DISCUSS CORPORATE GOVERNANCE AND ITS RELEVANCE

Corporate governance is the system of rules,practices and processes by which a firm is directed
and controlled.
It involves balancing the interests of a company’s stakeholders , senior management,
executives, customers,suppliers, financiers, the government and the community
It is also concerned with structure,processes for decision making, accountability,control and
behavior at the top of an entity.
Governance influences how an organization’s objectives are set and achieved,how risk is
monitored and addressed and how performance is optimized.
It is a core component of the unique characteristics of a successful organization.
EXAMPLES OF CORPORATE GOVERNANCE
1. Volkswagen’ AG
Bad corporate governance can cast doubt on a company’s reliability,integrity or obligation to
shareholders, all of which can have implications for the firm's financial health. Tolerance or
support of legal activities can create scandals like the one that rocked Volkswagen AG
2. Eron and Worldcom.
Public and government concerns about corporate governance tends to wax and wane. Often
however, highly publicized reverations of corporate governance become the subject. For
Example corporate governance became a pressing issue in the 21st century.
The problem with Eron was that its board of directors waived many rules related to conflicts of
interest by allowing the financial officer to create independent private partnerships to do
business with anyone. What actually happened was that these private partnerships were used
to hide Erons debts and liabilities which would have reduced the company’s profits significantly.
3. Pepsico
It's common to hear of bad corporate governance examples, mainly because it is the reason
some companies blow up and end in the now. It's rare to hear about companies with good
corporate governance because it is the good corporate governance that keeps them out of the
news as no scandal has occurred.
The following are the P’S Corporate governance
1. People
People come first in the 4 P’s because people exit on every side of the business equation. They
are the founders, the boards, the stakeholders and the consumer and the impartial observer.
People are the organizers who determine a purpose to work towards, develop a consistent
process to achieve performance outcomes and use those outcomes to grow themselves and
others as people.

2. Purpose
Purpose is the next step. Every piece of corporate governance. The fur is the guiding principle
of the organization. Their mission statement. Everyone's statement.Everyone of their policies
and projects should exist to further this agenda.
It might seem pointless to type up minutes for a meeting that felt irrelevant, but those minutes
and all the other governance from that meeting contribute to making the business effective at
achieving its stated purpose.
 3. Performance
Performance analysis is a key skill in any industry. The ability to look at the results of a
process and determine whether it was successful of a process and determine whether it
was successful and then apply these findings to the rest of your organization is one the
governance process. Using these results to develop skills, both your own and your co-
workers is how the four Ps Cycle revolves endlessly
4. Process
Governance is the process by which people achieve their company’s purpose and that process
is developed by analyzing performance. Processes are refined over time in order to consistently
achieve their purpose and it's always smart to take critical eye to the governance processes.
It takes work and effort to make processes function but once they do you will quickly see how
they can help the company

Reference: https/www.investopedia.com

OBJECTIVES OF CORPORATE GOVERNANCE

To create social responsibility. So as to ensure the company’s operations are beneficial to the
society.

To create a transport working system, in order to ensure long term customer loyalty and have
confidence in the decision making process of the company.

To create management accountable for corporate functioning. This is because management

develops and implements corporate strategy and operates the company’s business under the
board's oversight with the goal of producing sustainable long term value creation.

To protect and promote the interest of shareholders. This helps in building an environment of
trust, transparency and accountability necessary for fostering long term investments,financial
stability and business integrity thereby supporting stronger growth and more inclusive societies

To develop efficient organization culture. This ensures that businesses with an organizational
culture tend to be more successful than less structured companies because they have systems
in place that promote employee performance, productivity and engagement.

To aid in achieving social and economic goals. Corporate governance ensures that an
organization’s board of advisors meet regularly, retain control over the business and have
clearly defined responsibilities.

To improve social cohesion. This is fighting discrimination, social exclusion and inequalities by
building social capital and enabling upwardsocial mobility

To minimize wastage corruption and redtapaism. This is through reviewing the company's
policies.
Reference: babamantra.com

STEPS OF CORPORATE GOVERNANCE

1. Ensure a suitable board

The board should be balanced, competent and divers hoping to achieve success through
corporate governance
Ensure to have directors with the right skills, qualifications and understandable of the business

2. Review the board regularly

The nature of the board of directors is critical and make or break the success of the
organization’s corporate governance.Regularly reviewing the board can help to identify any
shortcomings quickly giving room for improvement thus things are on track.

3. Build solid foundations for oversight.

Overseeing the work of both the board and management is critical. Whereby developing a
systematic foundation to evaluate, assess their roles and responsibilities regularly.

4. Aim for long term value creation.

Identifying key performance indicators towards long term values production opposed to short
term will ensure sustainable success.

5. Prioritize risk management

Setting a risk management process and internal control framework that is both effective and
conducive aiming for its review periodically.

6. Ensure reporting integrity

Corporate reporting as it is critical as it is the insurance of its overall integrity.Aims to set up
safeguards throughout the reporting process such as conducting external audits of the
company.

7. To provide timely and balanced information.

Transparency with key stakeholders is vital which can be accomplished through providing
information regularly both in the good and bad times.
This promotes stakeholder’s confidence in the business and eliminates the risk of them
distributing your proceeding and pulling out.

8. Emphasis integrity as a whole

Practice of integrity do not stop at reporting but been consistent in promoting ethical behavior
and consult shareholders on the interest and concerns when it comes to the integrity of the
company

9. Treat stakeholders equitably.

Respect the rights of stakeholders and be open to adjust your plans to suit them if needed and
appropriate.

