GovernanceIQ

Demystifying Corporate Governance

Glossary of Key Q&As

What are the principles of corporate governance?

Section 1. Corporate Governance

What is corporate governance?

Corporate governance is a system of rules, practices, policies, internal controls and processes by which a company is directed and controlled. Governance involves balancing the interests and relationships of shareholders, management, customers, suppliers, financiers, government and the community.

“It encompasses the mechanisms by which companies, and those in control, are held to account. Corporate governance influences how the objectives of the company are set and achieved, how risk is monitored and assessed, and how performance is optimised.” (ASX corporate governance principles 2007)

What is a corporate governance framework?

A corporate governance framework is the codified practices and processes used by organisations. You can think of a framework as the internal governance wiring of the organisation. Governance professionals should understand their own framework well.

For a business to establish itself on a good footing for the future, the adoption of a framework is essential as “It encompasses the mechanisms by which companies, and those in control, are held to account.” (ASX corporate governance principles 2007)

There is no single accepted model of corporate governance or corporate governance framework.

What is good corporate governance?

There is no single model of ‘good’ corporate governance.

Good corporate governance normally refers to the leading principles and practices adopted by organisations that are recognised as leaders in their industry. These organisations adopt a corporate governance framework and adapt it for their specific organisational requirements.

As well as there being no single model of ‘good’ corporate governance, the model is also not fixed. It can change over time in response to the changing business environment and customer expectations. Two great examples are the energy and mining sectors, where good governance today requires a much greater consideration of the environment than in the past.

“Effective corporate governance structures encourage companies to create value through entrepreneurialism, innovation, development and exploration, and provide accountability and control systems commensurate with the risks involved.” (ASX corporate governance principles 2007)

What are the objectives of corporate governance?

Corporate governance is about the rules, processes and sometimes the conventions of the organisation. The objective of corporate governance is to establish a system by which the organisation will operate but it also enhances and protects shareholder value and helps understand the broader stakeholder environment.

Governance can include an articulation of the rules, expected behaviours, decisions, strategy and risk appetite of the organisation. Your approach to corporate governance is an articulation of your expectation of what ‘good’ looks like in terms of management and organisational behaviour and performance.

What are corporate governance guidelines?

To help establish a common frame of reference for organisations, the ASX Corporate Governance Council developed its Principles and Recommendations in 2003 –  which are the accepted corporate governance guidelines in Australia. The high level of reporting (by more than 2000 listed entities) against the principles and recommendations outlined in the publication has contributed to a relatively high standard of corporate governance practice in Australia.

 

Section 2. Responsibility

What is accountability? What is accountability in leadership?

Corporate governance “…encompasses the mechanisms by which companies, and those in control, are held to account.” (ASX corporate governance principles 2007)

Accountability is an underlying principle of corporate governance as those in control are expected and, in some circumstances, required to justify actions or decisions. Justification in this sense establishes responsibility. Corporate governance systems and processes (corporate governance framework) are designed to hold those responsible to account.

Can I be held personally responsible for decisions I make for the organisation?

Key office holders are personally responsible for the actions and decisions they make on behalf of their organisation.

In corporate governance terms, personal accountability occurs on a board and in senior management. Corporate governance systems and processes (corporate governance framework) are designed to hold those responsible to account.

It’s vital that key office holders have a strong understanding of corporate governance to ensure they are aware of their level of accountability.

Can I be held personally responsible for financial decisions?

Financial accountability occurs on a board and in senior management as key office holders are personally responsible for their actions or decisions relating to the financial affairs of an organisation.

The auditing of financial statements is one key example of establishing financial accountability. Office holders are also fiduciary agents meaning that their decisions are made on behalf of key stakeholders (eg: shareholders and community).

An underlying principle of corporate governance is that office holders should not treat a company as if it exists for personal benefit. (This also establishes office holder duty of care.)

What is lack of accountability?

A lack of accountability arises when systems and processes may be deficient, providing individuals too much scope to make decisions and act without being answerable for actions and results. This may lead to cases where actions can be undertaken without clear benefits to the organisation; for personal benefit; or be at odds with stakeholder expectations around ethical, environment, financial or social priorities for example.

An underlying principle of corporate governance is office holders should not treat a company as if it exists for personal benefit. (This also establishes office holder duty of care.)

What is ethical behaviour?

Ethics are values-based standards that establish a baseline of moral conduct for individuals or organisations.

Ethical dilemmas arise for organisations and boards when they are required to prioritise sometimes incongruent objectives of profit and social responsibility (business ethics).

It is every board members’ role to make a balanced moral decision (ethical behaviour) by taking into account all available information. To assist board members, boards sometimes create ethical codes of acceptable conduct to guide ethical behaviour and send a message to stakeholders that an organisation has an established set of expectations that it will uphold.

What is conflict of interest?

A conflict of interest arises when a board member (or any individual) attempts to serve two competing interests at the same time.

It may also refer to a situation in which a person may personally benefit from actions or decisions made in their official capacity. It is a common law principle and one that board members must be aware of. If there is an acknowledged or potential conflict, directors should abstain from voting and in certain circumstances remove themselves from meetings or discussions.

What is emotional Intelligence?

Emotional intelligence is the ability to monitor one’s own and others’ feelings and emotions, to discriminate among them and to use this information to guide one’s thinking and actions.

Emotional intelligence emphasises practical use. It’s not just knowledge about emotions and how they work; it’s an individual’s ability to apply that knowledge to manage their own behaviour or relationships with others, to attain a desired result.

Put more simply: Emotional intelligence is the ability to make emotions work for you, instead of against you.

The idea was primarily based on a theory formed by two psychologists, John D. Mayer and Peter Salovey.

For directors and executives, developing emotional intelligence can support healthy boardroom relationships and organisational culture.

Section 3. Board of Directors

What is a board of directors?

A board of directors is a group of individuals that are elected or appointed representatives of the shareholders or other beneficial owners of the entity.

Collectively, as ‘the board’, they are responsible for the governance of the entity. The board sets the strategic direction for the organisation, holds management to account and is the ultimate decision making body of the organisation on broad matters including corporate policy and executive remuneration.

At GGI we categorise board matters into six groups:

1. Purpose and culture
2. Entrepreneurship
3. Integrity
4. Society
5. Prosperity
6. Success

What does a board of directors do and why do organisations need them?

The board is collectively responsible for the governance of an organisation. It oversees purpose and culture for the organisation, holds management to account and is the ultimate decision making body of the organisation on broad matters including prosperity, entrepreneurship, social licence and integrity.

When does an organisation need a board of directors?

Organisations that look after the monetary interests of shareholders generally require a board of directors for oversight and to ensure independence. Organisations with shareholders can either be listed public organisations or non-listed private companies.

‘Listed’ organisations (those whose shares are traded on the stock exchange) require a board and other committees. As their shares can be traded publicly, all listed companies are also ‘public’ companies.

Non-listed private companies have shareholders but their shares are not available openly to the public. Private companies do not require a board, however there is a stage where a board is recommended. As a small private company grows it may require broader skills; independence for financing; access to broader markets; and, most importantly for the owner, a succession plan.

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