Good Corporate Governance: 4 Guiding Principles

The benefits of practicing good governance are invaluable. Organizations striving to achieve success and steer clear of legal and compliance issues must be diligent in their governance practices.

While governance best practices can vary depending on local contexts and complexities, there exist core principles that organizations and boards should follow.

First established in 1992 by the Cadbury committee, the UK Corporate Governance Code was a way to ensure the integrity and transparency of local organizations. Since then, it has expanded and developed into what it is today, with the most recent adjustment occurring as recently as 2018. Although the UK governance code was established specifically for the United Kingdom, it does serve as a meaningful basis for governance worldwide, with many countries modeling their governance standards around it.

Good Corporate Governance: 5 Guiding Principles to Follow

Governance principle #1: Leadership

Good governance starts from the top: it cannot exist without effective leadership behind it.

Without strong leadership, companies set themselves up for failure. Fair and thoughtful leadership is key for organizations looking to build a strong foundation for 2022. Good leadership can take on many forms and styles depending on the situation, context, and local culture. However, there are some qualities all good leaders have in common.

Strong leadership involves leading by example. Transparency is also a critical factor in good leadership governance. Without meaningful leadership, organizations face very little chance of maintaining good governance practices in the long run.

Governance principle #2: Effectiveness

An ineffective board of directors will not be able to keep their organization in good standing. With so many moving parts, the board needs to maintain a seamless and fluid means of communicating, documenting decisions, and moving forward as a team. Without this, the organization will lack vision and be more prone to making errors.

An efficient, well-oiled board takes a lot of work and coordination. Efficient boards are able to fully understand the challenges at hand and equip themselves with the right tools to overcome them, even if it at times feels like uncharted territory. Efficient boards waste less time and are able to achieve their objectives with relative ease. In 2022, technology will play a bigger role than ever for board productivity. With hybrid and remote work models becoming the new norm, boards need a secure and user-friendly means of communicating and sharing sensitive information and documentation.

Governance principle #3: Accountability

Unless key decision-makers take full responsibility for their actions, good governance is incredibly difficult, if not impossible, to maintain. Accountability is a critical factor in governance upkeep as it involves the integrity and honesty of the highest levels of management.

Pearse Trust illustrates that an accountable board must follow through on the following:

  • The board should present a balanced and understandable assessment of the company’s position and prospects;
  • The board is responsible for determining the nature and extent of the significant risks it is willing to take;
  • The board should establish formal and transparent arrangements for corporate reporting and risk management and for maintaining an appropriate relationship with the company’s auditor, and
  • The board should communicate with stakeholders at regular intervals, a fair, balanced and understandable assessment of how the company is achieving its business purpose.

 

Governance principle #4: Remuneration

Finally, another element to good governance is clear and transparent remuneration reporting. Often the topic of public scandals, remuneration can be a delicate governance element. Organizations should be forthcoming about how their budget is spent, particularly when it comes to executive pay. Hard work should be rewarded, however, the correlation between pay and work achieved needs to be as honest (and concise) as possible.