What is good governance?

This post draws out what constitutes “good governance” in the context of a company and its board of directors.

A company can be described as a “nexus of contracts”, by which a diverse range of stakeholders (suppliers, customers, employees, lenders, equity holders, regulators and the community) can participate in, and benefit from, a productive economic activity.  Corporate governance refers to the frameworks, systems and practices that coordinate (“govern”) these many stakeholder relationships and enable the company to operate on an ongoing, sustainable basis.

  • In this vein, the Institute of Directors “Four Pillars” document describes good governance as … “the effective separation, management and execution of the relationships, duties, obligations and accountabilities of an entity, such that the entity is best able to fulfill its purpose.”

A key element of this framework is the company’s board of directors, which is appointed by its shareholders and is required to act in the company’s best interests (s131(1) Companies Act 1993).  However, corporate governance is not just about what happens at the company’s board table and therefore “good governance” is not just about the operation of the company’s board of directors. Nonetheless, the board has a pivotal role in establishing and monitoring the governance framework and in “setting the tone from the top.”

This requires the board to have:

  • appropriate “bench strength” (capability, experience, diversity and succession),
  • clarity of roles and responsibilities (especially relative to management), and
  • an effective governance culture.

Governance is often characterised in terms of control, risk management, accountability and compliance. While these are critical, good governance has a broader focus also to include enabling the firm to seek out, identify and capitalise on opportunities.  A key role of the board in this respect is to determine the company’s purpose, goals and strategy so that relevant opportunities can be sought out deliberately, assessed objectively, and pursued purposefully.

Firms have a range of circumstances, risks and opportunities so there is not a single template for good governance that can be simply applied to all firms. However, while not wanting to advocate a slavish “tick the boxes” approach, it is essential to have regard to authoritative pronouncements on good governance, such as:

See also my post on State sector board governance for a range of links to resources on general corporate governance, as well as to resources specific to state sector board governance.  There is also an ISO standard under development on organisational governance.