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CGF Articles & Editorials

BOARDS THAT CREATE VALUE: CORPORATE GOVERNANCE FRAMEWORK® (2015-07-15)

Article by Jenè Palmer (CGF Lead Independent Consultant)

It has been painful to watch the likes of Lance Armstrong, Mike Tyson and Hansie Cronje sabotage their futures through poor decision-making.  Similarly, many organisations and their boards have failed to demonstrate strong and responsible leadership qualities to motivate and drive their organisations to success.  Awareness, decisiveness and accountability are some of the business leadership qualities required to achieve remarkable performances.

The ‘buck’ stops with the board of directors and it is the board of directors who are ultimately held accountable for the success of the organisation.  However, with the business landscape changing at an accelerating rate, risk management and decisive decision-making are becoming more challenging and business failures more prominent.  A recent Harvard Business Review reports the failure rate for mergers and acquisitions to be between 70% and 90%.  According to the United States Small Business Administration, only 44% of new businesses are still in existence after four years.  Against this backdrop, how does a board create a sustainable organisation in what are clearly turbulent times?

The board is expected to ensure that there is a common understanding of the governance structures within the organisation and that relevant and appropriate information is available to facilitate risk management and decision-making across the organisation.  In order to meet these expectations, the board will need to build and implement a Corporate Governance Framework® which clearly identifies those matters for which the board will be held accountable, and those matters for which management will be held responsible.  (It is important to understand that in terms of ethics and governance, accountability means being answerable or liable for your actions, whereas, responsibility means being in charge of or being the owner of a task.)  The Corporate Governance Framework® will provide a singular schematic status of the governance of the organisation at any one given point in time, furthermore indicating areas within the organisation’s framework that requires the board’s attention.  Through the use of this framework, the board and management will be better positioned to understand the different components of governance which are important to the organisation.

The one-size-fits-all approach to governance does not create value and simply adds to bureaucracy within the organisation.  The board must establish a process to identify those governance components which are relevant to its own environment and legislative boundaries.  Consideration must also be given to the complexity of the organisation as well as its geographic and subsidiary sub-structures before finalising the governance components to be included in the organisation’s own Corporate Governance Framework®.  It is worth spending some time on these decisions as the risk of business failure is increased when there is uncertainty as to which areas of the business are important and need to be regularly monitored.  Examples can include matters such as strategy, business structure and key organisational policies for which the board is held accountable, which in turn are differentiated from matters such as internal controls, business processes and group wellness and skills for which management is responsible.

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