Good Governance: what are the basic principles and why is it important?
The word governance has been bandied about a lot lately, whether it be in relation to the failure of our institutions to protect the young and venerable or the banking and financial sector and their failures in ensuring the right culture was embedded in their organisations.
It is not uncommon, however, when a conversation about governance is initiated within the general population that one of the first questions is: what does the word governance actually mean? If you Google the words “corporate governance”, you will be advised that there are 98,400,000 references to these words in the stratosphere, however in this article I will try to provide a simple definition, provide some basic principles and then explain why it is so important that organisations, both in the public and private sectors, incorporate good governance principles and practises into their daily business activities.
What does governance mean?
Governance can be defined as: “The system by which entities are directed and controlled. It is concerned with structure and processes for decision making, accountability, control and behaviour at the top of an entity. Governance influences how an organisation’s objectives are set and achieved, how risk is monitored and addressed and how performance is optimised.” Governance is a system and process, not a single activity and therefore successful implementation of a good governance strategy requires a systematic approach that incorporates strategic planning, risk management and performance management. An organisation, in most cases, is an incorporated body and is recognised by law as a legal entity, however it is an inanimate object; it does not have a soul, it cannot have empathy nor is it able to determine right from wrong – someone else, in this case, the Board and senior management are responsible for humanising the organisation - its governance practices play a leading role in this quest.
And like culture, an organisation’s governance is a core component of the unique characteristics of a successful organisation.
The principles of good governance
Again, there are many variations to a common theme of good governance; however below we list the fundamental requirements and expectations to meet this standard:
Directors should act always to optimise and sustain the economic, social and environmental value and potential of their organisation
- According to a well-informed conscience;
- With astute commercial judgement and a sound understanding of the organisation’s business;
- In the best interests of the organisation as a whole;
- With due care and diligence;
- Solely for a proper purpose;
- Free from any conflicts of interest or duty; and
- In conformance with the spirit as well as the letter of applicable legislation and regulation
If these basic principles are applied, good governance will naturally follow, and Directors will be meeting their fiduciary, personal and societal duties, and responsibilities.
Why is good governance important?
The fundamental reasons why organisations should adopt good governance practises include:
- To preserve and strengthen stakeholder confidence – nothing distracts an organisation more than having to deal with a disgruntled stakeholder group caused by a lack of confidence in the governing body. And on the positive side, a supportive stakeholder base can generate benefits for the organisation though social and emotional support, intangible but very valuable attributes that all organisations should strive to achieve and sustain;
- To provide the foundation for a high-performing organisation – the achievement of goals and sustainable success requires input and support from all levels of an organisation. The Board, though good governance practices, provides the framework for planning, implementation, and monitoring of performance and without a foundation to build high performance upon, the achievement of this goal becomes problematic. Achievement of the best performance and results possible, within existing capacity and capability, should be an organisation’s on-going goal. Good governance should support management and staff to be “the best they can be”; and
- To ensure the organisation is well placed to respond to a changing external environment –business today operates in an environment of constant change. Technology has created an information age that has transformed our world, and for business to both survive and remain profitable to enable it to fulfil its mission and achieve its vision, a system must be in place to assist an organisation to identify changes in both the external environment and emerging trends. This process of understanding our changing world does not happen by chance, it requires leadership, commitment, and resources from the governing body to establish and maintain such a system within the organisation. Change generally does not happen “overnight”, it is there for all to see if they have in place a system for looking. Governing bodies, as the ultimate leaders of an organisation, should take prime responsibility for this activity.
In summary, governance encompasses the processes by which organisations are directed, controlled and held to account. It includes the authority, accountability, leadership, direction and control exercised in an organisation.
Good governance does not guarantee long term success, however the “highway of business failure” is littered with the carnage caused by poor governance. The choice of which path to follow is yours to make.