The Pillars of Good Corporate Governance

Patrick Gitau CFE,CRISC,CERG,GRCP,CFIP,CRICP,CRA,

CPMP,CHPC,SRMP,CIA,CPPP,MBA-Finance (With Merit)

Lead-Forensic Audit and Investigations at HWG & Company CPAs

129 articles Follow

July 27, 2015

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The pillars of successful corporate governance are: accountability, fairness, transparency,

assurance, leadership and stakeholder management. All six are critical in successfully
running a entity and forming solid professional relationships among its stakeholders which
include board directors, managers, employees, customers, regulators and most importantly,
shareholders.

 Accountability: Accountability embraces ownership of strategy and task required to

attain organisational goals. This also means owing reward and risk in clear context of
predetermined value proposition. When the idea of accountability is approached with
this positive outlook, people will be more open to it as a means to improve their
performance. This applies from the staff all the way up to top leadership embracing
Risk management within defined formal appetite for risk. This also include fostering
culture of compliance to create real and perceived believe that the entity is operation
within internal and external boundaries

 Fairness: Fairness means “treating all stakeholders s including minorities,

reasonably, equitably and provide effective redress for violations. Establishing
 effective communication mechanism is important in ensure just and timely protection
of resource sand people asset as well correcting of wrongs

 Transparency: Transparency “means having nothing to hide” that allows its

processes and transactions observable to outsiders. It also makes necessary
disclosures, informs everyone affected about its decisions. Transparency is a critical
component of corporate governance because it ensures that all of entity’s actions can
be checked at any given time by an outside observer. This makes its processes and
transactions verifiable, so if a question does come up about a step, the company can
provide a clear answer

 Independent Assurance: In progressing transparency it is important for non-direct

actors to obtain confidence that that executive actors are leading the entity towards
pre-defined intent and not using it for self and obtain expert advisory on how applied
approached can be improved. Assurance services provide independent and
professional opinions that reduce the information risk (risk that comes from incorrect
information). Independent assurance is the verification by a third party (not directly
responsible for QA and acceptance of the product/deliverable and/or the reliability of
test results obtained from quality control and acceptance testing. This independent
assurance insures that (1) the representation or acceptance test results are accurate and
provide a fair and equitable basis for construction acceptance and (2) quality control
testing is accurate and thus will properly indicate process quality.

 Leadership; Direction “defining and offering leadership on organisation’s agenda

within the values and principles that frame the way business should be done. Those
charged with governance are responsible for these key strategic issues and for proving
leadership in establishing the right culture to drive the performance of the business.
Without clear direction, policy and procedures, the organisation will flounder and
likely never to realise its long-term goals and potential. This should include leadership
and core expertise renewal to both retains knowledge/experience, ensure appropriate
representation and continuity.

 Stakeholder engagement: Those charged with governance should identify the key
stakeholders and how they interact with the business and how they are engaged with
to ensure the best outcome for the organisation. Stakeholder engagement included in
the annual agenda and strategic plan.
Conclusion

In summary, the responsibility an individual assumes when he became charged with

governance of an entity is considerable and one that should only be taken with a clear
understanding of, and commitment to, fulfilling this responsibility to the best of their ability
foremost for the stakeholder interest. Having a clear understanding of the principles and
practices of good governance will enhance the performance of both the individual and the
organisation – so how do you and your organisation stack up against this checklist of good
governance

Finance, P. G. C. (n.d.). 10 Key Steps for Effectively Managing Fraud Risk in Not for
Profits. https://www.linkedin.com/in/patrickgitau/?lipi=urn%3Ali%3Apage
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Businesses thrive or collapse based on the rules established to serve the needs of everyone
involved, from shareholders and stakeholders to managers and customers. These policies and
guidelines make up corporate governance. ‌While corporate governance has evolved with
new expectations and technologies, it remains the business’ driving force. It dictates how a
company’s board of directors helps drive success in meeting short- and long-term goals.
Board members with the right tools for communication and corporate monitoring have a
profound impact on their organizations.

What is corporate governance?

Corporate governance encompasses the rules, practices and processes that guide a company’s
operations and decisions.

A corporation, whether publicly traded or not, is a complex enterprise: It’s an interconnected

web that weaves together the business itself, its executive leadership, the customers who buy
its offerings, and the investors and financiers who provide the capital to make it all happen.
Other key players include government bodies that impose guardrails and regulations,
suppliers who provide the resources an organization needs to function, and communities
affected by a company’s operations. Good corporate governance aims to balance all these
interests in an effective, fair and transparent manner.

