Every corporation, whether new or well-established, should follow corporate governance best practices. Best corporate governance practices apply to large, small, public, and private companies. They even apply to non-profit organisations and other entities.
Following the principles of effective corporate governance takes a bit of effort. However, while corporations can expect to invest some of their corporate dollars in governance, taking steps toward best practices doesn’t have to be expensive.
To help you implement best practices in corporate governance, this blog will explain:
- The benefits of corporate governance best practices
- Critical best practices you can start following now
- Additional resources to support effective governance
Why are best practices essential for effective corporate governance?
There are many benefits to following corporate governance best practices, and the potential impact is boundless. Here are a few ways that they lead to more effective corporate governance:
- Improve overall performance and promote trust among shareholders and other stakeholders.
- Provide sound strategic planning and better risk management.
- Corporations embracing best corporate governance practices continually move toward long-term sustainability.
Good governance prevents litigiousness and provides far-reaching legal protections for corporations.
11 effective corporate governance best practices
Best practices incorporate many different aspects of board work. They entail critically examining board directors’ qualities and characteristics, who they are as people, and how they approach governing an organisation. Effective corporate governance can incorporate many different practices.
Specifically, some of the primary corporate governance best practices include:
- Recruiting and building a competent board
- Aligning strategies with goals
- Exercising accountability
- Having a high level of ethics and integrity
- Defining roles and responsibilities
- Managing risk effectively
1. Recruit effective and diverse board directors
A prominent way for boards to do their collective best is to refresh their members. As the economic climate has changed, the composition of boards has needed to change with it. Achieving board effectiveness in corporate governance starts with a fresh look at their nominations and recruitment procedures.
An excellent first step is to develop recruitment packets with honest information about the organisation. Establishing nominating and governance committees is becoming the norm. Approach board director nominees with clear expectations for their time and talents. Board recruiters should vet candidates for their skills and abilities, potential conflicts of interest, and unique backgrounds.
Corporate governance best practices imply that not only should individual directors be qualified and independent, but hiring directors who bring diversity and decision-making to the table collectively is imperative. Boards may have traditionally vetted candidates based on their skills, governance experience, and industry-related expertise. Ideal candidates would possess CEO or senior management experience.
However, if you’re genuinely committed to effective corporate governance best practices, you should continuously work toward developing a more diverse, equitable and inclusive organisation. Diversity goes beyond gender; it may include age, ethnicity, tenure on your board and more. This is especially important given that there were fewer board appointments in 2022 than in years past, which has heavily impacted directors who are women and people of colour.
2. Establish board composition
Effective corporate governance today has a new focus on board diversity and independence. This is because boards are responsible for dealing with highly complex and often technical issues. Differing perspectives around the board table make for sound decision-making.
That is one reason why board composition is so important. Consequently, most governance experts favour the notion of boards having a majority of independent directors.
Boards should be composed of individuals with all the necessary skills and abilities to make sound corporate decisions. Board directors must have implicit trust in each other to make board discussions productive, even when debates are long and wrought with many strong opinions. Board directors, committees and the whole board should participate in annual self-evaluations to identify their strengths and weaknesses.
3. Onboard all directors
Board directors put their best foot forward when well-prepared for their first board meeting. Corporate governance best practices support corporations having a formalised process for board director orientation.
Orientations can be formal or informal. Information should include the organisation’s history, key accomplishments, and a review of the board’s organisational policies and procedures. New board directors should be aware of their legal and fiduciary responsibilities and receive a copy of their duties and responsibilities.
New board directors should receive the most recent copies of financial statements, meeting minutes, and the annual strategic plan.
4. Foster effective presentations
Boards oversee more than they did even a few years ago. From the SEC’s proposed ESG requirements to enhanced cybersecurity rules, boards have intense workloads — and ballooning board agendas to go with them.
As board agendas grow, functional leaders and directors must deliver effective presentations to ensure no reporting or oversight goes awry. Boards can help these leaders make the most of their time by implementing corporate governance best practices related to boardroom presentations.
Learn more about how to help your leaders become boardroom-ready.
5. Align strategies with goals
Another effective corporate governance best practice refers to boards that align their strategies and risk management activities with the company’s goals. Boards should use their human resources and other tools to identify and assess all forms of risk. The board must work together to develop the company’s risk tolerance and risk profile. Additionally, they need to ensure that the company has the proper framework and controls in place so they can monitor risk and mitigate it when necessary.