10. Ensure adequate disclosures

Disclosing all related parties transactions, and all other interests of all the directors involved.If a
director has eternal financial interests outside of the company, it could influence their decision
making.

Reference:icaew.com

CHARACTERISTICS OF CORPORATE GOVERNANCE

As we have noted in the above that corporate governance is the system of rules, processes,
principle by which a company is directed and controlled and therefore it involves balancing the
interest of a company and its many stakeholders
Therefore good corporate governance practice is aligned to the commercial success of a
company
Bellow are some of the key characteristics of corporate governance which companies should
integrate into their businesses ie

ACCOUNTABILITY
There should be a timely and accurate disclosure of information by the company to the
stakeholders and stakeholders on issues such as the company’s financial performance and
governance.
There must be effective monitoring of management( The CEO and Executive Directors) by the
board. Insufficiency and lack of transparency in corporate governance often leads to fraud and
scandals.
The board is answerable to shareholders and other stakeholders of the company
Accountability and transparency brings confidence by evaluating which company to invest in
and get returns on their investments based on the information evaluated and analyzed.

INDEPENDENCE
This is the extent to which mechanisms have been put in place to minimize or avoid potential
conflict of interest that may exist such as dominance by a strong cheif executives or large share
owner. These mechanisms range from the composition of the board to appointments to
committees of the board and external processes established should be objective and not allow
for undue influences
‘All processes, decision making and mechanisms used will be established so as to minimize or
avoid potential conflict on interest’

RESPONSIBILITY
Responsibility pertains to behavior that allows for connective action and for connective action
and for penalizing mismanagement. Responsible management would , when necessary put in
place what it would take to set the company on the right path. Whereas the board is
accountable to the company, it must act responsibly to and with responsibility towards all the
stakeholders of the company.

TRANSPARENCY
This is a plan to success. Within the corporate Arena, when managers do not limit information
from flowing down to employees, it unifies an organization. Keeping one's own counsel hurts
transparency and fails to boost employee morale but when employees are offered the freedom
to understand the management strategies and observe the financial performance. It becomes
easier to discern their individual role and responsibilities towards the organization and work
towards it.
Transparency should be implemented for the customers to,The public is scared about the
secretive corporations and trusts those that are more transparent.

DISCIPLINE
Corporate governance is a commitment by a company’s senior management to adhere to
behavior that is universally recognized and accepted to be correct and proper.It is important for
management to set procedures and policies for the organization as a whole.
However these policies are only effective if they are well developed and thoroughly
implemented in the system.The management invests time and hard work in developing a
strategy that they can implement inorder to access the market.In Order to achieve the success
in each initiative taken by management and also establish good corporate governance, it is
necessary to implement these policies, strategy resolutions and above all be disciplined and
committed which from the foundations for all the above.

FAIRNESS
One of the best characteristics of corporate governance is to be fair. To be fair within and also
outside the organization. The management is expected to treat fair minded as a priority and use
this among employees to strive for the best , but not at the cost of low morale.The management
must recognise the heavy workload shouldered by an employee and its long term negative
impact.
Again, when it comes to customers, a business must offer equality of treatment. Being fair to
customers is mandatory for a business to function ethically and to build a strong customer
reputation.
Unfair treatment for short term benefits could be a major blow to the long term prospects of the
business.

SOCIAL RESPONSIBILITY
A well managed company will be aware of and respond to social issues, placing a high priority
on ethical standards. A company is likely to experience indirecte economic benefits such as
corporate reputation, improved productivity as long as it considers the social factors
Consumers always expect their providers to be exemplary and a good member of the
community.for example if a business invests in good quality packaging ald also takes the
initiative to recycle and reduce waste then that will generate a very positive impression.
Consumers like businesses which give back to society. These practices help the business to
identify the ways and techniques improve corporate practices and promote good social behavior
while investing in the community.

SELF EVALUATION
It's next to impossible to avoid making mistakes/errors no matter how smartly the organization is
managed and therefore it's important to conduct self evaluation.
Good corporate governance advocates that regular self evaluations and identification of
developing issues within the corporation can help to avoid disasters.
Customer surveys and customer reviews are two highly efficient measures to collect vital
feedback on the effectiveness of the current organization's policies. The use of external
consultants t o annalyse its operations will enable the business to easily and impartially identify
ways to improve its performance and efficiency as a whole.

A CLEAR STRATEGY
This is a very clear key practice to begin with under corporate governance. For Example a
training school whose management needs to establish a clear strategy inorder to make a better
success. They will first need to conduct thorough research and find the niche market of their
service. Once it is identified they all create. The services as per the needs, the management will
design its marketing strategy from research to marketing must be pre-conceived and pre
planned in order to rule out errors and help the workforce to remain focussed on their strategy.

FRAMEWORK OF CORPORATE GOVERNANCE

ISO (INTERNATIONAL STANDARDS ORGANIZATION)
International non-governmental organization made up of national standard bodies. It develops
and publishes a wide range of proprietary industrial and commercial standards and is composed
of representatives from various national standard organizations. There are two most popular
isos standards ie i s o 9001 and 14001. 9001 provides criteria for quality Management systems
while 14001 provides criteria for environmental Management systems.

ISO has the following components;

Quality objectives
Organizational structure and duties
Data management
Processes
Consumer satisfaction with product quality
Continual improvements
Quality instruments
Document control

ISO standards comprise fundamental tools to be used in the organization's corporate

governance ie;
Quality Management systems. ISO is the first and the world's first and most popular
management system standard, and is a powerful tool for initiating corporate governance in
institutions.

