Unit 4 (Business policy and strategy)

 

THE BASIS OF STRATEGY EXECUTION & CORPORATE GOVERNANCE

In an era when trust in business is at a premium, and scrutiny from stakeholders is ever wider and more intense, it has never been more important for organizations to behave in accordance with their core purpose and principles in order to protect reputation and trust. Corporate governance is a vital mechanism through which boards can ensure that the behaviours of their workforce are aligned to the organization’s purpose and principles – and that corporate goals and values are translated into their people’s decisions and actions.

Good corporate governance can be summarized under three main themes. First, effective corporate governance is grounded in a clear view of what matters most to the business, the full range of risks facing the organization, and how these risks relate to the business and its strategic priorities. Only with an understanding of these areas is it possible to say what is or isn’t a risk. Second, it begins and ends with the board, which is responsible for crystallizing a clear corporate purpose, exhibiting the right values, and ensuring these are being acted upon. Third, behaviour and decisions in the ‘moments that matter’ represent the ultimate test of good corporate governance – not least when a crisis hits. When boards succeed in creating and sustaining effective corporate governance, it generates a range of business benefits that combine to create higher trust, stronger resilience and enhanced competitive edge.

Corporate governance is one of the most frequently used – some might claim overused – phrases in the business lexicon. But different people often have different perspectives on what it actually means. For some, corporate governance is primarily about legal structures. For others, it’s mainly about business controls, and the check and balances on how people carry out their work. For a third group, it’s a much wider concept encompassing the entire way a business is led and managed.

The Five Pillars of Corporate Governance

There are five (5) pillars of corporate governance. They include:

  • Leadership strategy and culture

The way a business’s leaders conduct themselves and communicate on a daily basis – and the ethics and values they exhibit in doing so – are instrumental in setting the ‘tone from the top’. This tone shapes every action, decision and relationship across the organization. As a result, the right leadership tone is the starting-point and bedrock not just for corporate governance, but also for the effective overall management of any business.

  • Structure and performance oversight

The tone from the top must be infused and embedded at all levels of the organization, through structures that ensure it is translated into everyday behaviours. Mechanisms for achieving this include monitoring by the board and its various sub-committees, assurance through functions such as Internal Audit and Compliance, and contingency plans for crisis management.

  • Risk

Risk is the pillar which lies at the heart of corporate governance, underpinning and interconnecting the other four. All components of an organization’s governance framework need to be designed and managed in the context of its overall risk appetite, reflecting the fact that managing risk – and being accountable for doing this effectively – are central to the board’s role. The right focus on identifying and owning risk equips the board to understand, analyse, prioritize and manage risks of all types, supported by the Risk & Compliance Officer.

  • Management information and controls

Clear and open reporting requires a solid underpinning of timely and accurate management information, so both financial and non-financial impacts and performance across the business can be monitored, measured and benchmarked against relevant key performance indicators (KPIs) using a balanced scorecard approach. This pillar encompasses the information systems for collecting, analyzing and reporting the information, and reward and recognition processes that encourage the behaviours that the board wants to see across the business.

  • Transparency and reporting

One of the benefits of a well-developed structure and effectiveness is that they enable the business to communicate in an open, accurate and timely way with all its stakeholders. This means interested parties ranging from shareholders to regulators, from employees to regulators, and from suppliers to environmental NGOs can gain a clear understanding of the business’s unifying purpose or ‘board mandate’, how its chosen strategy aligns with this purpose, and how it’s pursuing this strategy.

The following are principles guiding each of the pillars:

  • Leadership
  • Effectiveness
  • Accountability
  • Remuneration
  • Relations with shareholders

There are several drivers for better governance. These range from stakeholder performance expectations to the need to manage increased complexity and risk, and from various regulatory requirements to the desire to secure capital at an affordable cost. But what’s interesting is that not all drivers are of equal importance in achieving effective corporate governance. The most effective drivers are those that focus on the desire ‘to do the right thing’ rather than those that are forced on an organization as a result of regulation.

The benefits of better governance

They include:

  1. Strategic advantage
  2. Greater resilience both to sudden shocks and long-term change
  • Higher confidence among all stakeholders in the business’s ability to generate value in the future.

Ultimately, all these benefits come together in a single, invaluable asset: higher trust. An organization that is demonstrably and visibly well-governed will generate stronger trust both internally and externally – and will enjoy an inherent competitive advantage over its less trusted counterparts, in the ongoing battle for better relationships, revenues, talent and investment.

The role of the board

From setting the right ‘tone from the top’ to maintaining and monitoring business controls – and from rewarding the right behaviours to communicating openly and transparently with all stakeholders – the board plays a pivotal role in all aspects of corporate governance. These activities can sometimes be disconnected, so it is the board’s role to apply the right risk lens to every decision and action. For this to be a success, organizations need to have the right people on the board – challenging, experienced, inquisitive and with the time to understand both the risk landscape and their legal and ethical responsibilities. The board is best placed to enable and ensure effective corporate governance.

There are four broad categories of risk that the board must monitor, manage and mitigate: financial, operational, hazard, and strategic risks.

  1. 1. Financial risks are usually a regular focus of board risk discussions, with strong impetus coming from today’s increased regulatory, accounting and financial audit focus. Financial information is clearly a key element of stakeholder communications, performance measurement and strategic delivery.
  2. Operational risks are typically managed from within the business, and often focus on market, quality, compliance and health and safety issues where industry regulations and standards require. These risks may affect an organisation’s ability to deliver on its strategic objectives.
  3. Hazard risks tend to stem from major factors that affect the environment in which the organisation operates. While contingency planning is often used to help address them, there is a danger that the difficulty of controlling these risks means boards may not take them into account when formulating strategy.
  4. Strategic risks arise when the strategy gets out of line with what the business needs to do to create value sustainably, typically because of external change. In cases where a board get too ‘bought in’ to a particular strategy, these risks may be missed out from its risk register.
 
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