Governance – the new high-performance tool

Governance – the new high-performance tool
Published: 
June 2014

In the wake of the GFC, businesses are under pressure to improve corporate governance. But while some complain of the added burden, others are starting to appreciate the benefits.

Achieving a better balance between financial and non-financial performance should not entail paying less attention to either, but instead paying proper attention to both.

In an era of disruption and change, improved governance makes good business sense. Companies of all sizes can benefit from the discipline and focus that governance procedures bring, while being a good corporate citizen will improve your reputation and allow you to build trust.

Increasingly, governance is being seen as a tool to improve performance and differentiate the business. According to Gordon Cairns, chair of David Jones: “If you’ve got good corporate governance… it creates confidence amongst your shareholders that you can be relied on to do the right thing.”

Here are ten things that companies can do to use governance as a high-performance tool:

      1.  Get the board structure right

In the new business climate of uncertainty, the board has an increased responsibility, says Denise Morton, CEO of Effective Governance, Australia’s largest governance consultancy.

She believes boards need to be structured to play an active role in leadership with the right balance of skills and experience. “A board needs a good understanding of what skills it has and those skills it requires,” she says. “There should be a balance between directors with experience and knowledge of the organisation and directors with specialist expertise or a fresh perspective. Directors should also be considered on their ‘behavioural competencies’ as these qualities will influence the relationships around the boardroom table.”

Diversity is also important – not just in gender but ethnicity, experience, age and other factors – as are independent non-executive directors as they bring an objective view and can prevent small groups from dominating decision making. If you are a small company without a board, consider setting one up.

      2. Appoint a strong chair

According to Denise Morton, the chair sets the tone. “As the leader of the board, the chairperson should demonstrate strong leadership, and the ability to establish a sound relationship with the CEO, conduct meetings and lead decision-making processes without dominating board meetings,” she says. “The chair should also be visionary and dynamic.”

      3. Clarify the board’s role

The role of the board differs slightly in each organisation, so be clear about what its role is in the company, and what is the responsibility of management.

In general the board appoints the chair, and the CEO approves budgets and oversees the financial reporting and audit, while management is responsible for the day to day operations. The board works with management to set strategy, while management implements it and the board monitors its progress.

In its guidance to listed companies, the Australian Stock Exchange advises setting out the board’s role and responsibility in a board charter – a measure that many others could usefully adopt.

      4. Set out expectations of the CEO

The board has a key role in setting expectations of the CEO. Making clear what type of behaviour it expects of him or her will help safeguard the relationship between both sides, avoid any embarrassing or damaging incidents and allow the CEO’s performance to be effectively monitored.

      5. The buck stops here

The board is ultimately accountable for the organisation’s performance, so it needs to ensure the business complies with all the relevant regulations and codes of practice. There needs to be policies and procedures in place which guide the way the company goes about its business and ensure consistency throughout the organisation.

      6. Monitor performance – and not just the $

Another important role for directors is to monitor the performance of the organisation and look for ways to achieve improvements. While financial results are the most obvious indicators of performance, they do not tell the full story.

In research conducted by Deloitte and the Economist Intelligence Unit, 78 per cent of managers said that financial indicators alone did not capture their company’s strengths and weaknesses. Deloitte says directors need to understand the rationale behind the numbers and the underlying trends: “Achieving a better balance between financial and non-financial performance should not entail paying less attention to either, but instead paying proper attention to both.”

      7 . Put a risk strategy in place

Risk is inherent in any business. It is the board’s duty to determine how much risk is acceptable, and ensure there are measures in place to identify and mitigate the key risks.

Good risk management practices have other benefits in addition to preserving value. According to the ASX, they can help identify new opportunities to create value. Denise Morton adds: “Effective risk management supports better decision making because it develops a deeper insight into the risk-reward trade-offs that all organisations face.”

      8. Ensure directors have the right information

Governance failures often result from the lack of, or misuse of information. Directors need to have access to the right information to guide their decision making. Their needs will differ depending on their skills – not everyone will understand spreadsheets or technical data so supplement these with alternative formats such as commentary, diagrams or charts. In addition to regular board papers, individual briefings, site visits and even director development programs can all be used to increase directors’ knowledge of the company’s business.

      9. Evaluate board performance

As well as monitoring the company’s performance, boards need to monitor their own effectiveness. Evaluations can take the form of self-assessment or a review by an external consultant. Be sure to address any issues arising or weaknesses which come to light.

According to the international accountancy trade body the ICAEW, evaluations like these can significantly improve performance. “Establishing an effective process for board evaluation can send a positive signal to the organisation that board members are committed to doing their best,” it adds.

      10. Lead by example

Legislation by itself does not ensure good governance – much depends on the integrity of the business leaders. Organisations need to create a culture that promotes responsible behaviour and the board should lead by example. Companies which go beyond mere governance as a compliance activity and use governance as a performance tool and key business differentiator will set the organisation up for long-term success.

Colin Coulson-Thomas, the author of Developing Directors, believes boards should aim high in all respects: “Conscientious boards try to get everything right – right products, right pricing and so on – and the better results are a consequence of making more right decisions rather than merely following a governance code.”