The standard with the objectives of focusing on the client and meeting the requirements of the
parties and within this structure required as requirements,the assessment of the scenario,
structure and responsibility of the leadership competencies of roles and responsibilities planning
of resources and changes, standardized operations of processes continuous monitoring and
improvement.

Information security Management systems. ISO presents requirements according to information

security Management with that. It is necessary to establish process controls to meet this
objective. The standard is currently the focus of the global discussion because it is also a tool of
complying with data protection laws.

The information security management system implemented and certified brings an even greater
robustness to the government of organizations because information security and other
protection will be the main organizational risk.

Business continuity Management systems. ISO aims to promote organizations business

continuity and for that single phase it is already a corporate governance standard. The highlight
of the regulation is the preparation of the business impact analysis that isn't sure for all
organizations that want to manage risk of accidents that may impact the business as a tool and
governance.

Reference: certification.com

FACTORS INFLUENCING CORPORATE GOVERNANCE INCLUDE THE FOLLOWING

GLOBALIZATION
One of the biggest factors influencing corporate governance is globalization so we should start
with it. Due to advances in travel,information sharing and exposures to the outside world many
societies have broadened their scope and horizons. People on one end of the globe have
access to information from the other parts of the globe and influence culture and practices.
Corporate governance in particular has seen more businesses adopting best practices from
around the world or moving towards it because the markets are globalized.

TECHNOLOGY
Technology is another factor influencing corporate governance. We have already observed that
advances in technology make sharing information much easier across borders. The same effort
can be observed within organizations much easier, analysis and manipulation of data have
become much easier. Due to this, organizations are working at much bigger and remote scales.

POPULATION GROWTH AND DENSITY

Populations have steadily increased over the decades. Population growth and density is another
major factor influencing corporate governance. Population growth means that markets have
grown, businesses are serving bigger markets and have a lot more people in a given
geographical region. Manufactures and their inhabitants are responsible to many more people
than in the past

FREE MARKET ECONOMIES.

It has been a gradual process but free market economies are becoming more and more popular
all over the world.The key to free markets is transparency and this makes it a factor influencing
corporate governance.With business practices shying away from monopoly,oligopoly and cartel
type behaviors, free markets, economies have played a heavy role in influencing corporate
governance.This is evidenced in both businesses being more transparent and in their
operations and stakeholders being more demanding to businesses about their policies and
operations.

MANAGEMENT CULTURE
Management culture is another factor influencing corporate governance management culture is
a collection of leadership norms and practices that emerge from a firm's history of leadership .
It's a sub corn point of organizational culture that describes management realities beyond
official policy and procedure. Management culture is another Factor influencing corporate
governance in a broader sense as it is influenced by the state of leading minds in industries and
economies.

PROFESSIONALISM AND COLLABORATION

It is the conduct, behavior and attitude of someone in the work environment. A person does not
have to work in a specific profession to demonstrate the important qualities and characteristics
of a professional. Best standards of professionalism but exist in an organization particularly in
those charged with governance will be the factor influencing corporate governance.

OBJECTIVES OF MANAGEMENT
Generally, the objectives of management of a company should always be to increase the return
of stakeholders. This can be done through profit maximization and wealth maximization
strategies. To achieve this management will possible policies that grow the company's revenue
through growing their market share, customers and communities want a company that is
involved more with the community. A company which directly and indirectly benefits the
community they operate in. This has a boom in the importance of corporate social investment
activities and initiatives. This Factor influences corporate governance and raises the Bible which
companies judge to be beneficial community members.

REPORTING
The financial reporting environment companies find themselves in an additional Factor
influencing corporate governance. As domestic accounting rules across the world moved closer
to convergence with international financial reporting standards ( IFRS) rules, there is greater
pressure on those charged with governance to comply with international best practice in
corporate governance. Companies are required to comply with accounting standards which
often involves being more open and also reflection on how things are being presented.
Complicated transactions are being simplified to a minor; users of financial statements can
make true sense of the substance of relationships and not just their legal form.

Reference: financialyard.comp

EFFECTIVE PRINCIPLES OF CORPORATE GOVERNANCE

Competition capacity. Ensure that members on board are functioning and have the appropriate
qualifications other than being reluctant and I do ie the director should understand the business
thoroughly.

Human rights cultural diversity and social cohesion.Ensure free and open interaction among the
board external auditors and management as improving teamwork

Fairenes. There should be respect for the rights of shareholders of the organization. The virtual
ensures that responsibilities are clearly defined.

Openness and transparency. There should be clear and open processes accountability and the
different risk management policies both are board level and throughout the organization.

Accountability. But should ensure that the management team is in position to explain each
action made in the organization so as to support the company's long-term value creation
strategy

The board and management should engage with long term shareholders when issues and
concerns that are avoided spread interest to them. Shareholders should ensure that there is
clear disclosure of appropriate information and ensure accountability for long term interest of the
company and its shareholders as a whole.

The bud should provide an organization strategy for the company for it clearly outlines mission
vision objectives goals and plans of the organization thus enabling the shareholders to know
what they are expected to do as it improves efficiency and effectiveness.

In the decision making process the board should consider all the interests of the companies
constituencies ie shareholders under which we have employees suppliers and the community.

The board should approve corporate strategies that intend to build sustainable long-term value.
The board ensures that it oversees the Senior Management operations of the organization.

