Five steps to ensuring sound governance

Five steps to ensuring sound governance

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Governance
Published on 21 November 2018
Reading: 3 minutes

Five steps to ensuring sound governance

So you’ve decided it’s time to set up an advisory committee or board of directors at your SME. Well done! That’s a smart move, and so is adopting sound industry practices from the outset. The following are a few steps for implementing governance best practices at your company.

  1. Set up an independent board of directors

The board of directors should consist primarily of outside directors, free of any business or family ties with company officers. “Independent directors should be just that: strong and steadfast, independent of mind and willing to challenge the CEO and other directors constructively... At the same time, directors should not be divisive or self-serving,” stated the authors of Commonsense Corporate Governance Principles, published in July 2016.

Board members must act with integrity at all times, refusing any personal advantages that are not contractual perquisites of their office. In a nutshell, for any board to be worthy of the name, it must be completely independent!

  1. Encourage diversity amongst its members

Diversity can take many forms: age, expertise, gender, culture, and so on. Many studies have demonstrated that a group of people with diverse backgrounds makes better business decisions, particularly due to a wealth of viewpoints. In addition, board diversity reportedly results in a higher capacity for problem solving and creativity. Lastly, 30% Club studies show that higher female representation on company boards correlates positively with stronger corporate performance and faster economic growth.

 

 

  1. Choose highly motivated directors

Serving on a board is a major responsibility requiring the director’s full commitment. “Directors need to commit substantial time and energy to the role. Therefore, a board should assess the ability of its members to maintain appropriate focus and not be distracted by competing responsibilities,” state the Commonsense Corporate Governance Principles authors.

Ideally, board members should be offered a comprehensive onboarding program when their term of office begins. Directors should be acquainted with the industry’s historical background and competitive landscape, plus any sustainability issues potentially affecting the the business. They must also understand the inner workings of the organization.

  1. Clarify each member’s role

The board of directors plays a key role in providing strategic direction for your SME. To avoid unnecessary friction, the roles of the board, president and management must be well defined, setting out who does what and when. The lines of responsibility and reporting expectations for all stakeholders must be made clear in a timely manner.

Determine whether specific board committees are to be set up, such as a human resources committee. “A board should have a well-developed committee structure with clearly understood responsibilities. Disclosures to shareholders should describe the structure and function of each board committee,” suggested the report authors. Sound governance calls for roles to be clearly specified, defined and segregated to keep the board running smoothly.

  1. Collaborate with your board

Board members must maintain productive and effective relationships with senior management. Quality relationships between stakeholders is of utmost importance, as it allows senior management and the board to work effectively together. These relationships make it possible to tie in the company’s strategic direction with the concrete achievement of business objectives.

The CEO in particular has a role to play in this responsibility. “In addition, the CEO should actively engage on corporate governance and key shareholder issues (other than the CEO’s own compensation) when meeting with shareholders,” state the report authors. Often, one of the main roles of the board is in appointing, assessing and replacing the CEO, as needed. Clearly, working hand in hand is in everyone’s best interest!