Corporate Governance

GOVERNANCE PRINCIPLES

The phrase “corporate governance” is prominent in both the business world and the public sector. This is due to the increasing pressure to protect shareholder value and public money following a number of high profile financial scandals, which have received media attention

Good governance is about the effective supervision of the company, and managing risk, so that business is done competently, with integrity and due regard of the interests of all stakeholders. It is the means by which organisations can achieve their objectives and sustain their performance

Investors, including financial institutions and banks, have put a growing emphasis on how well companies manage themselves and their relationships with shareholders and stakeholders. Those organisations that can demonstrate that they act with honesty and probity are now seen as having a competitive advantage

The benefits to be gained from applying best practice in governance include:

Confidence of investors – who may be more inclined to support development and growth

Trust of employees – with the likelihood of increased commitment and retention

Stakeholder & Customer confidence – leading to increased competitiveness in the market place

Long-term sustainability – through achievement of aims and financial strength

Resilience and adaptable to change – built upon a firm foundation of risk management and control

The key guidance on corporate governance is directed towards companies listed upon the stock exchange and is set out within the Combined Code, which was originally published in 1998 but has been revised in 2003 and 2006. The code is voluntary and is designed to strengthen and increase the effectiveness of the unitary Board system (one main board with a chairman and a CEO). The main principles of the code are as follows:

A. Every company should be headed by an effective board collectively responsible for the Company. Their duties should include:

o Setting the company’s strategic aims

o Providing the leadership to put strategies into effect

o Supervising the management of the business

o Reporting to shareholder on their stewardship

B. Levels of remuneration should be sufficient to attract, retain and motivate directors. There should also be a transparent policy for setting executive remuneration.

C. The Board should carry out a balanced and understandable assessment of the company’s position:

o The board should maintain a sound system of internal control to safeguard shareholder’s investment and the company’s assets

o The board should at least annually conduct a review of the effectiveness of the system of internal control and should report to shareholders that they have done so.

o The review should cover all material controls, including Financial, Operational and Compliance controls and Risk Management systems

D. Dialogue with shareholders based on objectives, including an AGM to encourage shareholder participation

Since the publication of the Combined Code and related guidance upon the nature of internal control issued in 1999 (Turnbull Report) there has been a great deal of debate and academic research upon what represents best practice with regard to corporate governance. There are differences of opinion but the following list, reported in Tottel’s Corporate Governance Handbook2005, is generally regarded as a useful summary

Principles of Corporate Governance, Tottel’s Handbook 2005.

1. Stakeholder involvement and control in the business
2. A strong, involved board of directors
3. Risk assessment and control
4. A strong, independent element on the board
5. A balanced board composition
6. Maximum and reliable public reporting
7. Avoidance of excessive power at the top of the business
8. Effective monitoring of management by the board
9. Competence and commitment
10. A strong audit process

While much of this may seem remote and of passing interest to small or medium size companies there are a several practical aspects that can be drawn from the detail that could provide a competitive advantage to small and medium size organisations. Consider the action you can take under the following categories to improve governance

Strategic

Fully document and communicate your values and business objectives to stakeholders: employees, customers, investors. Seek feedback
Set specific targets and objectives for the most senior managers and hold review meetings
Establish a simple and effective system of risk management that will prevent things from going wrong. Encourage involvement is risk
Find or appoint a critical friend(s) who is prepared to ask challenging questions about performance and direction of the business

Operational

Look at how you receive assurance that the business complies with regulations and contractual conditions, such as the Companies Act, Inland Revenue, VAT, Data Protection, and Health & Safety etc
Consider the need for audit processes to gain full assurance
Create a simple set of measures (key performance indicators) that tell you how the business is performing. Include stakeholder measures to provide a balanced scorecard
Set out standards of behaviour and customer expectations to emphasis the importance of customer care

Financial

Prepare long-term financial plans, cash flow projections and annual budgets that link directly to your business plans and objectives
Establish decision and authority levels for managers so that financial risks are understood and applied.
Set credit limits for your key customers and carefully monitor and mange your debts.
Ensure that there is reconciliation of your balance sheet figures to supporting records. Report and regularly review financial performance

If you would like to discuss corporate governance issues further or would like to implement risk management and audit processes within your business please contact Capable People

Chris Baker

Technical Development Manager for the Institute of Internal Auditors,

and critical friend of Capable People