The board ensures the ethical conduct of the management in the organization. Of the top of
ethical conduct.
The management under the oversight of the board and the audit committee should ensure that
financial statements produced a fairly presented and present company's financial condition and
results of the operations. This improves the timely disclosures needed by investors to assist the
company's financial soundness and the risks being encountered.

Management should ensure that it develops and implements corporate strategy and operates
the company under the supervision and oversight of the board.

The audit committee of the board should ensure that there is a good relationship with the
external auditors who oversee the companies and your financial statements. The audit
committee of the board should ensure that the external auditors are independent and should
provide them with resources.

The board should ensure that it provides risk management through establishing a risk
management process and an external control framework that is effective and conducive to the
needs of the organization.

The board should be reviewed for it can make and destroy the success of the organization.
Reviews made on board of directors in identify any possible shortcomings that may affect the
organizations operations
.
Reference: https://sprigghr.com

THE FIVE GOLDEN RULES OF CORPORATE GOVERNANCE

RULE 1: THE IMPORTANCE OF BUSINESS ETHICS

In a world disillusioned with globalization, the importance of business ethics is greater than
ever. Business needs to be truly acting in a way which goes beyond purely profit based
motivations, towards a model which works for everyone – what we call the Triple Bottom Line:
People, Planet, Profit. We believe in this so passionately we have it as our slogan: our goal is to
ensure that leaders look after people and the planet and so ensure long-term, sustainable profit
with which to continue the virtuous circle.

An ethical approach is fundamental to sound business practice…

…as it underpins the structures and systems used to ensure good governance and without it
governance will fail.

So the first of our Golden Rules of Corporate Governance is that the business morality or ethic
must permeate an organization from top to bottom and embrace all stakeholders.
Factors highlighting the importance of business ethics

Long-term growth: sustainability comes from an ethical long-term vision which takes into
account all stakeholders. Smaller but sustainable profits long-term must be better than higher
but riskier short-lived profits.

Cost and risk reduction: companies which recognize the importance of business ethics will
need to spend less protecting themselves from internal and external behavioral risks, especially
when supported by sound governance systems and independent research

Anti-capitalist sentiment: the financial crisis marked another blow for the credibility of
capitalism, with resentment towards bank bailouts at the cost of fundamental rights such as
education and healthcare.

Limited resources: the planet has finite resources but a growing population; without ethics,
those resources are replete for purely individual gain at huge cost both to current and future
generations.

1. Long-term growth

Large profits are always attractive, potentially allowing faster achievement of strategic goals, a
greater provision against risk and a greater sense of success and stability. However, there are
countless examples in corporate history of dramatic boom and bust cycles (both on a micro,
corporation level and macro-economic level). Now, more than ever, we need to re-evaluate our
endless search for bigger and bigger profits with the bigger and bigger risks that entails. The
financial crisis which began in 2008 is painful evidence of that. Whole countries have gone to
the brink of bankruptcy as a result of an unwillingness or inability to plan long-term.

More and more organizations are recognizing what most owner-run businesses have always
known: that stable profits are a better bet in the long run than large profits now and an
uncertain future. It is on the long term which we must focus to avoid the blindness which leads
to such huge corporate collapses as Lehman Brothers (2008) and such huge risks and balance
sheet holes as Morgan Stanley (as late as 2012). Even the largest remaining investment banks
like Goldman Sachs are having to recognizes this (if only to try and fend off more aggressive
regulation) and attempting to make their bonus allocations more dependent on longer term
value than the current year’s performance. One can only hope that the heads of such
organizations recognize the importance of business ethics and the resulting need to change to a
more sustainable model of growth.

Certainly the only way to change the huge, unwieldy vessel that is global business is to focus on
the business benefits. While it may seem contradictory and hypocritical to place self-interest at
the heart of change for the better, it is the only conclusion that seems to offer hope.
Fundamentally the importance of business ethics is driven by personal ethics and morality and
most people are fundamentally self-interested. But, if it is in people’s best interest to be ethical,
this has the potential to drive real change. It is already happening in several consumer markets
where demand is shifting to ethical products and social networks are instrumental in spreading
stories about unethical practices. (Sadly, very rarely is positive action rewarded with the same
degree of enthusiasm but with some good – but earnest – marketing, it can be given a kick start
and be highly successful long term.)

2. Cost and risk reduction

A precedent which argues the case made above is the Quality Management industry. In the
West, this sprung up in the early 1980s, when products began to be inspected before leaving
the factory in an attempt to reduce the amount of costly customer complaints. Now, most
products come with at least a one-year warranty and in the case of some car manufacturers, up
to five years. What started off as a self-interested need to reduce costs has led to more reliable
products.

Note: The idea of “built-in obsolescence” is a separate issue in which consumer demand for
more and more new products is arguably the bigger culprit (this is likely to be the subject of a
future blog post!)

Meanwhile, we offer another analogy from wider society. Just as widespread bribery and
corruption in society are recognized as being inimical to the development of a healthy
economy, similarly the lack of a high standard of ethical behavior in a company is inimical to
trust and loyalty, which in turn has a detrimental effect on the health of the company over the
longer term.

It may be argued that an owner can run a business in whichever way he or she wishes, and at
first glance there would appear to be a case for this so long as no other shareholders are
involved, and only his or her money is at risk, and of course with the acquiescence of the
employees and trading partners. However, in many years of observing different standards of
behavior in different business circumstances, one recognizes the relationship between the
perception of ethics which permeates an organization and the degree of trust and loyalty
present among employees and between staff and management. The conclusion one reaches is
that loyalty and trust have a significant value in terms of the efficiency and effectiveness with
which a business can be run, and the concomitant cost of control systems needed.

