What is Governance? What's It Involved?
Good governance is important for the smooth and effective functioning of the organization. It is a broader concept; and includes oversight and practices to establish an organization’s strategic direction and achieve its purpose and make the best use of available resources.
In this article, we'll take a look at what governance means, why it's important, and the steps to establish a strong governance framework.
What is Governance?
Governance is defined as the systems that control and operate an organization’s decision-makers and the actions that hold its people accountable. This includes rules, laws, relationships, systems, and processes. Ethics, risk control, facilitation, and administration are all part of governance too. Governance is subtle and may not be easily observable.
Governance is much more than the organs of the organization. In a broad sense, it is about the culture and institutional environment in which the public and stakeholders interact among themselves and participate in public affairs.
Why is Governance Important ?
Governance is the heart of any successful organization. A company or organization needs to achieve its objectives and drive improvement, as well as maintain legal and ethical standing in the eyes of shareholders, regulators, and the wider community.
The broader goals of good governance are as follows:
Creating a culture of integrity
A culture of integrity exists when employees recognize top managers as honest, trustworthy, and ethical and there is transparency in working. This sets a positive example and allows them to be respectful, even during conflicts.
Good governance helps in maintaining healthy relationships between employers, employees, and co-workers. It leads to effective relationships in an organization.
Achieving sustainable growth
Good governance has always been recognized as a critical tool for advancing sustainable development.
Achieving sustainable development is a participatory and constant process to achieve economic, environmental, and social objectives in a balanced and integrated manner.
It provides decision-makers with a framework for working systematically across sectors and territories. Ultimately, it helps standardize processes for consultation, negotiation, mediation, and consensus-building on priority societal issues where interests differ.
Holding individuals accountable
Good governance is also about measuring performance to achieve targets and takes appropriate actions, in case of non-performance.
The governance structure helps you work with updated systems and avoid mistakes due to redundant systems. When all rules are appropriately followed and every detail is recorded, it minimizes the chances of careless errors.
Benefits of Good Governance
The benefits of good governance which can have a greater and positive effect on the business are as follows:
Build a strong culture
Consistency in good governance creates a culture of brilliance in an organization. The leadership's behavior defines the behavior of the personnel. Good governance helps reinforce this sentiment.
Develop a reliable reputation
Good governance leads to good business outcomes, which in turn leads to better performance from the organization's employees. All of this has a positive effect on the reputation of a company.
Each organization has issues, problems, and nonconformities. An organization with good governance can eliminate these by diminishing the negative impact of these issues and containing the risk internally.
When major stakeholders such as employees, suppliers, and the wider community participate in decision making together, it creates a greater vision for successful outcomes. When each stakeholder has sufficient responsibility, it increases the chances of an organization reaching its goals.
Improve financial sustainability
Good governance reduces the fear of safety, performance, and warranty concerns, which may dangerously affect an organization and its stakeholders. This improves financial stability and safeguards the interests of customers, staff, suppliers, and shareholders.
An organization that represents stability and reliability has a greater chance of attracting investors of premium quality. It also increases opportunities to borrow funds at a higher rate.
Difference between Governance and Management
It's easy to mistake good governance for good management, but both are different. Let's take a look at the finer differences between the two concepts:
Governance refers to the norms, strategic vision, and direction that formulate high-level goals and policies. Management runs the organization in line with the broad goals and direction set by the governing body.
Governance directs the management to ensure that the organization is achieving the desired outcomes and it ensures that the organization is acting wisely, ethically, and legally.
On the other hand, management makes operational decisions and policies to keep the governance bodies informed and educated. Management is always responsive to requests for additional information if required.
The role of governance is to ensure that the organization is working in the best interests of the public, and more specifically the stakeholders who are served by the organization’s mission
The management is responsible for implementing the broader vision and goals of governance.
Steps to Establish Good Governance
Let's take a look at the important steps to establish good governance:
Appoint a Suitable Board
A Board should be balanced and competent if you wish to achieve success from governance.
Qualified directors are a part of good governance who understand the business properly, and also provide a good point of view in the meetings.
Regularly review the board
The make-up of the board is crucial and can build or destroy the success of the corporate governance of the organization. A review of your board allows you to make improvements when needed and keep things up to the mark.
Build a strong foundation for inspection
Develop a strong system to monitor and evaluate the actions and responsibilities of the board and management. A board must have a clear view of management’s actions and be available while making all key decisions.
Make risk management a priority
Initiate a risk management plan and internal control structure that is beneficial to your business and aims to assess its effectiveness regularly.
Plans of disaster recovery are critical for any business, and a key component of good governance.
Promote honest reporting
Reporting is a critical part of corporates. Governance should aim to set up seamless processes for audits and other financial reporting, to ensure transparency and accountability.
Provide appropriate information
Being transparent with stakeholders is quintessential. It can be accomplished by providing appropriate information at all times.
It includes declaring all transactions of parties involved as well as the interests of all the directors of the organization. If directors have any interests outside the organization, it influences their decision making.
This level of transparency promotes the confidence of stakeholders and lowers reputational risks.
Integrity is not limited to honest reporting. An organization must encourage a sense of integrity in all actions, and ensure employees have sufficient incentives to put it into practice.
Good governance is a cornerstone of success and development for a company. It is a work in progress and needs to be evaluated at all times, so an organization doesn't lose its way and forget its mission.
If you're looking for a better way to manage governance in your organization, take a look at GRC software by VComply.
About the author
VComply Editorial Team