Over the past few years I have debated and learned from a very diverse group of senior professionals. In improving our governance practices it is absolutely vital to consider the different perspectives of the various stakeholders in good governance. 

 

There has been much debate about principles-based versus rules-based governance. There is also much concern on whether our focus should be on strategy or control. Many believe, myself included, that risk management is at the intersection of good governance by promoting well defined strategic goals and objectives and then the management of risks in achieving them.

 

Improving governance involves the board, executive management, the accountants, the auditors (both external and internal), the investor, and others. Everyone’s views are valid and contribute in moving forward and improving governance, in fact the engaged involvement of all stakeholders is part of good governance.  So next time you grit your teeth when someone else expresses a position you are uncomfortable with take the time to try to understand that person’s view and learn why they are talking as if they are from Mars.

 

Principles based guidance is useful to guide priorities

 

The Professional Accountants in Business (PAIB) Committee of the International Federation of Accountants (IFAC) has published an exposure draft entitled “Evaluating and Improving Governance in Organizations”. The IFAC paper identifies 12 key principles for good governance and then provides guidance to assist in their achievement. I have included some of my views within each IFAC principle.

 

1.   The creation and optimization of stakeholder value should be the objective of governance.

Defining our purpose, our overriding objective, is very important. It helps obtain agreement among the many stakeholders on what we are trying to achieve. While it seems quite basic stated as a principle, spending some time obtaining everyone’s agreement of this core principle would be time well spent.

2.   Good governance should appropriately balance the interests of stakeholders to optimize value.

There are conflicting interests among the many stakeholders. Good governance needs to consider all the interests and ensure the decisions are in good faith and follow a due diligence process. Board decisions are difficult at times, but informed and educated actions are always needed.

3.   The conformance and performance dimensions of governance are both important to optimize stakeholder value.

In my words, strategy and control are both important, without both you will not succeed.

4.   Good governance should be fully integrated into the organization.

Board governance, IT governance, organizational governance, public sector accountability, governance goes by many names, especially if you ask different stakeholders. But the overriding important point is that governance needs to be baked into the organizational efforts, it is not an afterthought, nor is it something that is done to the organization.

5.   The governing body should be properly constituted and structured to achieve an appropriate balance between performance and conformance.

Investing in defining your governing body and efforts is well worthwhile. The board charters, the organization of the various committees, the membership of each, the board evaluations, are all vital in moving governance forward.

6.   The governing body should establish a set of fundamental values by which the organization operates. All those participating in governance should embrace these fundamental values.

Values and ethics are a defining attribute of the great organizations. Spending time in providing overall direction and discussion of same is important.

7.   The governing body should understand the organization’s business model, its operating environment, and how stakeholder value is created and optimized.

Why is governance important, to help succeed in the “intention” of the organization.

8.   The governing body should provide strategic direction and oversight in both the conformance and performance dimensions.

Enough said.

9.   Effective and efficient enterprise risk management should form an integral part of an organization’s governance system.

Absolutely!

10. Resource utilization should align with strategic direction.

Under and over resourcing always causes challenges in implementation.

11. The governing body should periodically measure and evaluate the organization’s strategic direction and business operations, and follow up with appropriate actions to ensure appropriate progress and continued alignment with goals.

Performance reporting is always helpful in guiding performance.

12. The governing body should ensure that reasonable demands from stakeholders for information are met on a timely basis, and that the information provided is relevant, understandable, and reliable.

An informed oversight group is an engaged governing body.

By defining our purpose we obtain consensus on our direction

 

It is always hard to dispute principles and that is one of their key benefits—that is it helps gain consensus among the different points of views (our lens).

By defining our purpose (or goals) we can then debate (endlessly it seems) on our strategies and approaches in achieving our purpose.

 

So take your accountant for lunch, have coffee with your auditor, take a night course with your lawyer, or attend a briefing with a board director, the view point you learn my change your mindset (for the better).

 

Have another great month.

 

Dan Swanson

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 Frequently Asked Questions in Corporate Governance (FAQs)

 

Organizational Governance - IIA Position Paper

 

Roadmap to Being an Effective Director

 

Is Governance Effective Within Your Organization?

 

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