In other words, a highly ethical operation is likely to spend much less on protecting itself against
fraud and will probably have to spend much less on industrial relations to maintain morale and
common purpose. This should be motivation in itself to recognize the importance of business
ethics and instill good corporate governance in any organization.

3. Anti-capitalist sentiment

The eye-watering profits of some of the world’s largest corporations attracts a lot of negative
sentiment from those outside the world of business and finance. While clearly a result of the
scale of these organizations, there is always a suspicion that these profits have been achieved
through not entirely ethical means – and in some cases downright unethical means, often
resulting in major public failures, most recently in Japan, where senior management of Nomura
resigned en masse after an insider trading scandal.

Banks in particular receive a lot of bad publicity over profits and executive pay (especially
bonuses), and while not always justified, the fact is, an industry at the Centre of the credit
crunch and resulting economic and financial crisis continued to produce hefty profits and
bonuses even while making large numbers redundant. This is, of course, a huge generalization
and simplification of the issue (this is not place for such details) but it is the natural reaction of
the general public, who lack such detailed information and understanding.

Public sentiment cannot be ignored. This situation makes the importance of business ethics all
the more pressing in the 21st century.

4. Limited resources

One irrefutable fact is that this planet has limited resources. Probably the biggest failure in
human development over the last three hundred years has been in recognizing that and
attempting to minimize use and maximize re-use and recycling. While there are now global
initiatives to try and reverse this trend, and much progress has been made, there is still a long
way to go. In the major developing economies, especially, history is repeating itself on a
massive scale. With notable exceptions, this applies not only to specific environmental and
sustainability issues but to corporate governance generally and the importance of business
ethics to the new high growth regions and corporations.

This is another example of short-termism prevailing over long-term vision and preservation of
limited resources for future generations – and in some cases the same generation, as in
deforestation driving native peoples and animal species to the point of extinction. Just as basic
financial management requires planning to ensure capital reserves and so solvency, the same
principles should clearly apply to the extraction and usage of natural resources.

There are some notable exceptions, of course, with the likes of Sir Richard Branson
(founder of the Virgin empire) taking a keen interest in environmental affairs (as well as
entrepreneurship). On a governmental level, the 2012 London Olympics are the “greenest”
ever, with 40% reduction in water usage (despite the record amount of parks and planting) and
98% waste recycling. Let’s see how Brazil picks up the baton in the quest for a carbon neutral
Olympics. And how the private sector accepts the importance of business ethics in the rapid
development they are experiencing.

Conclusion: evaluating business ethics and implementing improvement programs

An experienced eye and ear will recognize the ethical stance of a business within a fairly short
while from talking to directors and senior management, and this will be rounded out customers
and personnel management. It will almost certainly be confirmed by a by discussions with a
representative sample of staff, particularly those concerned with conversation with the Finance
director and an appreciation of how the money matters are dealt with.

Clearly it is necessary to deploy rather more than gut feel in examining a business’s position in
regard to business ethics and in the rest of this corporate governance best practice section and
our corporate governance course you can find out how to install an effective, ongoing
assessment and monitoring programme which uses primary research, including market
research, a key differentiator to other approaches. In our view it is the only way to pick up on
questionable behavior and so ensure good corporate governance. It is also offers a highly
effective and detailed way of measuring the importance of business ethics to all within – and
connected to – the organization.

This is the first in our series on Best Corporate Governance Practice – the Golden Rules
of corporate governance:

RULE 2: TOWARDS A COMMON GOAL – ALIGN BUSINESS GOAL

There are two main dangers in failing to align business goals:

Lack of a common, clear goal and strategic direction. This leads at best to
inefficiencies and at worst business failure as decisions become increasingly difficult, especially
in reacting to competitive pressure. (Click here for a case study on clear goals)

Dissent among stakeholders. If the majority of interested parties in a business are not
aware (due to a lack of effective corporate communications) or disagree with the board’s view
of the business goal, there are likely to be difficulties with stakeholder relations which can
disrupt the smooth running of the business.

So our second Golden Rule of corporate governance is that the business should be targeting an
appropriate goal which properly reflects the expectations of the stakeholders.

“Properly” in this context means that it has been arrived at after due consideration of all the
interests concerned, and an appropriate weighting which recognizes that the various
stakeholders have different claims on the organization. A misjudgment of the weighting may do
serious damage to the totality of the business, and a lack of understanding of the need for
congruence between the aims of the different stakeholders may make the business impossible
to run at all.

This article will help you identify these dangers and implement effective remedies to align
business goals more successfully. It draws on our Applied Corporate Governance™
methodology developed over nearly twenty years of corporate governance training, authoring
and consultancy.

Failure to align business goals is one of the most frequent yet undiagnosed causes of corporate
failures. As we repeat throughout this site, every stakeholder has a different perspective on
where the business is and should be going. This makes establishing and maintaining a regular
review of the business goals essential, not just using the conventional (though often still
overlooked) strategic management approach, but employing stakeholder consultation. Without
agreement from at least a majority of stakeholders, it is difficult to keep progress towards the
goal on the rails. Indeed we would regard stakeholder consensus as the rails, without which the
strategy cannot run smoothly if at all.

