Board governance is the framework that structures the Board and how it operates, ensuring that the management runs the business smoothly and successfully.
It balances the interest of the company's stakeholders and ensures that the organisation functions in a way that makes everyone happy. Corporate governance provides the framework for enforcing the company's core values. Therefore it encompasses every sphere of management.
Proper governance is rooted in open and honest communication, whether good or bad. It requires openness about decisions and the explanations behind them. The Board must also be transparent about its compliance with laws and regulations.
The team at BoardPro have compiled a list of three governance ideas to bring some insight into good governance and how to get it right.
Idea #1 - The role of Board Governance
The role of board governance is to ensure objectivity and accountability, making the business more valuable. There are four areas that a governance board focuses on:
- Identifying and mitigating risks
- Being aware of opportunities
- Overseeing strategy and developing it to align with the company's mission and core values
- Manage the CEO's performance.
If these four points are completed successfully, it will maximise the business's chances of success.
More often than not, businesses fail because organisations tend to overvalue their financial risks and often neglect to notice external market and internal operational risks. As a result, financial risk tends to present itself as a lagging indicator. This means that something else has failed for the indices to present themselves as such.
Idea #2 - Exits benefit well-governed private companies
There are two main reasons why a private business owner would be interested in governance:
- They have reached a level of business complexity where an outsider's perspective would greatly benefit the growth and development of the company.
- The owner is preparing the business for a future exit with a selection of worthy investors.
Buyers and potential investors appreciate well-governed boards. It ensures the integrity of the business, as it shows transparency in running, managing, and monitoring. This is because it gives the owners and the organisation credibility; ultimately, private businesses with good corporate governance practices are much more valuable.
Idea #3 - Objectivity is key
The most critical aspect of board governance is to ensure objectivity. With objectivity, directors can assess risk and opportunity without external interest. Objectivity means reality. Acquiring directors from inside and outside networks is advised to maximise the chances of creating a balanced, unbiased Board.
Even if a director may not have previous corporate governance experience, it should not be a factor that should limit their potential for selection. External directors with limited board knowledge can bring novelty and fearlessness when voicing concerns, and they are not conflicted when making tough, objective decisions for the Board.
Learn more about good governance in our detailed playbook.