Boardroom Secrets
Trust is the foundation of sustainable success. Companies who earn the trust of their stakeholders are able to mobilize more resources throughout their value chain to achieve sustainable success. The essence of good corporate governance is ensuring trustworthy relations between the corporation and its stakeholders. This is the fundamental reason why good corporate governance is being embraced by companies in diverse industries, small and large, and publicly or privately owned, throughout the world.
Good corporate governance is the key to attract financial and human capital to the corporation, strong business partners to the value chain, and to ensuring sustainability of value creation. Corporate governance refers to the quality, transparency, and dependability of the relationships between the shareholders, board of directors, management and employees that define the authority and responsibility of each in delivering sustainable value to all the stakeholders.
While good governance is the responsibility of all those who conduct the relations with stakeholders, it is the board of directors who sets the tone at the top and are responsible for ensuring that the right climate and culture exist within the organization. The key to good corporate governance is ensuring that the principles of Consistency, Responsibility, Accountability, Fairness, Transparency, and Effectiveness are Deployed (CRAFTED) throughout the organization. Applying CRAFTED principles is a sine qua non of sustainable success. Any lapse in applying these principles results in failure of even global giants such as like Enron, Arthur Anderson, or more recent notable corporate casualties at the blink of an eye.
Earning the trust of the stakeholders is the key to mobilize their resources towards a common vision. Transparency in the relationships is the key to earning that trust. Success requires effective utilization of resources entrusted to a corporation. Being fair and accountable to all the stakeholders whose resources are entrusted to the corporation is the key to sustainability of access to those resources. The communication and behavior of each institution influences not only how its own resources are utilized, but also those of its stakeholders. Therefore, consistency of the policies of a corporation is the key to ensuring that right expectations are formed throughout the value chain, thereby making the whole value chain stronger. Value creation requires measured risk taking. Risk is the kin of profit. Therefore, taking initiative and responsibility which naturally involves risk taking is a key element of value creation. Sustainability of success requires continuous improvement and innovation. This in turn requires the participation and involvement of all in the organization. Hence, creation of a climate that emphasize good governance principles and deployment of a good corporate governance culture is the key for sustainability.
Executives are responsible for managing a corporation on behalf of its shareholders. In order to ensure that the risks taken by management on behalf of the shareholders are consistent and balanced and to prevent any potential conflicts of interest between the management and shareholders, an effective guidance and oversight are required. Provision of such a guidance and oversight, requires an in depth knowledge of the industry dynamics and company’s competitive positioning. The sustainability of an organization requires striking a fine balance between risk and reward, and ensuring that there are effective internal control mechanisms. This in turn requires a fair process to challenge the management about their decisions, particularly on strategic choices. The board of directors is the key to providing such guidance and oversight. The relevance of the experience and expertise of the board members to the corporation’s business and risk profile, their integrity, independence, involvement, and their understanding of fiduciary duties, are critical for ensuring the sustainability of the corporation.
Among the most important assets of a corporation are its human resources, especially its management team. The competencies and performance of this team must be assessed and new members introduced should the need arise. Another factor that will determine the future of a corporation is the introduction of a fair reward mechanism designed to maintain a high level of motivation among team members. A board that operates soundly will ensure that these assessments are conducted in a fair and balanced manner.
The mission of the board, as the highest decision making authority, is to guide the corporation in a proactive manner and, in the long term, to ensure that value is created for its shareholders. One of the most important elements that pave the road to success is the corporate strategy. The essence of strategy is choice. Therefore, each rejecting another. Taking one road means eliminating another. Strategic choices are intended for the future, whereas the future is uncertain. The quality of strategic decisions can be enhanced by boards that scrutinize these strategic choices based on the experience of their members. Therefore, having a board with sufficiently diverse experience, and critical and independent thinking skills to challenge the strategic choices from multiple perspectives increases probability of success.
The fiduciary duties of the board require them to oversee the protection of corporate assets, tangible as well as intangible. For example, protection of the reputation of the corporation in the minds of its all stakeholders requires board oversight not only from a financial or legal perspective but also with respect to value creation capabilities.
Therefore, the composition, processes, and culture of the board of directors are critical for the sustainability of the organization. Adherence to good corporate governance principles is a precursor to continuously improving management quality. In many countries where families hold controlling stakes in the corporations, the relationship between the board and the majority partner is often the greatest obstacle to the development of corporate governance. For this reason, a critical priority for the board of directors is to assume responsibility for guidance and oversight of the corporation rather than implicitly assuming the role of an advisor to the controlling shareholder. Boards are responsible not only for looking out for the interests of an institution’s largest shareholder but also for overseeing the interests of other small shareholders and all stakeholders alike.
The board of directors is among the most important strategic assets of any institution. Consequently, the competencies and experience of the board members, and their ability to remain independent and to adhere to the principles of good governance, bear great importance on the institution’s success and sustainability.
Corporate governance is relevant not only for large publicly traded companies, but also for SMEs, family businesses, and even for non-profit organizations, as each of these organizations is dependent on sustainable access to the resources of other stakeholders, and would benefit from balanced guidance and oversight. Therefore, having a reputable board may be useful in avoiding family conflicts, in attracting talent, and in improving the reputation and value of the organization. A good board can also aid in attracting partners, in raising capital and in supporting the establishment of trustworthy partnerships with the stakeholders.
In order to be competitive, organizations should apply good governance principles. This is so, not due to some external pressure such that from the OECD, EU, World Bank, IMF, shareholder activist or any regulatory agency, but in order to ensure proper management of risks, to be more competitive, and to gain access to more resources for continuous development.
