Member Article

The Importance of Good Governance

Andrew Marsh, chair of Vistage for the North East and Northumberland, NED for numerous businesses and charities; and successful entrepreneur, has committed to imparting his knowledge throughout 2021 to help business leaders come out of the last year with a solid view for the future.

In this latest series, he has discussed trust, communication and good execution. In this article he looks the importance of good governance.

“What is governance? Does your company have it? Does your company need it? In exploring a new business topic, it is always helpful to start with the questions and work our way to the answers.

“In my world, governance is a strategic tool that can influence the performance of any company. Get it right, and revenues and margins improve, get it wrong and you waste significant resources and opportunities. Good governance is the process of providing scrutiny of performance with clarity of decision making.

“If your company has shareholders, stakeholders, a board and /or a senior leadership management team, then governance should be on your radar and if you don’t have it, then my advice is to be making it a priority.

“Typical governance is referred to for companies with formal boards, but all organisations effectively have a board; at Companies House any person registered as a Director effectively creates a ‘board’. Governance can be both formal, driven by the board (strategic governance looking at medium to long term) or it can be informal (short term), day-to-day governance completed by the executive team or founder/entrepreneur. If you have both, it is essential that the two are interdependent and so must work hand in hand.

“I would recommend you start early and build in good governance from the beginning or as soon as you can – the depth and detail must be dependent on the status of the company, the challenges it faces, where in its journey it is. Just don’t put it off as you could regret it. The best way to start is to think about the challenges you will face in next three years and shape it around that – don’t do governance for today, think of the future.

“Good governance provides transparency for all stakeholders on decision making and control within the company. Shareholders may want the formality and indeed many investors demand it given they are providing their cash for you to deliver the business plans so they will want security. PLC and other listed companies MUST have it as part of being on the stock markets. Others will choose to have it because it just makes business sense. In recent surveys it emerged that 87% of firms experienced improvements in sales and profits when they instigated governance. 91% of companies reported an upturn in performance when they restructured their thinking and actions in response to governance.

“Benefits include 1) diversity of perspectives - providing wider inputs, insights and options, 2) ensuring focused actions / performance and 3) providing clarity of how decisions are made and who can make them. All of which increase business sustainability… It also focuses on a healthy working culture and practice, as well as being a marketer’s dream as it builds a positive reputation. With all these benefits, what’s not to love about having a governance structure in place, whatever your size or ambition?

“Gauging the amount and style of governance is key for all organisations. Too much red tape/process and you risk losing agility and speed; too little and you risk drifting off plan and decision-making chaos. There are frameworks and standards that can help you in your thinking i.e. the FRS UK Code of Governance and Charity Commission Code of Governance framework. But you can also look at businesses that you feel have good governance and learn from them!

“At the Experience Bank Group, we work with companies to improve their Governance Effectiveness using our 5 foundations of success. You cannot achieve governance without great information linked to your vision/plans, clarity of processes, clear leadership, diverse composition of the board and robust dynamics within them. Given the amount of topics a board could be discussing I wanted to share with you my top 10 core areas for consideration in your governance discussions:

“1. ESG. Environmental, social and governance reporting. What impact do you determine your company should have and how and when is that achieved? Make commitments to your community and to things that matter today and make them happen.

“2. Cyber Security. The world has moved online. Have you? Are you protected? What are your parameters for protecting your staff, your customers, your suppliers? It can feel rather daunting but what a huge relief you will feel to have it in black and white.

“3. Compliance. What boxes do you HAVE to tick and how? What boxes is it helpful for you to tick? And which ones see you going above and beyond duty but will give a return? Governance is particularly helpful if your company has gone through very quick growth, or is evolving, as it makes sure that nothing that must be compliant can fall through the net.

“4. Strategy and board responsibility. The roles of the senior management. Look at what is right in front of you and needs doing. But more importantly look at the future and what, if you get this right (or wrong), it will look like?

“5. Risk. What are your risks? Form a risk register and make it form part of your board and management meetings, make sure it is updated regularly. Have solutions, responses and impacts thought out fully. To be prepared, is to be in part ready to stop something bringing the company to the ground. Many disasters can be avoided with good governance in risk management, spotting something early or responding in the right way can be invaluable.

“6. Reporting and managing external relationships. How do you stay abreast of what is needed to be done, how do you respond and how do you report to stakeholders and the public? How could you bring about change in your industry? Do you want to be in the limelight and fight for regulations, or do you want to play your role quietly? Governance makes sure that decision makers behave the same way when it comes to sensitive actions.

“7. Recruitment and growth. HR. Diversity. All these conversations form good forward-looking decisions and shape the future of any decent company. Behaviour and expectations of the board – knowledge needed, skills, commitment, dedication to time. You can’t expect to have a good board, if they don’t know what is expected of them.

“8. Finances. Are there ways you must behave within financial constraints? Do you forecasts include unforeseen events and are they watertight? Do you expect certain reports from the finance team? Are you regulated? Could or should you be? What needs to happen to reach that regulated status?

“9. And finally dealing with damaging challenges. Crisis Management. Disaster recovery. It’s not always comfortable thinking about these things, but they are essential conversations that need to be on paper as frameworks.

10. External scenarios. What is going on in your markets, what are your competitors doing, UK economy, wider economies and world-wide that could have an impact. Examples of where companies’ governance hindered things include Blockbusters v Netflix, Amazon v traditional Retail, consumer changes in their spending habits, Covid accelerating online and virtual working

“In recent years, the most used buzz word has been strategy. Compliance of course has been a necessary focus for a good while. But boards and leaders need to change and do so, quickly. Going forward, both strategy and compliance must be part of a much wider governance conversation.

“So, my final tip, is to build your team accordingly, be well informed by them, have a strong cohesive approach and be confident that your company can only improve with good governance!”

This was posted in Bdaily's Members' News section by Anna Toms .