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it has been two years now since I have been working in corporate governance office. I found there is great misconception about the subject. So I decided to write this. Corporate governance is a system that defines how the organization should be directed and controlled. It has to be understood that corporate governance is not simply an internal-looking regulatory function; rather that it involves consideration for external stakeholders, such as the market, as well as the industry standards.
In Program Management Standard from PMI following definitions are found
Governance Management is defined as the program management function that provides a robust, repeatable, decision making framework to control capital investments within an agency, organization, or corporation.
Program Governance is defined as Systems and methods by which a program is monitored, managed, and supported by its sponsoring organization.
Program Governance Plan. A document that describes the systems and methods to be used to monitor, manage, and support a given program, and the responsibilities of specific individuals for ensuring the timely and effective use of those systems and methods.
I would like to take this discussion beyond with help of few good reference books towards the corporate governance beyond the boundaries of program governance.
Corporate governance is also about allowing managers to drive the company forward; however, this freedom is under a framework of control mechanisms and accountability, decision-making process, and clear distribution of power.
Corporate governance at the organization level is thus concerned with:
1. Setting up policies, controls, and procedures for provisioning and the management of organizational assets (including employees) and services in order to maximize organizational benefits.
2. Creating a decision-making mechanism and assigning decision rights to the correct level.
3. Establishing practices to meet internal and external requirements related to effectiveness, efficiency, confidentiality, integrity, availability, compliance, and reliability for its information and information-based services.
Chau (2011) summarizes corporate governance framework by mentioning that “The heart of all instruments and mechanisms should be directed to proper stewardship, integrity, openness, transparency and accountability without excessive surveillance and bureaucracy” (p. 10).
I guess he is talking about the balance in transparency and surveillance which only comes when an experienced expert in corporate governance lays the fundamental framework of Governance of an organization or enterprise so that it is absorbed in the culture of the organization.
Within the conformance, performance, and relating responsibility (CPR) framework, Pultorak (2005) focuses on the board ownership of corporate governance and mentions that “corporate governance must be ordered within a framework established by the board that aligns and informs day-to-day decision-making, objective setting, achievement monitoring and, communication”.
Corporate governance and organizational well-being is the responsibility of the board. Good governance is not just about compliance and transparency; rather, it benefits organizations by increasing the confidence level of the market on the organization, which eventually results in higher profitability. Thus, corporate governance should be seen as a strategic tool instead of an audit mechanism.
FUNCTIONS OF CORPORATE GOVERNANCE
Reporting and Disclosure
Efficient, effective, and comprehensive reporting is at the core of corporate governance. A governance mechanism can have its strategic value in the reporting system, and the information contained within the reports. The objectives of transparency and full disclosure, which are important to stakeholders, can truly be achieved through timely, comprehensive, clear, and accurate reporting.
Resource Management
Resource management as an activity is a management level responsibility; however, corporate governance should set up the framework under which management makes the investment decisions. Also in certain cases, such as executive level hiring, the corporate governance institutions, such as the board of directors, act as an approving authority.
Risk Management
Risk management is a key attribute of corporate governance. Effective risk management helps organizations to mitigate potential risks to an acceptable level. Without an effective risk management framework, corporate governance is viewed by the market as risky. Therefore good governance, which includes risk management as a practice, results in instilling a sense of belief in the creditors and investors.
Performance Management
Performance of the organization should be a key function of the governance framework. Performance is measured in terms of effectiveness and efficiency in maximizing the value for all stakeholders with a special focus on shareholders. Governance should be carried out beyond the financial indicators. Thus, performance is not just about financial performance, even though it matters the most. It is also related to nonfinancial matters such as effective human resource management and organizational process efficiency.
Relationship Management
Managing the relationships with all stakeholders is a governance responsibility. Pultorak (2005) calls this relating responsibility and states that the governance function should be there to work with the stakeholders, pay attention to their needs, manage expectations, and balance their requirements from the corporation.
Corporate social and ethical responsibility to society should also be considered. This function of governance is related to all the other functions, as one of the major reasons for the other governance focus is to sustain and build a clear and transparent relationship with the shareholders, in particular, and all stakeholders, in general.
Strategic Oversight
Strategic oversight is a major function of corporate governance. The development and implementation of strategic plans is a management responsibility; however, corporate governance institutions, such as corporate boards, have a major role to play in terms of reviewing, approving, and overseeing the implementation of strategic plans.
Compliance
Compliance is a concept that deals with how organizations work under a framework of principles, values, policies, and codes. Regulations, such as SOX, focus on accountability of the executive management and the board of directors. Such regulations also focus on the independence of auditors and disclosure of financial and nonfinancial reports to all stakeholders. Compliance with such standards helps in reducing the probability of issues related to fraudulent and opportunistic behavior of the executives. Compliance with these standards is no longer a matter of choice, and organizations have to adapt if they want to operate, especially in progressing markets. Pultorak (2005) refers to this dimension as conformance to legislative requirements. Legal compliance, which is related to complying with standards and codes, should go hand in hand with ethical compliance, which is concerned with the values and norms of people.
Dear Followers and those who are interested, In my Next upcoming articles I would define the reverse KISS model from Martin Hilb. Stay Tuned.
Strategy, Leadership and Success Mentor 