Decades of strategic business experience and observation have proven to us time and time
again the need to align business goals, or as we like to say, achieve congruence of goals.
Congruence implies more than a linear, two dimensional alignment but a deeper level of
cohesion brought about by effective systems of universal feedback. It should be a key objective
of any business to have all interested parties buy in to its vision and mission and so help, rather
than hinder achieving its goal. Regardless of how good, and even honorable, the board may feel
the goal they established is, if others are ignorant of, misunderstand or disagree with it,
problems are likely to arise.
This could be as simple as customers misunderstanding the brand name or concept and so
associated it with negative qualities. That is more likely to be picked up by primary research
done by the marketing department. But it could be more buried. We once ran parallel
corporate governance and strategy projects for a mutual retail client who had a large database
of members. On closer inspection, while there were members who were fully aware and
bought into the mutual ethic, the reason most people joined was to receive the higher rate on
the savings account they offered. Clearly these were very different expectations and goals and
identifying this enabled a different approach to be taken to encourage members to shop and
retail customers to join.

Most companies would argue that they align business goals instinctively through their
relationships with key stakeholders, industry knowledge and management information systems.
To an extent this is clearly true or most (well run) businesses would not survive. But history is
littered with examples where it is not true and there are very few who achieve stakeholder
satisfaction through purely intangible methods.

Achieving stakeholder satisfaction clearly requires consultation, and our methodology has at its
heart primary research to deliver an objective view of the organization and ensure corporate
communication is two-way for all stakeholders, not just customers and perhaps employees. Our
Stakeholder Survey is the key component of this research and allows for measurable and
traceable alignment of business goals.

A full Stakeholder Survey should be carried out at least once a year, but with the internet
technologies now available at low cost, it is possible and desirable to have an ongoing system of
feedback in place to allow continuous evaluation of progress.

Having decided to act to align your business goals, think about the following questions –
especially how well you are able to answer them:

● Do you have clear business goals, physically (or electronically) documented and
distributed within the organization?
● Are your employees aware of and do they agree with the long term business goal(s)?
● Is the outward expression of the goal a factor which helps or hinders sales?
● Do you establish goals with your suppliers and trading partners?
● Is the community in which you operate aware and supportive of your business goals?

If you had difficulty answering some or all of these questions, you are not alone. Few businesses
spend sufficient time in defining and communicating a clear goal to their stakeholders. Sure,
you will have a mission statement and perhaps an extended vision document designed to steer
corporate culture. Your spend resources on developing and communicating your brand and
associated values to customers. And you may even regularly poll customers and employees
about what they think of these statements, values and culture.

To fully align business goals, however, and therefore fully commit to good corporate
governance, you need to have a formal, well planned and inclusive approach to setting,
communicating and monitoring goals. We believe to achieve this requires:

✔ Full support of the CEO and board and for the programme to be linked to the strategy
process
✔ Use of an objective, third party research company to ensure results are not distorted by
internal assumptions and prejudices

Without this support and independence accurate results cannot be guaranteed. Good
corporate governance demands that commitment or it is no more than the lip service paid by a
significant proportion of annual reports and account documents we have read in the twenty
years since such statements began to appear therein. If you do manage to align business goals,
without proper planning it will likely be more down to co-incidence.

This is the second in our series on Best Corporate Governance Practice – the Golden
Rules of corporate governance:

Rule 3: The Importance of Strategic Management

We cannot emphasize strongly enough the importance of strategic management in good

corporate governance (remember good governance = good management). In fact, we believe
corporate governance should be an integral part of the strategy process.

So our Third Golden Rule of corporate governance is that good corporate governance requires
an effective strategic management process to be in place.

By this we mean that the company is organized and run according to rules which;

o Set a goal which matches the duly considered expectations of the stakeholders work out
a feasible strategy to achieve that goal.
o Put in place an organization which can carry out the strategy and attain the goal.
o Set up a control and reporting function to permit management to drive the organization
effectively and make necessary adjustments to the strategy or even the goal
Anything less rigorous than the above strategic management definition will only achieve
success by accident and will be vulnerable to all kinds of unexpected events. As we discussed on
our best corporate governance practice page, good corporate governance is, or should not just
be about compliance and risk management, but – more positively – good management. So let
us explore for a moment the critical importance of strategic management to overall good
management.

As Harvey MacKay said, “Failures don’t plan to fail; they fail to plan” (based on an old military
proverb). And Thomas Edison famously said “Good fortune is what happens when opportunity
meets with planning.” Examine any successful business and you will observe the high and
disciplined level of planning which incontrovertibly led to that success – and the world is full of
failures who failed to plan. Even many that have subsequently failed often did so because the
importance of strategic management within the organization diminished and with it the
essential structure and visibility required to achieve goals and avoid pitfalls.

The importance of strategic management in the financial crisis

At the other end completely of the scale, we would argue that there was a major failure in
strategic planning by almost all the major global financial institutions, as well as in the
governance of these organizations as there was clearly not enough knowledge or information in
key places which would have signaled – via the direct, or more often indirect connection to it –
the risk that the sub-prime lending market was running.

An almost blinkered attitude persisted that said “We don’t do sub-prime”, when due to the
globalized nature of the financial system this risk affected them anyway, whether or not they
had direct relationships with players or (re-)insurers in the sub-prime space. So we place a
major part of the blame on those financial institutions, not just the sub-prime lenders
themselves and the lending policy and bonus culture that actually provoked the credit crunch.

