The Top 5 Corporate Governance Best Practices That Benefit Every Company
September 16, 2014
Many believe that only public companies or large, established companies with many shareholders need to be concerned about, or can benefit from, implementing corporate governance practices. The reality is that all companies – big and small, private and public, early stage or established – compete in an environment where good governance is a business imperative. One size doesn’t fit all, but right-sized governance practices will positively impact the performance and long-term viability of every company.
This belief that corporate governance “doesn’t apply” comes from a view that it’s only theoretical and doesn’t impact the bottom line or performance, is costly to implement, is “bureaucratic” (and slows decision-making), it can’t be tailored to a company’s size and stage of development – or all of these. But in reality, all companies compete in an environment where good governance is a business imperative in relation to things like:
- raising capital;
- securing debt;
- attracting and maintaining talented, qualified directors;
- meeting the demands and expectations of sophisticated shareholders; and
- preparing for potential acquisition / exit or next phase of growth.
CORPORATE GOVERNANCE BASICS
“Corporate governance” doesn’t have a single accepted definition. Broadly, the term describes the processes, practices and structures through which a company manages its business and affairs and works to meet its financial, operational and strategic objectives and achieve long-term sustainability.
Law. Corporate governance is generally a matter of law based on corporate legislation, securities laws and policies, and decisions of the courts and securities regulators. Generally, directors owe a duty of loyalty to the companies they serve, and have a fiduciary duty to act honestly, in good faith and in the company’s best interests. Corporate governance is also shaped by other sources, like stock exchanges, the media, shareholders and interest groups. Corporate governance practices help directors meet their duties and the expectations of them.
Relevant Factors. The objective of corporate governance is to promote strong, viable competitive corporations accountable to stakeholders. But one size doesn’t fit every company, and there’s no uniform, comprehensive set of policies or practices: the “right” ones depend on several factors, including:
- the nature of the business;
- the company’s size and stage of development;
- availability of resources;
- shareholder expectations; and
- legal and regulatory requirements.
Benefits. Proponents of corporate governance say there’s a direct correlation between good corporate governance practices and long-term shareholder value. Some of the key benefits are:
- high performance Boards of Directors;
- accountable management and strong internal controls;
- increased shareholder engagement;
- better managed risk; and
- effectively monitored and measured performance.
TOP 5 CORPORATE GOVERNANCE BEST PRACTICES
Right-sized governance practices will positively impact long-term corporate performance – but companies must design and implement those that both comply with legal requirements and meet their particular needs. Here are the top 5 corporate governance best practices that every Board of Directors can engage – and that will benefit every company.
- Build a strong, qualified board of directors and evaluate performance. Boards should be comprised of directors who are knowledgeable and have expertise relevant to the business and are qualified and competent, and have strong ethics and integrity, diverse backgrounds and skill sets, and sufficient time to commit to their duties. How do you build – and keep – such a Board?
- Identify gaps in the current director complement and the ideal qualities and characteristics, and keep an “ever-green” list of suitable candidates to fill Board vacancies.
- The majority of directors should be independent: not a member of management and without any direct or indirect material relationship that could interfere with their judgment.
- Develop an engaged Board where directors ask questions and challenge management and don’t just “rubber-stamp” management’s recommendations.
- Educate them. Give new directors an orientation to familiarize them with the business, their duties and the Board’s expectations; reserve time in Board meetings for on-going education about the business and governance matters.
- Regularly review Board mandates to assess whether Directors are fulfilling their duties, and undertake meaningful evaluations of their performance.
- Define roles and responsibilities. Establish clear lines of accountability among the Board, Chair, CEO, Executive Officers and management:
- Create written mandates for the Board and each committee setting out their duties and accountabilities.
- Delegate certain responsibilities to a sub-group of directors. Typical committees include: audit, nominating, compensation and corporate governance committees and “special committees” formed to evaluate proposed transactions or opportunities.
- Develop written position descriptions for the Board Chair, Board committees, the CEO and executive officers.
- Separate the roles of the Board Chair and the CEO: the Chair leads the Board and ensures it’s acting in the company’s long-term best interests; the CEO leads management, develops and implements business strategy and reports to the Board.
- Emphasize integrity and ethical dealing. Not only must directors declare conflicts of interest and refrain from voting on matters in which they have an interest, but a general culture of integrity in business dealing and of respect and compliance with laws and policies without fear of recrimination is critical. To create and cultivate this culture:
- Adopt a conflict of interest policy, a code of business conduct setting out the company’s requirements and process to report and deal with non-compliance, and a Whistleblower policy.
- Make someone responsible for oversight and management of these policies and procedures.
- Evaluate performance and make principled compensation decisions. The Board should:
- Set directors’ fees that will attract suitable candidates, but won’t create an appearance of conflict in a director’s independence or discharge of her duties.
- Establish measurable performance targets for executive officers (including the CEO), regularly assess and evaluate their performance against them and tie compensation to performance.
- Establish a Compensation Committee comprised of independent directors to develop and oversee executive compensation plans (including equity-based ones like stock option plans).
- Engage in effective risk management. Companies should regularly identify and assess the risks they face, including financial, operational, reputational, environmental, industry-related, and legal risks:
- The Board is responsible for strategic leadership in establishing the company’s risk tolerance and developing a framework and clear accountabilities for managing risk. It should regularly review the adequacy of the systems and controls management puts in place to identify, assess, mitigate and monitor risk and the sufficiency of its reporting.
- Directors are responsible to understand the current and emerging short and long-term risks the company faces and the performance implications. They should challenge management’s assumptions and the adequacy of the company’s risk management processes and procedures.
Please contact your McInnes Cooper lawyer or any member of our McInnes Cooper Corporate Governance & Compliance Law Team to discuss this topic or any other legal issue.
McInnes Cooper has prepared this document for information only; it is not intended to be legal advice. You should consult McInnes Cooper about your unique circumstances before acting on this information. McInnes Cooper excludes all liability for anything contained in this document and any use you make of it.
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