Governance is a word that is bandied around a lot these days, particularly when it comes to board directors and their responsibilities. One the one hand we have board directors insisting on the scope they require to apply good governance and on the other we have governmental institutions insisting that boundaries are needed to control the activities of board directors.

Of course any function requires some boundaries as well as freedoms. But where do these boundaries and freedoms extend and who sets out the role of directors in boards. Further, how far should government go in imposing boundaries for corporate governance? And at what point is the responsibility of directors overshadowed by too much legislation with regard to director’s functions and range of activities?

Let’s look at some basics to help to understand this issue.

Governance

Governance has been around since the dawn of civilization. We see it in history with governments going back to the Roman Empire and again further back in the Chinese Courts many thousands of years ago. Governing the country or the land, setting up laws and basically stating the freedoms and barriers under which the country would operate.

The term governance refers to the activity of exercising and directing an influence over the decision making and how these decisions are put into effect. This comes from governing, to direct and control the actions, affairs, policies, functions, etc, of (a political unit, organization, nation, etc); rule. It also means to be a predominant influence on (something); to decide or determine. The word comes from the old French word, gouverner, originating from the Latin gubern meaning to steer, and possibly from the early Greek kubernan.

Probably the Latin derivation is the most accurate for our purposes.

Corporate Governance encompasses a wide range of structures designed to push forward the goals or mission statement of the organisation. This would include accountability, responsibility, economic efficiency, strategic aptitude among others. In governance various stakeholders need to be addressed, such as stockholders, the well being of the organisation, its employees, officers and management and external groups such as consumer groups, green issues addressed, neighbourhoods and the environment etc.

So governance is the system of guiding and steering the group, organisation, company or department towards a stated objective by those selected to apply the governance.

It includes, making sure that the organisation conforms to the laws and statutes of the county in which it operates. That it operates in an efficient and profitable manner but not to the detriment of its resources, including manpower, its stakeholders, such as investors and shareholders, creditors etc. That it works to achieve the goals set out by the goal setter, often the founder of the organisation but can include the board of directors these days. It is the system used to direct and control companies.

This includes ensuring economic efficiency, profitability, good relations with stakeholders, such as shareholders, creditors and indeed management and employees.

The board of directors of any organisation are concerned with the forward progress of the organisation towards the stated goals or mission statements. The larger the organisation the more broad is likely to be their strategy. Also the more ‘extended’ functions such as committees to ensure regulatory compliance, financial, health and safety, remuneration, and so forth, would be set up and report to the board.

The roles of governance include:

Communication. Being effective in the communication with the CEO, management and stakeholders ensuring that all are appraised.

Strategy. Setting out the business objectives and strategy required to meet them. This includes setting a strategic corporate plan to attain the vision for the future for the organisation. This a broad long range plan and different to the annual business plan that would outline the objectives for the coming year but which should also integrate with the long range planning set out.

Responsibility. Accepting responsibility for the stewardship of the organisation, and for ensuring that the organisation is performing within the regulatory framework for companies and directors. Ensuring that the organisation is financially viable and acting in a financially responsible manner.

Business Planning. Thinking through and documenting the best considered strategic direction and how to implement it.

Analysing environmental factors.

Identifying the current objectives.

Developing and ensuring implemented appropriate policies that forward the strategic plan for the organisation.

Performance monitoring and reporting. Receives reports on various areas such as financial, environmental impact, risk management, for larger organisations, renummeration reports, reports on directors proficiency etc.

Stewardship. Provide leadership and monitoring for new directors although this will tend to be more the responsibility of the chair (chairman of the board).

A word on the Chairman of a Board. He or she has a broad range of duties, in addition to being a board member, that include:

Ensuring that the board has available all the relevant policy documents to do their duty.

Setting the board agenda including all appropriate items included.

Running the board meetings.

Ensuring that all board members can express their views and that they all participate in the decision making process.

And that, as a first duty, any conflicts of interest or duty is raise at the beginning of the meeting in the event any board members needs to recluse him or her self from the meeting in accordance with board policy.

The Chair has a role to ensure a balance is maintained to ensure that all board members have a fair opportunity to ask questions and express their views. Directors have a duty to follow a code of conduct which includes, acting with honesty and integrity. Being open and transparent in their dealings. Using power responsibly and not placing them in a position that would involve a conflict of interest.

Directors have a duty to follow a code of conduct which includes, acting with honesty and integrity. Being open and transparent in their dealings. Using power responsibly and not placing them in a position that would involve a conflict of interest.

Part 2 is here.