As we argue elsewhere on this site, had there been proper, regular and direct dialogue between
the various stakeholders and especially trading partners of these institutions, and detailed
analysis of the strategic positioning in relation to the sub-prime market, the greater part of the
credit crunch could have been avoided. The resulting recession could therefore have been
much less severe. We find it inconceivable that using our approach and independent market
research (which would have picked up on affordability issues, for example), such risks would
not have been picked up and acted upon. For us, therefore, what happened was a failure both
of corporate governance and of strategic management.
In the current economic climate, whatever the size of your business or organization, the
importance of strategic management is particularly great. To avoid drifting into an iceberg flow,
or if already there, to plan a way out and minimize the risk of actually hitting one, you need the
visibility good strategic planning gives you. You may will suffer the same fate as the Titanic, but
you stand a much better chance with it. And that you owe to ALL your stakeholders, so
consider strategic management as vitally important to good corporate governance too.

This is the third in our series on Best Corporate Governance Practice –the
Golden Rules of corporate governance:

Rule 4: Organizational Effectiveness for Good Corporate Governance

Organizational effectiveness should not be seen as a goal in itself but rather the means to an
end – achieving your goals. Since our definition of corporate governance is in essence about
good management, it follows that to achieve your goals, through the implementation of an
ongoing strategic management process, requires an appropriate and effective organization.

So our Fourth Golden Rule of Corporate Governance is that the organization should be framed
to embody the most appropriate shape and style of management to achieve success, and that it
is constructed to serve the needs of all the key stake holding groups.

With an inappropriate organization in place, the goal will not be achieved, and the approach to
business will be vulnerable to a falling short in ethical behavior.

Furthermore, any relationship between the way the business is being run and the expectations
of the various non-managerial stakeholders will be purely coincidental.

Before embarking on change to improve organizational effectiveness we must first understand

where we are now and where we want to get to. This once again highlights the importance of
strategic management, our third Golden Rule of corporate governance. During this process, we
analyze all our available resources and how they are currently organized.

This will give clear insights into pros and cons of the present way of organizing the business,
and the strategic plan will indicate desirable modifications.

Guiding the decisions about organizational change will be:

▪ clear-headed logic about the natural way to organize in the most effective way,
disregarding the baggage of current practices
▪ paying due regard to the experience of the past in assessing what appears to work well
and what appears to give problems
 ▪ putting in place the mechanism to deliver the agreed strategy, with whatever
modifications and additions are needed

Into this process must be built the means of providing appropriately for the needs of all the
various stakeholders to ensure that their interests are properly taken care of.

There are two key elements to be considered when designing for organizational effectiveness:

Shape: there are five basic types of organization structure:

simple: an organization run by an individual, with little formal structure, unworkable beyond a
certain size

functional: an organization based on the functional elements, sales and marketing, production,
finance, and found in smaller, more focused businesses, and the divisions of larger ones, since
the structure gives rise to a big coordination requirement as businesses grow

multi-divisional: an organization combining functional business units with central support

services, and requiring more sophisticated management techniques, but useful to serve the
development of product/market businesses in a larger company

holding company: suitable for the larger organization in which the Centre exercises little day
to day operational control but behaves more like an investment company

matrix: representing a significantly more complex way to organize, with business, functional
and geographical dimensions sharing responsibilities, and leading in different circumstances; a
structure praised for focusing skills and experience but criticized for confusing ultimate
responsibilities.

Style: there are three basic styles of management:

strategic planning: with the Centre operating as an overall planner, developing a detailed
central plan and laying out roles for the divisions

financial control: where the Centre sees itself as a shareholder or banker for the divisions with
little desire to get involved in defining their individual product/market strategies

strategic control: where the Centre allows the divisions to develop their own plans and
approves them against an objective to implement an overall strategy and achieve a balance
between the divisions.
To achieve maximum organizational effectiveness, we believe the stakeholder approach is
required. Through regular consultation with all stakeholder groups we can assess how effective
our chosen shape and style are and where and how it needs modification. As long as this is
performed as part of the ongoing strategy process, it can only contribute to the success of the
business in achieving its goals. As we say in our second Gold Rule, an essential part of this
process is the need to align business goals through the same process of consultation.

This way, we know we have a common goal that the majority of stakeholders believe in, a
coherent strategy to achieve it, and a high level of organizational effectiveness to implement
the strategy and out-perform the competition.

This is the fourth in our series on Best Corporate Governance Practice – the Golden
Rules of corporate governance:

Rule 5: The Importance of Corporate Communication

Well run organizations that fail to recognize the importance of corporate communication are
like the proverbial mousetrap in the middle of a wood. This is true not only of sales and
marketing but of good corporate governance, and regularly communicating with stakeholders
(of which customers are key, of course) helps keep all relationships open and healthy.

So our Fifth Golden Rule of Corporate Governance is that effective systems of

stakeholder communication are in place to ensure transparency and accountability.

The other Golden Rules have focused on there being an ethical approach to running the
business (we define business ethics here), the need to align business goals, to have an effective
strategic management process in place and an effective organization capable of delivering the
strategy and achieving the agreed goals. The underlying importance of corporate
communication in all these rules is clear. From finding out what our stakeholders think of the
company (including how good our communication is!) to disclosing full details of how it is run,
(eg directors’ remuneration), communication plays a vital role throughout.

The various codes on corporate governance have also honed in on the importance of corporate
communication, though purely in this limited sense of disclosure. They require stakeholder
consultation, but very little mention is made of incoming communication – it’s all outgoing. This
seems perverse to us as surely the only way we can really tell if the whole company and its
culture is ethical and well run for allour stakeholders, is by talking and listening to all our
stakeholders.
As we discussed in our third golden rule about the importance of strategic management, it is
also logical that in order to know how well we are doing in implementing our strategy and
achieving our goals, we need a monitoring and reporting system which is connected directly to
the stakeholders upon whom that success depends.