Corporate governance best practices require board directors to examine risk and strategy on a short—and long-term basis. The board will engage in routine oversight of risk management/enterprise risk management (ERM), whether that takes the form of a risk register, heat map, or other framework. The board will oversee recommended risk mitigations and ensure the organisation has appropriate controls and resources.
6. Hold directors accountable
The many scandals that have made headlines demonstrate why accountability has such a strong position in best practices for corporate governance. Boards need to develop strong internal controls and monitor them often.
Having reporting systems that are accurate and transparent and that have a system of adequate checks and balances is considered an important part of corporate governance best practices. Have the board and management agreed upon quantifiable performance metrics/key performance indicators (KPIs), and how are they reported? Look at your board’s disclosure practices and how transparent it is in its internal and stakeholder communications.
Accountability in effective corporate governance also includes deciding the correlation between attracting the most talented board nominees and offering them enough compensation to make board work worthwhile without creating a conflict of interest. It’s generally preferred for board committees to manage and oversee board director remuneration.
7. Emphasise a high level of ethics and integrity
Board directors are the corporation’s voice. As such, they frequently receive requests to make public presentations. Effective corporate governance requires board directors to consider their fiduciary duties whenever they speak for the corporation. The best nominees are people with high ethics, honesty, and integrity in their speech, work, and relationships with people.
Best practices in corporate governance require boards to create and cultivate a culture that values honesty, integrity, and ethical dealings. Boards should carefully write three important policies to support integrity and ethical dealings: a conflict of interest policy, a code of business conduct policy, and a whistleblower policy.
Boards should have a clearly stated conflict of interest policy and ensure that board directors declare all conflicts of interest and refrain from voting on such matters. Boards should also institute policies for whistleblowing and reporting noncompliance.
8. Define roles and responsibilities
Another hallmark of corporate governance best practices is to separate the roles of the board Chair and the CEO and implementing distinct roles for each.
All board directors should have job descriptions and an outline that describes their duties and responsibilities. Boards almost always need to delegate some of their responsibilities to committees, such as the nominating or governance committee, audit committee, compensation committee and other special committees, as required. This makes collaboration especially important.
9. Produce accurate financial reports
Thorough financial reporting is not only a legal mandate but also essential to effective corporate governance. While regulations like SOX require comprehensive internal controls over financial reporting, ongoing financial reports are also how boards gain insight into the organisation’s financial performance now and in the future.
It’s a corporate governance best practice to provide the board with monthly financial reports that offer visibility into how the organisation’s finances have changed and some reasons why. The economic reports should be clear and easy to read so even those new to the board can glean actionable information.
In many cases, monthly financial reports are brief overviews. Accounting teams should be ready to deliver deeper, more specific data as requested by the board.
10. Communicate effectively with shareholders
Shareholder activism has recently increased, particularly as ESG remains a fixture on board agendas. Effective corporate governance doesn’t suppress these shareholders; instead, it finds ways to understand and affirm their point of view. This is especially critical ahead of proxy season, as the new universal proxy gives shareholders the tools to express themselves.
While it’s tempting to start greasing the wheels with shareholders ahead of proxy season, the governance best practice is to identify and respond to shareholder concerns proactively. Boards should work with their teams to monitor activist investors and craft response strategies to remedy discontent long before issuing proxy statements. This helps organisations better understand their shareholders and create a collaborative and productive environment for the annual meeting and beyond.
11. Utilise technology, including artificial intelligence
Generative AI can still be considered an emerging technology. Yet boards who want to ride that wave — not get lost in the tide — should consider how to integrate AI into board and company operations efficiently and securely.
Boards should start by working with management to arrange training sessions about generative AI and other technology.
Rigorous training will be a critical corporate governance best practice as boards adopt AI because they can’t make policies about technology they don’t understand. Topics should include both how AI works and its associated risks, including whether AI introduces inaccuracies into company assets or incorporates language protected by copyright.
“The benefits will surely vary by industry and will undoubtedly involve changes to business processes,” says John Rodi, partner at KPMG and leader of their Board Leadership Center. That benefit should focus on what companies need to do so they don’t get left behind. The risks should focus on those that raise reputational and legal peril for companies.”
Effective corporate governance also depends on having clear policies and procedures for AI. Boards should consider who will be responsible for the AI model, when it should be developed and deployed, what risk management should be in place and so on.
Turn governance best practices into a resilient infrastructure.
Corporate governance best practices are constantly evolving. Where once the emphasis was on the bottom line, today’s stakeholder capitalism means boards must balance the bottom line with the organisation’s long-term impact.
