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Corporate Governance in Practice

Summary of a paper presented by Peter Kaye

Corporate governance as a term is relatively new to our every day business language for most of us. There is certainly much confusion as to what the term includes. This is because corporate governance is a very inclusive term, covering a wide range of activities that relate to the way your organisation is directed and governed. It deals with the policies and practices that directly impact on your organisation's performance, stewardship and its capacity to be accountable to its various stakeholders.

For example, corporate governance includes such activities as:

  • Strategic and Business Planning
  • Board Composition
  • Risk Management
  • Performance Assessment
  • Reward and Benefit Distribution
  • CEO/Management Succession and Appointment
  • Disclosure and Stakeholder Reporting
  • Corporate Values and Corporate Culture
  • Independent Input
  • Organisation Structure

Using a corporate governance analysis model developed by Larkin & Kaye organisations can evaluate where they are high in performance and where they are under performing. The model called TOGS uses 59 governance criteria divided into 14 governance factors. Using a weighting system to highlight the more substantive governance criteria, an organisation's governance can be scored out of possible 100 points.

Analysing a sample of 25 organisations that have been reviewed using TOGS the following observations can be made:

  1. Companies/corporates do not display a higher level of corporate governance compared to not for profit organisations
  2. The quality and use of client data in key decision making is not a strong practice
  3. There is little evidence of values being monitored or reported on. Rarely are they written in measurable terms
  4. Larger organisations have better documentation relating to policies, roles, planning
  5. There is a substantial over reliance on input from management with very little evidence of board input in the form of papers and issues. Boards also rely on external input being initiated and/or arranged by management
  6. Board composition appears to be more a product of history and personal contacts rather than current need and intent
  7. Strategic planning where undertaken does not appear an ongoing driver in terms of board debate and ongoing decision making
  8. There is concern amongst directors about being seen by management as being over inquisitive and interfering
  9. Typically there is substantial difference of understanding and opinion amongst directors and between the board and executive management on at least 10 -15 of the 59 governance criteria
  10. Structured Board and CEO performance assessment is not a common practice. Similarly there is little evidence of Board and director role descriptions and performance criteria. Where performance assessment is undertaken there is only little linkage to the strategic plan and to non-financial key performance indicators

Using TOGS the range of score to date are 23 for the lowest scoring organisation and 79.75 for the highest scoring organisation. Typically organisations with poor control and management of their corporate governance score between 30 and 40. Those with stronger corporate governance typically score between 65 and 75.

Once an organisation is aware of their governance strengths and weaknesses they are able to quickly improve their score by between 10 and 20 points by clarifying policy and undertaking some documentation.

The most frequent feedback from directors that have subjected themselves and their organisation to a corporate governance review is that they feel empowered. This empowerment is put down to improved understanding of their role and responsibilities and recognition of the differing views and understanding that their fellow directors held.

Recognition of the importance of strategy, using a wider base of performance indicators and the role of independent input often form the foundation for immediate corrective action.

Ensuring proper control and ensuring a balance between compliance and strategic performance are the reasons of good corporate governance.

Shareholder/owner confidence and organisation effectiveness and sustainability are the outcomes of good corporate governance.

16th June, 2001

 

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Last modified 24/05/2011