September 16, 2014
This publication has been updated as at August 25, 2022.
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 fact 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. And the rapidly growing adoption of ESG (Environment, Social and Governance) principles in Canada and globally is increasingly making good governance practices a priority for all companies. 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), 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:
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 companies 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:
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:
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 five corporate governance best practices that every Board of Directors can engage – and that will benefit every company.
1. Build a Strong, Qualified, Diverse Board of Directors
Boards should be comprised of directors who are knowledgeable, have expertise relevant to the business, 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?
2. Define Roles & Responsibilities
Establish clear lines of accountability among the Board, Chair, CEO, Executive Officers and management:
3. Emphasize Integrity & 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:
4. Evaluate Performance & Make Principled Compensation Decisions
The Board should:
5. Engage in Effective Risk Management
The risks that companies face aren’t static; they constantly evolve, as the emergence of risks arising from cyber security and data breach, war, and a pandemic illustrates. Companies should regularly identify and assess the risks they face, including financial, operational, reputational, environmental, industry-related, and legal risks:
Please contact your McInnes Cooper lawyer or any member of our Corporate Governance & Compliance Team @ McInnes Cooper for help finding the corporate governance practices that fit your organization.
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.
© McInnes Cooper, 2014. All rights reserved. McInnes Cooper owns the copyright in this document. You may reproduce and distribute this document in its entirety as long as you do not alter the form or the content and you give McInnes Cooper credit for it. You must obtain McInnes Cooper’s consent for any other form of reproduction or distribution. Email us at [email protected] to request our consent.
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