Good corporate governance is fundamental to providing effective oversight.
It is increasingly important for companies to articulate the vision and plans for the future so that investors have a clear picture of the long-term plans of how the company intends to address uncertainties and capitalize on the opportunities for the future. What does this mean from a board’s perspective?
The role of a board is to review and understand these plans, discuss and challenge them and guide the company successfully into the future while governing it for the present – to provide oversight, insight and foresight.
Good corporate governance is fundamental to providing effective oversight. Corporate governance generally refers to the rules, processes and procedures used to manage the business of a company and to set the company’s objectives in the context of the economic, social, regulatory and market environment; and put mechanisms in place to monitor progress against these objectives. Good corporate governance creates a transparent set of principles, processes and controls in which the interests of the board, management and stakeholders are aligned. It is founded on the values of ethical behaviour and ethical culture, sustainability of the company in the long-term and enhancing value for all stakeholders.
If you are striving to achieve good corporate governance, here are some of the fundamental questions you may wish to ask.
What should the board look like?
The board of directors is elected by a company’s shareholders. The size of the board will be dictated by the needs of the company and the normal practice in the respective industries. Directors should understand the business of the company. A board should have a sufficient number of directors to represent a diverse set of skills, experience and perspectives. Diversity comes in many forms - not only gender and experience, but also generational, ethnic, geographical and across industries – all these attributes play a key role in widening the lens of the board. Additionally, there are regulatory requirements in place that require a certain number of directors to be independent and financially literate. The current securities regulatory policy recommends that a majority of the directors, including the chair or a lead director, should be independent. While there is no specific rule on the number of board members, we see that seven to 10 directors will typically allow the company to meet these requirements and for adequate representation on various committees of the board.
What steps should a board take to ensure if operates effectively?
The primary role of every board is to assume responsibility for the stewardship of the company, overseeing the activities of management particularly focused on strategy, risk, oversight of the business and succession. The board should adopt a written mandate that acknowledges its responsibilities for stewardship of the company. The mandate should include clear position descriptions for the chair of the board, CEO and subcommittees. The board should also adopt a written code of business conduct and ethics designed to promote integrity and deter any wrong-doing in the company.
To help the board fulfill its mandate, the current Canadian securities regulators has issued Corporate Governance Guidelines. Companies are encouraged to consider these guidelines when developing their own policies and practices.
Moreover, to fulfill their responsibility of providing risk oversight, boards appoint committees to oversee the common risks faced by the company. Risks can be wide ranging and include, for example, financial reporting, reputation, litigation, ethics, technology, or health, safety and environment. Board committees should have written mandates establishing their purpose, responsibilities, member qualifications, member appointment and removal, structure and operations and reporting to the board. The securities legislation requires every public company to have an audit committee and recommends that a company consider appointing a nominating committee and a compensation committee. These are the three committees seen typically in the Canadian public companies governance structure.
In order to achieve good corporate governance, the board should ensure that senior management understands all the potential risks to the company and puts in place appropriate processes to mitigate them. These risk factors include economic and market risks as well as operational risks, involved in acquisitions, financings, dispositions, infrastructure and technology, as well as reputational and disclosure risks. Boards should ensure that senior management and the board are on the same page in terms of the strategy, priorities, risk management, that accountabilities are clearly set out and agreed upon, and information flow is timely, effective and adequate so that the foundations of building a trusting relationship is strong. Boards should be well informed about the critical issues facing the company to not only ask good questions, but also contest management views when needed.
At the same time, it is also important that the CEO views the board as a body that understands the company’s business, strategy for success, risks and challenges and, as such, believes the board members can help the company achieve its goals.
Boards should also consider, periodically, looking beyond the statutory requirements of their role and consider items such as company culture, employee engagement, learning and development of the people and succession planning – all the matters that are important to building a trusting relationship with senior management.
Evaluation of the board’s own effectiveness has become a better practice in many organizations. This can be done either by way of self-assessment or an external assessment to ensure that the board is working in a manner consistent with its mandate and best practices, and that board members when being re-nominated have been diligent and continue to be effective. Best practice would be to perform the evaluation at an individual member level, as well as for the overall board. This process is simple and works best when structured properly. It can be carried out by way of questionnaires or interviews, and can be done every 2 to 3 years as the terms for directors come up for nomination. Overall board evaluation provides data about the board performance and, more importantly, bring out issues about individual board member performance in an indirect way and serves as a reference point for future improvement.
Corporate governance methods are continuously evolving, and there is a broad spectrum of expectations and demands on the role of the board. Regardless of the country or the company, the goal of corporate governance remains the same – get the basics right – oversight of risks and selection and oversight of company leadership. To this end, the board should be diverse, visionary, think long term and focus on the key stakeholders.
Companies that are on the right path of setting up a sustainable governance model get the right people and mix of skills on the board and management, have boards that set the right tone at the top, establish clear policies and understanding of accountabilities, develop a relationship of trust between board and management and encourage a culture of strong ethical values, innovation, engagement and empowerment.