 

• Invest in a Compliance System: Install a full compliance identification process and system within the company. This includes employing internal compliance officers and internal auditors to verify in-house compliance with the rules and out-of-house compliance with the law.
• Adopting Global Standards: As an international business, you should steward global regulation and governance standards. This could involve adopting International Finance Reporting Standards (IFRS) or anti-bribery acts like the U.S. Foreign Corrupt Practices Act (FCPA).

7. Board Effectiveness

Board effectiveness is critical in delivering an effective system of governance. The board must govern, make strategic decisions, and operate effectively. More board effectiveness can be fostered through the following:

• Regular Board Evaluations: The company should periodically review the board’s performance to establish that the directors contribute, add value appropriately, and carry out their governance responsibilities.
• Independence and Divergence: Relevant company heads should present to the board a list of independent directors with varied experience, backgrounds, perspectives, and skills to provide insights to aid decision-making.
• Continuous Development: Companies should train and enlighten ongoing board members on governance issues, pending threats, and industry developments to make sound decisions.
• Succession Planning: Organizations should develop succession plans for the executive and board to offer leadership continuity and minimize the risk of leadership change shock.

8. Sustainability and Long-Term Strategy

Companies should promote long-term sustainable development by integrating Environmental, Social, and Governance (ESG) considerations into strategic decision-making. Your company should establish long-term sustainability goals based on their long-term environmental and stakeholder effect.

Moreover, it should embed the environmental and social factors into the governance system to transform the company into an environmentally sustainable and socially responsible organization.

How to Strengthen Your Corporate Governance Framework

And now, since you already know what a good governance framework is and what it is made of, let us proceed to see how you can strengthen it. Below are nine practical steps for stronger governance:

Step 1 – Have Clear Structures of Governance

A clear structure of governance is where responsibility and effective decision-making start. Here’s what your company can do to facilitate it:

• Establish an effective board: Ensure that the board is a representative body of directors with diverse skills, experience, and vision. The board should be independent and have a majority of non-executive directors to avoid any conflict of interest.
• Set up responsible committees: Assign part of the work to specialist committees (Audit, Risk, Compensation, and Nominations Committees, for instance). The committees should have clear guidelines and report regularly to the board.
• Define the top management’s role: Clearly define the executive management role and its responsibility to the board. The board and management need to engage regularly to harmonize operations and strategies.

Step 2 – Promote Ethical Conduct

Ethics and good behavior are the pillars of good corporate governance. The company should have and develop its ethical code and code of conduct, and for that to be the case, it has to demonstrate the following: 

• Leadership Commitment: The board of directors and the top management should lead by example and embrace high standards of ethical behavior.
• Regular Training: Your company should offer regular training to employees and stakeholders about the code of ethics and provide simple, easy-to-follow guidelines for ethical decision-making.
• Enforcement and Accountability: Consider providing compliance systems for applying the code of ethics and handling violations. Also provide an employee confidential reporting system (whistleblowing) for reporting unethical behavior.

Step 3 – Enhance Transparency and Disclosure

Transparency is a key pillar of business governance. Open communication should extend to all stakeholders – employees, customers, regulators, and the firm’s shareholders. Here are easy to enhance transparency and disclosure and eventually strengthen governance:

• Accurate Financial Reporting: Demonstrate accuracy when reporting about finances and ensure timeliness and consistency with international accounting standards. 
• Timely Stakeholder Engagement: Occasionally organize shareholder and other stakeholders’ meetings and inform them about the firm’s performance, strategy, and governance process.
• Accurate Risk Reporting: More simply and understandably, report the company’s risk management plan, risks, and how you plan to avoid or manage them.

Step 4 – Institute a Clear Risk Management System

Companies must know, should have information on, and have some idea about the risks they are likely to face. They should be able to address them at the very first stage. This means establishing risk confirmation procedures for possible risks on agreed schedules in all zones (operational, regulatory, reputational, financial). Such operations are possible by utilizing risk mapping, scenario analysis, and stress testing.