The details vary across companies, geographies and industries, but strong corporate
governance can typically be defined by these traits:

 It’s responsive, participatory and consensus-oriented

 It’s efficient and effective

 It upholds the rule of law in applicable jurisdictions

 It advances equity and inclusiveness, along with the company’s strategic vision —
ensuring that the corporation “does good while doing well,” and vice versa

 It prioritizes transparency and accountability

As Marc Hodak, Partner at Farient Advisors, said at Diligent's 2022 user conference, "Good
governance is ultimately what is right for the long-term health of the company."
Ensuring stability and growth: What is the purpose of corporate governance in the
United States?

The role of corporate governance in the United States is to maximize long-term shareholder
value while ensuring transparency, accountability, and fairness for all stakeholders involved.
This includes shareholders, employees, creditors, customers, and the broader community. By
establishing a clear framework for decision-making and oversight, effective corporate
governance fosters stability and growth for modern organizations, ultimately contributing to
a healthy and sustainable business environment.

6 principles of corporate governance

The business landscape is always evolving, which means the principles of corporate
governance are constantly changing as well. How can organizations maintain the core tenets
of good governance while keeping up with the times?

In 2023, the G20 and the Organisation for Economic Co-operation and
Development (OECD) issued six principles of corporate governance to help. These
principles are intended to assist policymakers in evaluating and improving legal, regulatory
and institutional frameworks. They also serve as a guide to help corporations innovate and
adapt their practices to stay competitive in a changing world. So, what are these revised
principles of corporate governance?

1. An effective corporate governance framework

Just like a house needs framing to determine its structure and “good bones” to remain
standing over time, effective corporate governance requires a strong foundation.

According to the OECD, a corporate governance framework “should support transparent

and fair markets and the efficient allocation of resources. It should be consistent with the rule
of law and support effective supervision and enforcement.”

Each of these components is critical. Take, for example, consistency with the rule of law,
which encompasses legislation in the jurisdictions where a company does business, rules for
listing on various exchanges, and regulations that impact worker rights and the environment.
Each of these guardrails exists to protect the rights of communities, customers, employees,
shareholders and other parties. The first corporate governance principle helps ensure that a
company is accountable and operates in a way that upholds these rights.
2. The rights and equitable treatment of shareholders and key ownership functions

As the owners of a publicly traded corporation, shareholders do more than reap the
company’s profits. They also contribute to its governance in many ways, including:

 Participating and voting in general meetings

 Electing and removing members of the board, as well as an external auditor

 Approving or participating in fundamental corporate decisions, like the authorization

of additional shares or amendments to governing documents

The second principle behind good corporate governance helps these rights play out equally
for all shareholders, regardless of class. Take a shareholder’s right to obtain relevant and
material information about the corporation on a timely, regular basis, for example. Insider
trading laws in the United States make it illegal to share information with one set of
stockholders — like a prominent pension fund or majority investor — unless that information
is available to the entire market at the same time.

3. Institutional investors, stock markets and other intermediaries

The immediate relationship between a company who issues shares and the investors who buy
them is just one aspect of how capital markets work. Several intermediaries keep the gears
turning. For example, stock exchanges and brokers connect buyers and sellers, while
institutional investors buy, sell and manage stocks on behalf of other parties. Throughout,
credit rating agencies, analysts and proxy advisors deliver guidance.

All these parties need oversight for fair and effective functioning. Enter corporate governance
to maintain fairness, accountability and trust.

Imagine if a conflict of interest were allowed to go unchecked in any of these areas. Say a
personal connection among top leadership leads to the favorable treatment of one company
over others: Brokers might promote one company’s stock over others, and the clients of
institutional investors might not get the best mix of companies in their own portfolios.
Meanwhile, investors wouldn’t be able to trust the objectivity of an analyst report or credit
rating.

4. Disclosure and transparency

If a decision affects the material health of a publicly traded company, investors must be made
aware in a timely manner. The fourth principle of corporate governance requires clear and
transparent communication to all shareholders and stakeholders.

Take the appointment of a new CEO, for example. A publicly traded company can’t just slip
a new CEO into such an important and fiduciarily responsible leadership position without
solid explanation, rationale and context.

When choosing new leadership, companies should follow a structured process for succession
planning, conduct the appropriate due diligence, consider diversity and representation in the
recruitment process, and choose leaders who fit the skills needs of the board, marketplace and
corporate strategy — while providing visibility into the entire process.

Such thoughtfulness and transparency engender confidence, while showing shareholders that
the company has nothing to hide. It also demonstrates the company’s commitment to
protecting shareholder interests and a willingness to be held accountable.

