Managing a business is good, doing it ethically is even better. Corporate governance is an important part of CRM, and translates into several practices to create value.
06/09/2022
THE CORPORATE GOVERNANCE
8 minutes read
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GRC has become a crucial element in the proper functioning of an organization. Effective risk and compliance management means growing your project in a stable and innovative environment. However, we must not neglect corporate governance, which is a pillar of GRC, and of the company in general.
Today, corporate governance has several definitions, but in general, it refers to the way in which companies are managed.
It is a steering system that ensures the conduct, management and control of the various processes within the company.
The main goal is to ensure the durability of the company as well as the creation of value in the long term.
It is the set of processes and structures that allow to operationalize its management but also to defend the social interest.
Why is governance so important in GRC? And what are the keys to good governance? These are the questions we will try to answer together.
What are the Power of Governance ?
Corporate governance is arranged in the same terms as any other organized system. Governance results from three main powers:
The Sovereign Power
In a company, it is essential to know who exercises the sovereign function. This power is held by the leaders whose legitimacy cannot be questioned, except to ruin the company’s system.
Sovereignty is also the power from which the other powers emanate and from which it ensures their perpetuity.
The Executive Power
The executive has the responsibility to define strategies but also to implement them by taking decisions, which will then be approved or not by the sovereign power.
The one who has this power has in his possession all the information of the company as well as the steering system. It is him who directs the orientation of the main activity.
The Power of Control
Also known as the power of surveillance, it is the link between the two previously mentioned powers. Indeed, it ensures that the executive does not betray the interests of those who exercise sovereign power.
It is a complex power because it implies establishing a control over the executive power, without creating tensions or imbalance within the company.
Which Components of Corporate Governance are Involved?
Before looking at the factors that make up good governance, it is important to know what constitutes it.
The General Assembly
This is the entity made up of the company’s shareholders. They play a primordial role in the organization and are often represented as a pillar in a governance that can be described as shareholder-based.
They have political rights, notably the right to information and the right to participate in the company’s decisions to defend the collective and social interest.
The Council of Directors
When it comes to governance, we often tend to go further than the legal aspect. This is why the board of directors is controlled by the General Assembly.
This board of directors has several roles, for example to approve the accounting exercise or to nominate the general director of the company.
The administrators will thus supervise the governance by setting up a strategic monitoring and by increasing the capacities of the company in terms of talents, expertise and resources.
The Supervisory Council
Often present in anonymous companies, it sets up a permanent control of the company. This control is set up to ensure the good functioning of the organization as well as its members and partners.
The missions assigned to it are the control of the adopted strategy, but also the examination of the management reports and the annual accounts.
The Management Committee
It is composed of the employees of the direction and who deal with the current management of the company and the strategy approved by the board of directors.
Its role is to coordinate the projects carried out by the different departments of the company in order to achieve the global development of its activity.
The Executive Committee
This governance organ gives recommendations to the Management Committee with regard to strategic objectives and priorities.
Other Governance Structures
Other entities are actively involved in corporate governance, including specialized committees such as the Strategic Committee, the Risk Committee, the Compensation Committee, the Appointments Committee and the Quality and Sustainable Development Committee.
There is also a Family Council, which is part of the framework of family businesses.
Governance is an organization in itself, it is thought out in such a way that the companies walk in the right direction, always well accompanied.
What are the Models of Governance ?
Today, many companies are questioning their way of governance and their adaptability to the world around them.
Shareholder Governance
This mode of governance favors the shareholder and the maximization of his wealth. Some firms opt for this “merit” model, where the stakeholder who has taken the most risk is awarded the most remuneration according to its contribution.
This collaboration between directors and shareholders creates a balance of power between the two.
Here, the shareholder is the only owner of the company, which induces an integrity of the value for him. Therefore, this model is limited because it only takes into consideration the owner.
This is why another model has appeared that takes into account all the firm’s parties involved.
Stakeholder Governance
In this model, the leader is aware of and takes into consideration the consequences that his decisions may have on all the stakeholders.
