Effective organizational governance is essential for any organization, no matter its size or industry. It ensures that the organization is being run in a transparent, accountable, and ethical manner, and helps to guide the organization towards achieving its goals. Good organizational governance also promotes a healthy organizational culture, where employees feel valued and are able to contribute to the organization’s success.
It is important for organizations to regularly review and assess their governance practices to ensure that they are effective and aligned with the organization’s objectives.
the importance of organizational governance
A prime example of the importance of organizational governance, as noted in a blog post by the Volkov Law Group, is the Enron scandal of the early 2000s. Among other unethical business practices, the company used fake accounting to conceal its financial troubles. This ultimately led to its collapse and tarnished reputation. Had Enron followed basic governance rules, it might still be around today.
Not every case of faulty organizational governance is as extreme. For example, if you bring on new leadership and fail to update permits with the name, title and role of a new leader, you could be cited for failure to maintain documentation. This type of issue often goes unnoticed until you are faced with an inspection or regulatory action.
Organizational governance is not a new risk. You’ve probably already addressed it in your risk assessment. But once you conduct your initial risk assessment and take corrective actions, it’s easy to forget about organizational governance. Over time and through various changes, you can fall out of sync with your original governance. This places your organization at further risk.
It is important for organizations to have strong organizational governance in place to avoid the negative consequences that can arise from poor governance. This includes not only financial risks, like those faced by Enron, but also reputational risks and potential legal consequences. Regularly reviewing and updating governance practices can help organizations avoid these risks and ensure that they are operating in a responsible and ethical manner.
Additionally, organizations should consider implementing internal controls and processes to monitor compliance with governance policies and identify any potential issues. By taking proactive steps to address organizational governance, organizations can protect themselves and build trust with their stakeholders.
how to minimize your risk
What steps do you need to take to reduce your organizational governance risk? There is no one-size-fits-all answer. But it’s important for your board and executive management to agree on how they will work together to build a risk-intelligent organization.
In today’s environment, boards are scrutinized by regulators, shareholders, the media and analysts. Therefore, everyone in your organization must be open, transparent and collaborative. You must also take the time to address your risks with thoughtful action plans.
Volkov Law Group suggests these five steps to prepare for and prevent risk exposure:
- Increase the diversity of your board and management team. This will invite broader and differing points of view.
- Practice due diligence. Choose leaders who are qualified and competent to fulfill their roles and requirements.
- Share information in a timely manner. Open communication between the layers of leadership will ensure that information is shared and acted on quickly.
- Prioritize your risks. You cannot address every known risk, but you can prioritize the most critical ones for your organization.
- Evaluate your leadership. This will identify strengths in your leadership team that you can capitalize on, and weaknesses that you can work toward improving.
Effective corporate governance and stakeholder management practices can create several benefits for a company and its stakeholders. According to BoardPro, benefits may include:
- Improved productivity and efficiency
- Increased transparency and error visibility
- Faster time to consensus, leading to smoother operations
- Better performance that leads to reputation-building
- Better alignment of mission, vision and core values
- Improved financial sustainability
To effectively manage your corporate governance risk, your leadership team must actively identify risks and seek ways to reduce them. You must also accept that some risks are inevitable. But you should still consider risk-sharing or risk-reducing measures through outside assistance in your action plans.
integrating governance, risk management and compliance
In the age of government regulation, public focus on corporate responsibility, and third-party business partnerships, you can no longer afford to operate in silos. One approach that many organizations are taking is to integrate governance, risk management and compliance (GRC).
Historically, these functions have often worked independently of each other. When that happens, individual departments can become reluctant to share information or resources with each other. This results in miscommunication, redundant tasks and an atmosphere of mistrust, all of which hinder your ability to succeed.
The purpose of GRC is to encourage company wide cooperation. This helps you achieve results that meet internal guidelines while reducing risks, costs and duplication of effort.
Investopedia defines the three integrated functions as:
- Governance — “the overall system of rules, practices, and standards that guide a business”
- Risk management — “the process of identifying potential hazards to the business and acting to reduce or eliminate their financial impact”
- Compliance — “the set of processes and procedures that a company has in place to make certain the company and its employees conduct business in a legal and ethical manner”
GRC will apply differently to every organization, but it usually involves integrating core business functions like information technology, human resources, finance and performance management, according to Investopedia.
corporate governance keeps your organization strong
Corporate governance is a necessary part of any organization. It helps you stay on track with your mission, principles, processes and procedures, and keeps you competitive and ethically sound. Integrating governance with risk management and compliance streamlines the risk process and opens communication between departments.
By improving your organizational governance, you can secure your reputation within your industry and community, earn the trust of your employees, solidify your position and keep your organization strong.
In conclusion, strong organizational governance is essential for any organization to operate in a transparent, accountable, and ethical manner and to achieve its goals. It is especially important to regularly review and assess governance practices to ensure they are effective and aligned with the organization’s objectives. By implementing internal controls and processes to monitor compliance with governance policies, organizations can minimize their risk of financial, reputational, and legal consequences. Taking proactive steps to address organizational governance and building a diverse, competent leadership team that promotes open communication and prioritizes risks can help organizations protect themselves and build trust with their stakeholders.
If you have any questions, feel free to reach out to Benchmark or Rob.