5. The responsibilities of the board

The fifth principle ensures that leadership at the top is structured for effective oversight and
accountability, so directors can exercise objective and independent judgement, oversee risk,
and monitor managerial performance — in effect, perform their fiduciary duties.

This principle gets into the nitty gritty of board operations:

 Are processes like meetings and minutes in place to keep directors fully informed?

 What about conflict-of-interest measures and a balance of independent vs. executive

directors, to ensure they’re acting in good faith?

 Do committees and the full board regularly delve into important areas like audit and
cybersecurity to exercise due diligence and care? And does this due diligence extend
to their own ranks when choosing new directors?

 Finally, do appropriate disclosure, engagement and accountability measures exist to

ensure the board is operating in the best interests of the shareholders?

6. Sustainability and resilience

Making sure that a company can withstand the winds of change and thrive well into the future
involves a great deal of decision-making and risk management. Corporate governance
provides the frameworks, practices, policies and incentives for this work.

One example is climate change and the transition to net zero operations. What are the
potential risks of moving from fossil-fueled operations to renewable energy sources? What
are the risks of not doing so, like non-compliance with evolving regulations, or a poor
reputation among environmentally-minded future workers? What are the potential
opportunities, like cost savings and increased goodwill?

Within a company, good corporate governance enables sound management of these risks.
Within the greater capital market ecosystem, disclosing material data in a consistent,
comparable and reliable way ensures that investors, exchanges and advisors have the
information they need for smart, timely decisions.

In essence, the six principles of corporate governance, recently outlined by the G20 and
OECD, stand as indispensable guidelines for fostering resilience, transparency, and ethical
practices in an ever-changing business landscape.

The consequences of bad corporate governance

Failing to follow the four principles of corporate governance adversely impacts any business.
Time and again, corporations have shown just how damaging improper governance is. In a
world of fast-paced news and instant information, any misstep or unethical practice can ruin a
business in a heartbeat. Take these notorious examples:

The 2008 financial crisis

The 2008 financial crisis is an example of a complete failure of corporate governance.

Greed permeated every level of multiple industries, creating an unnecessary and uncontrolled
amount of risk, even as foreclosure data continued to raise alarms. Banks issued bad loans to
numerous individuals and companies, despite the lessons of the past.

The result was a debt trap comparable to the credit crisis of the 1920s and one of the worst
recessions in world history. Proper risk analysis and accountability were never implemented.
Shareholders and companies fell to bad governance.

The Enron scandal

Some of the worst outcomes occur when there’s no governance at all. The Enron scandal
represents a failure of corporate governance at nearly every level.

‌Cooking the books, suspending the code of ethics, deceptive business practices, and outright
lying all brought down Enron, a corporation Fortune deemed “America’s Most Innovative
Company” — not once, but six years in a row. It turns out that their profits were nothing
more than a figment of the imagination.

Enron may have started as a legitimate venture. However, mixing the board of directors with
bad actors and self-interested parties soon saw a disaster in the making. A lack of oversight
allowed former CEO and COO Jeffrey Skilling and former chairman and CEO Kenneth Lay
to take advantage of their positions in a highly unethical and illegal way.

The company eventually collapsed under the weight of its own deceit, leaving damage to the
California power grid that continues to resonate to this day. Shares tumbled from $90.75 to a
meager $0.26, and congress enacted the Sarbanes-Oxley Act to prevent similar fraudulent
financial reporting and manipulation of financial laws.

Assessing corporate governance

Monitoring governance standards is a crucial task alongside environmental and social criteria.
This is the essence of ESG, which stands for Environmental, Social and Governance.

These three factors play an essential role in the choices investors make. Many mutual funds
and brokers use them to help their clients pick stocks. They also directly impact your
bottom line. ESG criteria are interrelated. They all impact your company’s risk management
and business strategies.

Social criteria relate directly to your business relationships. Critical choices in how the
company treats surrounding communities and acts on social issues reflect its quality and
revenue. Shown to increase the available talent pool by 25% and even raise sales by as
much as 20%, social responsibility and transparency are now firmly entrenched in the
corporate landscape.

ESG criteria should be reflected in every decision a company makes. They reveal just how
open, accountable, and responsible your organization is.

How to ensure good corporate governance

It may not seem easy to implement good governance, but the right technologies can help.
Modern platforms collect and analyze a large swath of information related to your business
activities.

You can get a good idea of how well you perform on these criteria by analyzing investor
sentiment, news articles, public opinion and your own policies.

Leverage data

The average organization generates a lot of data. Companies collect nearly 7.5 septillion
gigabytes of data every day.