The priority objectives are diversified; for example, one thinks as much about profitability as about the impact that the company may have on the environment.
This way of governing implies that managers align the interests of all stakeholders, without neglecting any.
What Does Corporate Governance Allow?
The art of governance involves institutions, practices and rules that allow the creation of wealth and ensure that its management is in line with the interests of shareholders.
What must not be forgotten is that for governance to be efficient, it must be preventive in order to avoid the appearance of crises and curative in order to provide solutions should they occur.
Furthermore, the employers’ organization “Le Mouvement des Entreprises de France” (MEDEF), in partnership with the AFEP, has created rules to bring transparency and real control to corporate decisions.
Its purpose is to represent and defend the interests of all French business leaders with the government and trade unions.
For the governance system to be complete and effective, it requires the combination of three main dimensions:
- The cognitive dimension: This involves ensuring the longevity of the company by providing it with all the resources (mainly external) that it needs.
- The disciplinary dimension: this consists of defining the control methods and limits within which managers can act to carry out the value creation process.
- The dimension relating to the mode of governance: as mentioned above, this choice can be made between the oldest model, which is the shareholder mode, and the most recent one, which is the stakeholder one.
What is an Ethical Governance?
Ethics comes to moralize the business world. Obviously, the activity is regulated by well-defined legal rules but also by a corporate culture that is linked to the attitudes and norms established within the organization.
Ethics represent the image that must be maintained. This image is reflected by practices that must be found in the daily governance system:
The human aspect: no matter how many regulations, controls and monitoring systems are put in place, the human element must take priority over the formal framework of the organization. The company and its leaders must place its employees at the center of their priorities.
Of course, the framework is important to give meaning to the work done, but it must not lead to abuse of power. It is absolutely essential that the framework supports freedom, not tramples it.
The goal is to find a balance between framework and freedom so that everyone can work in the best environment.
Freedom must therefore exist and play an important part in company life, but must still be at least minimally framed. This framework has a role that is reassuring and not limiting.
The individual and the collective: there must also be a balance between interests, which tend to be more individual, and the collective interests.
In a world where many relationships exist to serve personal interests, it is essential to work in a collective dimension.
Again, one should not crowd out the other: finding a balance between the two would be ideal for the well-being of governance. Everyone must work towards a common goal, without forgetting to value and recognize each individuality.
Trust: In order to put forward the individualities of a community, trust must reign above all else. Trust will allow to establish a certain harmony by freeing the words and the creativity to each one.
Trust must be a two-way street: the group must trust the leaders, but the leaders must also learn to delegate some of their responsibilities.
In addition, managers and leaders must learn not to behave in the traditional way, i.e. to give directives in a hierarchical manner, in order to increase this trust.
On the contrary, they must act as a support and referent for their teams.
Coherence: leaders play a fundamental role in the functioning of corporate governance. However, they must try to be coherent in the long term.
This does not exclude changes in methods, strategies and organizations, but it is best to do so smoothly so that they do not betray a well-established corporate culture.
CSR: Ethical governance, and this is often forgotten, implies taking into consideration the three dimensions of Corporate Social Responsibility:
- The economic aspect to develop the company in the long term.
- The social and justice aspect to preserve health, well-being and fight for human rights.
- The environmental aspect to protect the environment and rare resources.
Implementing new innovative methodologies: to move forward means not to remain based on what has been achieved, to constantly question and innovate. Among these innovations, these last years have seen the birth of a new methodology called AGILE.
This methodology allows to make the link between long term vision and short term vision. It also offers a gain in time and efficiency for all participants in the project.
Governance...Risks and Compliance
Like compliance and risk management, governance plays an important role in the management of the company.
A company’s main purpose is and will continue to be to create value, and that doesn’t happen with a snap of the fingers. Putting in place solid processes, robust risk and compliance management as well as ethical governance is what will maximize the value created.
GRC is one of the keys to good corporate driving, an article dedicated to this topic is available in our blog.
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