Also, the company should aim to implement controls to eliminate identified risks. This is possible by establishing contingency arrangements, defining the level of risks, and diversifying operations as mitigation measures for exposure. What’s more, regular risk monitoring is important, and the board should always be updated on any changes.

Step 5 – Institute Strong Internal Controls

Internal controls enable effective operations, financial reporting integrity, and regulatory and statute compliance. Some of the key steps towards improving internal controls are:

• Segregation of Duties: Segregate employee duties so that no single employee has sole control over material processes (be it authorization, recording, or confirmation of transactions).
• Internal Audits: Establish an independent internal audit department that regularly assesses the effectiveness of internal controls and communicates areas for improvement.
• Monitoring of Compliance: Monitor compliance with policy, procedure, and regulatory requirements at specified periods. Utilize systems to identify and correct instances of non-compliance.

Step 6 – Build an Effective Board 

Board effectiveness is important in determining the success of the corporate governance system. As a result, your company should continuously monitor and enhance board performance. Proven strengthening board practices for building an effective board include:

• Board Assessment: Periodically measure the board’s performance, including the director’s contribution and that of the board committee.
• Development and Training: Continuously educate the directors on new governance practices, laws, and industry trends. This not only keeps them up to date but also enables them to make informed decisions.
• Plan for succession: Provide a succession plan for the board of directors and the executive to ensure there’s no leadership gap for whatever reason – be it retirement, long absence due to a critical illness, or any other. With leadership succession planning comes the ability to mitigate risks that could crop up when there’s a leadership gap. 

Step 7 – Develop a Culture of Accountability

An accountability culture is necessary for good governance. Everyone, including stakeholders and employees, must be well-versed in their roles and responsibilities. Mechanisms for individuals to be accountable for their actions should be in place, including:

• Defined Duties: Clearly define the board’s and other key players’ roles and responsibilities and communicate them effectively within the firm.
• Performance Monitoring: Establish mechanisms for monitoring performance against mutually agreed objectives and enforce penalties for default or misconduct.
• Leadership Accountability: The senior executives and the board should demonstrate compliance with the necessary governance standards to uphold the company’s business integrity and preserve its financial health. 

Step 8 – Engage Shareholders 

Shareholder involvement is needed to protect the interests and rights of the investors. That’s possible through these operating procedures:

• Annual General Meetings (AGMs): Conduct frequent AGMs, at which the shareholders have an opportunity to have a say on matters related to the company’s performance, governance process, and decision-making. AGMs offer an open line of communication and feedback.
• Minority Shareholder Protection: Treat the minority shareholders fairly and do not allow their rights to be overridden by the interests of majority shareholders.
• Regular Communication: Update the shareholders regularly on performance, financial statements, and company direction. This allows shareholders to pose questions and get answers.

Step 9 – Comply with Legal & Regulatory Requirements

Good governance is all about following relevant laws and legislation, and that includes the following:

• Staying up to date with applicable statutes: Ensure your company stays up to date with various laws and regulations, which include labor laws, environmental regulations, and financial reporting standards. 
• Building a strong compliance team: Create a strong, balanced legal and compliance team that can ensure and maintain compliance with all the firm’s legal and regulatory requirements.
• Demonstrating international compliance: Multinationals must comply with international governance standards, such as anti-corruption law and international financial reporting standards (IFRS).

Improve Your Corporate Governance Framework Today!

Creating a solid corporate governance framework is an ongoing process. It calls for effort more than anything—the effort to establish clear governance structures, demonstrate ethical conduct and transparency, and build a solid risk management system. It also calls for the effort to demonstrate board effectiveness, a culture of accountability, and regulatory compliance, among other practices discussed in this nine-step guide. 

As the Center of Governance(CCG) family, we understand the importance of not only building but also improving your corporate governance framework, and that’s why we are here to help. Through our monthly corporate governance training, you can master how to leverage the opportunities that lie in effective corporate governance as you learn from industry experts. Sign up today to start changing your corporate governance course!