This data includes information on products, goals, customer sentiment and almost every other
business activity. The right data management and visualization tools can transform these facts
into useful information to monitor ESG criteria.

Diligent organizes data into powerful dashboards that filter and present essential information
from a wide variety of sources. News, your own data and stakeholder surveys all combine in
a single suite of tools to create a powerful feedback loop for monitoring every decision your
company makes.

Keep up with news and public opinion

For every action, there’s a reaction. Each decision you make plays out over the long run.
Irresponsible activities that eventually hurt shareholders and stakeholders usually start as a
small ripple that turns into a tidal wave.

If your company decides to reduce costs by cutting quality, the grumbling of customers will
eventually impact your bottom line — and those customers will find another place to go.

News and public opinion are terrific and underutilized sources of information. Many
organizations fail to realize customer and stakeholder perceptions until it’s too late.

Know where your organization stands

All of this information helps you to understand your risk and where you stand within your
industry. Are you a leader in the field, or is there room for improvement?

Your data helps you create gaps and SWOT analysis reports. These are the basis from which
to generate risk and other corporate strategies.

Establish informed policies and strategies

With a complete understanding of your business environment, including how you meet ESG
criteria to risks and opportunities, you can create a strategy to mitigate risk.

Data-driven decision-making is not just a trend, it’s a necessity. Companies that strategize
based on accurate data and key performance indicators capitalize on their markets.
Establish policies and guide your organization using the four principles of data governance.

Be transparent, accountable, fair and responsible

Planning and data are worthless without the drive to deploy them correctly. It’s up to you to
act with the right data-based strategies in hand.

Present and own your decisions. Act on the insights you gain responsibly. Avoid the pitfalls
of bad data governance.

Using technology to achieve strong corporate governance

Successful corporate governance often uses a data-driven approach to setting the rules and
policies that guide an organization. The board of directors must act following the six
principles of governance for the best interest of stakeholders, shareholders and the business as
a whole.

Equipping your organization with the right tools, such as Diligent’s Board & Leadership
Collaboration solution, enables you to implement strong governance practices for effective
decision-making and a thriving company.

Corporate Governance | Diligent Corporation. (n.d.). Diligent Corporation.

https://www.diligent.com/resources/guides/corporate-governance

Pillars of Corporate Governance

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August 22, 2023

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The essential foundations of effective corporate governance encompass six key pillars
namely - Accountability, Fairness, Transparency, Assurance, Leadership, and Stakeholder
Management.

All of these factors play a vital role in the successful operation of an organization and in
building strong professional relationships with its stakeholders, including board members,
managers, employees, customers, regulators, and especially shareholders.

Accountability:

 involves taking ownership of strategies and tasks necessary to achieve organizational

objectives.

 entails assuming responsibility for both rewards and risks within a clear context of
predetermined value propositions.

 positively encourages people to embrace it as a means to enhance their performance.

 encompasses fostering a culture of compliance to instill a genuine and perceived

belief that the organization operates within established internal and external
boundaries.

Fairness:

 refers to treating all stakeholders, including minorities, in a reasonable and equitable

manner, while also providing effective remedies for any breaches.

 establishing robust communication mechanisms is crucial to ensure just and timely

protection of resources and human assets, as well as rectification of any injustices

Transparency:
  it is synonymous with having nothing to conceal, allowing external observers to
observe an organization's processes and transactions.

 involves making necessary disclosures and informing all affected parties about
decisions.

 it is pivotal in corporate governance as it ensures that the organization's actions are

subject to scrutiny by outside parties at any time.

 verifiability of processes and transactions ensures that the company can provide clear
answers in case inquiries arise.

Independent Assurance:

 in advancing transparency, it's essential for non-direct participants to gain confidence

that executive actors are steering the organization toward predefined objectives and
not exploiting it for personal gain.

 provides unbiased and professional opinions that mitigate the risk of incorrect
information.

 independent verification, usually performed by a third party, ensures the accuracy of

representation or acceptance test results, and the reliability of quality control and
acceptance testing.

Leadership:

 entails defining and guiding an organization's agenda within the framework of its
values and principles.

 those in governance roles bear the responsibility for key strategic matters and for
providing leadership in cultivating a culture that drives business performance.

 clear direction, policies, and procedures are crucial; without them, an organization is
likely to falter and may struggle to realize its long-term goals and potential.

 involves renewing leadership and core expertise to retain knowledge, ensure

appropriate representation, and ensure continuity.

Stakeholder Engagement:
  should identify key stakeholders, their interactions with the business, and how they
are engaged to ensure optimal outcomes for the organization.

 should be integrated into the annual agenda and strategic plans.

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