In essence, corporate governance is a set of standards or rules that enables organizations to ensure that they are rightfully serving the needs & wants of all the stakeholders that it engages with. However, it comes as a natural inclusion that they are running the organisation in a way that meets both its short and long-term goals. Good corporate governance has often underpinned sound strategic planning and risk management. Organisations embracing best governance practices continually move toward long-term sustainability. Also, Good governance almost always factors into preventing litigiousness and providing far-reaching legal protections for organisations. It would be fair to state that following the principles of good corporate governance takes a decent bit of effort. However, while corporations can expect to invest top dollar towards adopting effective corporate governance measures, taking steps toward these best practices isn’t all that expensive.
Installing mechanisms that guarantee the right appointments on the board.
In a bid to run the company for the long term, governance boards have an innate obligation to gather the proper mix of skills and perspectives in the boardroom. Seasoned experts have proposed a plethora of measures in recent years to push towards this goal. This has mainly constituted of age and term limits, but has also advanced to gender and other diversity requirements. Popular corporate governance rating agencies have constantly voiced their concerns on boards not taking a hard look at their composition leading to huge gaps between the skill sets possessed by the governance boards & the needs of the company.
Choosing a coherent business direction.
It is pivotal that governance boards provide a strong leadership structure and company management needed to set unambiguous, common goals to move in a similar direction. The best practices for good corporate governance formally establish goals, confirm support by top executives on the board, and communicate clearly with the stakeholders. Such a blueprint when designed to ensure coherent business direction plays a key role in eliminating inefficiencies and garnering the confidence of all stakeholders.
Defining Roles and Responsibilities.
As quoted by the Kotak Committee in the final draft of the report that was submitted to SEBI, Separating the roles of the Board Chair and the CEO and to have distinct roles for each of them will have a profound impact in bolstering the corporate governance framework in the country. It is also important for All board directors to have carefully curated job descriptions and a detailed outline that defines their duties and responsibilities.
Adopting an Effective Strategy.
Coherent goals are deemed useless without backing them with the thought & effort needed to achieve them. The board can only help an organization in reaching its goals by ensuring that an effective strategy is adopted to achieve them.
Ensuring accountability of different aspects of a business plays a crucial role in developing a sustainable business model. Organizations must focus on developing a robust blueprint that ensures the highest order of transparency amongst all reporting procedures.
Establishing a Robust Performance Evaluation model.
It is one amongst the foremost responsibilities of the governance board to set measurable performance & compensation targets for top executive officers including the CEO. The targets set must be regularly assessed and evaluated against the actual figures to tie a suitable compensation to the performance. A Compensation Committee must be established that comprises of independent directors in order to develop and oversee executive compensation plans including equity-based stock option plans.
Implementing Effective Risk Management Strategies.
Organizations must regularly identify and assess the risks they face, including political, economic, operational, social, legal, environmental & other industry-specific risks. The Governance Board is accountable for strategic leadership in defining the company’s risk tolerance and developing systems & processes for managing & mitigating risk. It must also consistently review the competence of the systems and controls to assess the sufficiency of its reporting.