Manage Risk and Achieve Compliance for Strong Corporate Governance

Strong corporate governance promotes effective risk management. Strong risk management is the key to solid compliance. Although achieving the ultimate level of corporate governance may seem to be a complicated effort, it does not have to be.

Corporate governance deals with the ways in which shareholders assure themselves of getting a return on their investment in an ethically acceptable manner. All role-players in the corporate governance structure have an interest in the effective performance of the organization. Executives, managers and workers receive remuneration and other earnings, Directors achieve the level of reputation they strive for and customers acquire goods and services.
Shareholders get a return on their capital and suppliers collect payment for their raw materials and services rendered.

Corporate Governance roles, functions and processes can broadly be divided into four categories namely key board function, effective governance processes, governance roles and board processes.

The aim of corporate governance is the separation of ownership and control between the shareholders and the managers. Basically, most scandals result when the power and control have been placed in the hands of one person, and at the same time a lack of supervision was present. A formal corporate governance framework and structure such as a Governance Charter that includes strong risk management and compliance requirements goes a long way to prevent this type of problem.

Comprehensive and formal corporate governance frameworks that companies use to coordinate all the functions associated with effective governance helps them to manage risks, identify gaps, and close these gaps for improved performance and stronger corporate governance in an effective and transparent manner. Corporate governance can be summarized as the structures, systems and processes an organization introduces to protect and promote the interests of its different and often opposing, stakeholder interests.

The primary mechanisms of corporate governance comprise of structures, systems and processes that interacts with one another in a very unique manner. The systems and processes include the board of directors and the board committees and sub-committees, the legal and regulatory framework within which the company operates the business practices and ethical environment in the company, disclosure obligation and the transparency requirements necessary to achieve the goals of the company, the enterprise risk management framework and supporting infrastructure as well as the monitoring mechanisms that the company is utilizing to ensure compliance, such as internal and external financial and operational audits.

All these structures, systems and processes should be laced together with a strong, focused and resilient formal and informal communication process that supports the strategies of the company.

A useful starting point for a company is to analyze their structures, systems and processes and present the information in a governance scorecard, which includes the seven components of governance and the maturity of the governance processes. This high-level analysis report has proved meaningful to companies and boards of directors and helped them gauge governance strengths and identify areas for improvement. The methodology utilize should as a minimum help organizations to identify the governance processes in use in the company where the business risks are not mitigated in an effective manner, implement improvements to the structures, systems and processes with the aim of strengthening corporate governance, attract, develop and retain talented directors, executives and key employees, reduce the cost of capital and enhance the stakeholders' value.

The development of Corporate Governance structures, processes and procedures should be focusing on achieving the best position the company can achieve by balancing any opposing interests. In an environment where these components are specific to the company and the particular issues pertaining to the company needs to be formalized in the company, bespoke systems will provide a better solution than using generically available components. Most companies that utilize a generic set of documents find out too late that their Corporate Governance does not provide them with the necessary outputs to manage their enterprise risk and achieve sufficient compliance to satisfy all interested and affected parties that will give all stakeholders the confidence required.

© (2011) Dr. Carl Marx