The 4 guiding principles of corporate governance

3 min read
Sep 12, 2022 10:29:16 AM

Corporate governance is the guiding principles and processes by which a firm functions. It involves balancing the interests of the company’s shareholders, be it senior management, staff, customers, or suppliers, as well as any stakeholder or influence from the external market.

graeme537“Whether a governing board is effective or not, it is constitutionally responsible for the organisation's governance (direction and control). In a real sense, therefore, whether to govern well (in other words, provide clear direction and effective control) or not is hardly a choice. Is any organisation going to wish for itself weak and chaotic governance? It is hard to imagine any reason, aside from ignorance, why an organisation and its stakeholders would not expect it to be well governed,” says Graeme Nahkies of governance advisory firm, Boardworks New Zealand.

The benefits of good governance are far from few and absolutely invaluable – whether it's to achieve the company’s objectives or avoid any potential legal and compliance issues. In this article, we explore governance best practices and their guiding principles.

The four guiding principles of governance are:

1. Leadership

Good governance is put in place by those at the top of an organisation; therefore, effective leadership is essential.

Strong leadership ensures that a company has a solid foundation and doesn't fail. Good leaders are self-aware; they set and prioritise goals, put up appropriate boundaries and avoid distractions. Good leaders also find importance in developing others in the team and building independence. They encourage strategic and innovative thinking and actions. Good leadership also ensures that they are ethical and civic-minded, making sure that diversity, equity and inclusion (DEI) initiatives are well put into place. They also practice effective communication within the organisation.

Strong leaders lead by example. They are transparent and make sure that there is visibility within the organisation. Their good example trickles down to other members of the organisation to follow in their golden footsteps.

2. Effectiveness

With a strong base of leadership, effectiveness follows. Ensuring good communication within the organisation allows for the different departments to function smoothly and seamlessly. There should be documented decisions, minute taking, and unison agreements when making decisions. This ensures a clear vision for the team members to uphold.

It takes work to have an efficient and smooth running board; there will be trials and errors, but the path should always be clear towards the ultimate effectiveness. Efficient boards should be able to comprehend the challenges at hand thoroughly and equip themselves with the correct means to overcome them.

3. Accountability

When boards are put into place, they ensure two things: objectivity and accountability. The leaders of the organisation must take full responsibility for their own actions and decisions. In fact, they are liable for their financial strategies on the company. Accountability is critical in governance as it involves integrity and honesty at the highest level of management.

Board accountability considers all of a company’s activities and presents a fair, balanced, and understandable assessment of the organisation’s internal and external situation. In this way, the stakeholders are able to have a clear report on their investment. By fully understanding a company’s internal and external risks, board members should follow by transparently reporting and creating clear channels of communication with the stakeholders involved.

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4. Remuneration

Finally, good governance is required to have transparency in remuneration reporting. Remuneration is often seen as a delicate topic, as scrutiny is generally quite high. As it can be a topic of public scandal, remuneration transparency is a topic that should be tackled with clarity and delicateness.

Organisations should be honest about what and where the budget will be spent. Executive pay should also be visible as it is a topic of high scrutiny. Hard work should definitely be rewarded but in a clear and candid manner.

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