What is good governance?
The Australian Institute of Company Directors considers governance essentially to be the systems that direct and control – or govern – an organisation (“Not-for-Profit Governance Principles”, 2e, 2019). Governance is about relationships. It concerns the relationships of the people involved with an organisation, both between each other and with the organisation itself, and the ways that the expectations of these relationships are understood and met.
Governance enables authority to be exercised appropriately and for the people who exercise it to be held to account. Good governance is about the effective way decisions are made and power is exercised within an organisation. It concerns itself with the board’s activities and culture, and the board’s relationship with the organisation’s management and stakeholders. Ultimately, good governance is the framework that ensures the organisation can meet its mission.
The Hon. Justice Neville Owen, who headed the Royal Commission into HIH Insurance, defined governance as:
“…the framework of rules, relationships, systems and processes within and by which authority is exercised and controlled in corporations. It encompasses the mechanisms by which companies, and those in control, are held to account.”
Good governance is tailored to the organisation
There is no one-size-fits-all approach to the many types of good governance. Every organisation must consider its own circumstances in determining how best to develop a fit-for-purpose approach to governance. This should include consideration of factors such as an organisation’s size, purpose, and structure. The way organisations are governed (and the resources available to support this) will differ between organisations. Some organisations will have the resources to assist them in developing a sophisticated governance framework whereas smaller ones with scant resources may struggle to do this, instead relying on more informal approaches to help them achieve good governance. That is not to say that good governance is more easily achieved by larger organisations. All organisations can achieve good governance.
The role of the board vs the role of management
Governance is different from management. While the board is tasked with ensuring the organisation is effectively pursuing its mission, management is tasked with the day-to-day running of the organisation. Directors set organisational strategy, risk tolerance, policy and culture. They are responsible and accountable for oversight of the organisation’s performance and regulatory compliance.
Ten principles of good governance
By definition, principles of good governance are not intended to be prescriptive. Principles guide the outcome rather than prescribe how it is to be achieved. This is mostly because one size does not fit all. Principles are intended to provide flexibility for boards to determine how to interpret and apply the supporting practices within their own circumstances. Two different organisations may demonstrate supporting practices in very different ways. However, the principles that underpin good governance can be applied universally.
Factors which may influence how a director should govern include, but are not limited to, the nature of the organisation’s activities (for example, its complexity, risks, maturity, geographical dispersion), its regulatory environment, the legislation and other regulation that governs the organisation and the organisation’s constitution. Good governance principles should not be considered a substitute for the relevant laws, regulations and standards with which organisations must comply.
The following principles of good governance are intended to provide organisations of all sizes and types with a starting point or guide for the development or review of their own good governance frameworks.
Principle 1: Mission
The board plays a key role in approving the vision, purpose and strategies of the organisation. It is accountable to the organisation’s members as a whole and must act in the best interests of the organisation.
Principle 2: Organisational culture
The board sets the cultural and ethical tone for the organisation.
Principle 3: Independent judgement
All directors should exercise independent judgment and provide independent oversight of management.
Principle 4: Skilled stewardship
Taking into consideration the scale and nature of the organisation’s activities, the board should comprise an appropriate number of directors who have a relevant and diverse range of skills, expertise, experience and background and who are able to effectively understand the issues arising in the organisation’s business. Where practicable, the chairman of the board should be independent, with the role of the chairman being separate from the role of the CEO.
Principle 5: Risk tolerance
The board sets the organisational risk tolerance and should have an appropriate system of risk oversight and internal controls put in place.
Principle 6: Diligence
Directors should act diligently on an appropriately informed basis and have access to accurate, relevant and timely information.
Principle 7: Noses in, fingers out
The board would normally delegate certain functions to management. Where it does so, there should be a clear statement and understanding as to the functions that have been delegated.
Principle 8: Executive appointment
The board is responsible for the appointment of the CEO and the continuing evaluation of his or her performance.
Principle 9: Stakeholder engagement
The board should ensure that the organisation communicates with members and other stakeholders in a regular and timely manner, to the extent that the board thinks is in the best interests of the organisation, so that they have sufficient information to make appropriately informed decisions regarding the organisation.
Principle 10: Board evaluation
The board’s performance (including the performance of its chair, the individual directors and, where appropriate, the board’s subcommittees), needs to be regularly assessed and appropriate actions taken to address any issues identified.