The requirements of such a system and the resources required to put it in place will be part of
the Business Plan. A good system provides the instruments whereby management and all the
other stakeholders can be made aware of progress in implementing the agreed strategy.
Without first-class systems there can be a dangerous lack of necessary information, or worse,
wrong information. All too often, monitoring and reporting systems are designed without
adequate regard for the big picture, and with an almost total focus on financial aspects.

In this Fifth Golden Rule, we are looking at setting up channels of communication and how
these channels – and the reporting system as a whole (i.e. including internal, operations
monitoring) – should be used to;

❖ ensure all stakeholders are happy with the proposed strategy

❖ monitor progress from point A to point B in the strategy
❖ ensure that stakeholders are receiving all the information they require

Logically, therefore, we need systems which have the following characteristics:

they serve all the significant stakeholder groups, that is:

❖ customers
❖ owners
❖ employees
❖ suppliers and other trading partners
❖ local communities

In total they communicate the intention to run the company under systems of good corporate
governance, and in particular they have very specific objectives in relation to each target group.
Following the methodology, then, They will thus include the four elements of:
Ethics: projecting the ethos which permeates the company, and thus communicating to all
stakeholders an image of the ethical company which the board to create and operate

Goal: reporting on the progress made by the company towards the agreed corporate goals, and
in particular fulfilling the specific interests of the particular stakeholders addressed in the actual
communications received by them.

Organization: show that the company is organized effectively to achieve the goals that have
been communicated to all the stakeholders, and to look after their individual interests.

Reporting: demonstrate through the high quality of the communications that the
accountability and transparency rule of good corporate governance is both understood and
being adhered to.

In their execution, high standards are in place to ensure that the communications are easy to
understand and do indeed provide the information required by the recipients, in line with their
expectations referred to above the systems provide regular communications to all stakeholder
groups, and whilst there is an appropriate weighting between the needs of the various groups,
no group is neglected, for instance through allowing address lists to become out of date.

The above comes from our unique methodology we have developed over nearly 20 years of
corporate governance experience. This methodology, described in this site and in more detail
via downloadable e-books, is based on our conviction that good corporate governance is
essentially just good management. So the systems outlined here could as well sit in a site about
general management, which may well be how you came upon this site. In fact you may not
have thought about corporate governance before at all, and view the subject as the realm of
accountants and risk management specialists.

If you have read other parts of this site you will realize we have a rather more positive view of
corporate governance and the importance of corporate communications than these groups. If
we have applied all these Golden Rules and learnt the lessons from communicating with
stakeholders, we can be confident that we are in tune with the majority of opinion. We can
then use this knowledge to produce much more sincere and confident communications than
the boilerplate corporate governance statements that appear in many company reports.

Of course there will always be times where bad news needs to be communicated but that only
reinforces the need for the channels outlined above to be in place. Without them, it will be
much harder to deliver bad news and it will be more unexpected. With them in place, there will
be less of a shock when final decisions are announced as the stakeholders will have known
about problems since the beginning. While this will not eliminate disagreement and even
dispute, the latter will clearly be much more likely to happen if communicating with
stakeholders is left to these negative announcements and not a continuous process.

We would conclude, then, that the importance of corporate communications is not down
purely to the need to protect the public face of the company but more fundamentally, to the
smooth running of the company – specifically the delivery of the strategy and goals of the
organization.

This is the fifth in our series on Best Corporate Governance Practice – the Golden Rules
of corporate governance:

RELEVANCE OF CORPORATE GOVERNANCE

Attracting investors. Corporate governance provides companies with a system for best
practices. Through this it ensures a company's operations are efficient. As mentioned it also
protects shareholders and other shareholders rights. When investors look for companies to
invest in they will always prefer companies with good corporate companies. This way corporate
governance can attract new investors

Ensure corporate social responsibility. One area that corporate governance introduces is
corporate social responsibility. It usually applies to how companies interact with the environment
in which they operate. Compensation responsibility enables companies to consider the impact
of the operations on the environment.

Improve efficiency. Corporate governance also helps companies maximize operational and
organization efficiency. Many companies have effective governance which also translates into
below average performance. Corporate governance lays the foundation for how a company
handles its operations, uses its resources, applies innovation and implements corporate
strategies. Through these it also improves a company's efficiency.

Promotes accountability. A good corporate governance system and she was that companies
follow a sound transparent and incredible financial reporting system. This will corporate
governance helps promote accountability in a company which in turn helps in attracting more
investors and protecting stakeholders.

Protect the cold as. Corporate governance protects a company's stakeholders as well. This may
include both internal and external stakeholders. It defines the relationship that companies must
have with the stakeholders. By doing so it has attained that its stakeholders rights are clear for
companies to fulfill.

Mitigate risks. Corporate governance also focuses on risk mitigation for companies one of the
areas that help with this is the audit committee or is committee. The committees are responsible
for managing and mitigating a company's risk from various sources by defining such
committees' corporate governance issues that the risks that companies face are minimal.

Minimize agency problems.Agency is when one entity acts as another entity's agent. In
companies the management acts on behalf of the shareholders which is a type of agency
relationship. In some instances the board of directors may not act in the shareholders best
interest. Corporate governance tackles that problem by ensuring the objectives of both
shareholders and the management online.

Reference: accountinghub.com