A governance framework is essential for modern governance and legal operations; it directs how people interact with the organization, with regulators and with stakeholders to closely guide and monitor operations.
Acting as a supporting structure to entity management and compliance, a governance framework provides the trunk from which the various branches of compliant operations can grow. It is through governance that companies and other organizations stay on the right side of regulators, in terms of filing requirements as well as aspects such as company culture, remuneration methods and transparency of operations.
A governance framework helps to center an organization’s approach around common themes, including who has a voice, who makes decisions and who has accountability. The governance framework acts as an essential supporting structure, a framework of rules and practices by which the board ensures accountability, fairness and transparency in both how the company runs and how it communicates with its stakeholders.
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What makes a strong governance framework?
A strong governance framework organizes operational, risk management, reporting and financial processes to ensure that the board gets continually updated. Rules and systems create the robust framework for governance, and the framework provides the structure that drives the strategic plan. A strong governance framework is integral to organizational success: it helps boards make considered, data-based decisions. A good framework can expose gaps or weaknesses within the board or management. Beyond the broad governance processes, a solid framework supports the company in numerous ways to effectively connect leadership with operations. A governance framework is an important basic tool for effective board oversight; the process of building the framework is often just as important and meaningful as the end result. Governance brings authority and accountability while enabling effective decision-making in an organization.The importance of governance frameworks and structures
The importance of corporate governance in today’s progressive and aggressive business environment cannot be denied. Corporate governance allows companies to put their positive traits firmly on display. With these intentions made visible to all, companies are more likely to be held accountable for their behavior and actions — and thus more willing to distance themselves from duplicity. Businesses today are held to incredibly high standards by investors and customers alike; being honest and open about process and operations counts for a great deal. Both shareholders and consumers want to see companies operating with integrity and transparency. Business advisory firm PwC calls corporate governance “a performance issue” as it provides a framework for how the company operates, stating that corporate governance should encompass:- The company’s performance and the performance of the board
- The relationship between the board and executive management
- The appointment and assessment of the board’s directors
- Board membership and responsibilities
- The “ethical tone” of the company, and how the company conducts itself
- Risk management, corporate compliance and internal controls
- Communication between the board and the C-suite
- Communication with the shareholders
- Financial reporting.
How to start building your own governance framework
Governance frameworks exist to ensure that a company remains in compliance and operates within legal boundaries. This means that any governance framework must take into account the local regulations wherever the organization has entities located. The governance framework then dictates the governance operating model appropriate to the aims of the organization. To start building your own governance framework, aim to answer these questions:- Who are the people with authority in your organization?
- What information do those people need to access, and when?
- What does the organizational structure look like?
- How does the structure influence how decisions are made?
- What are the organization’s reporting obligations?
- How does information need to flow around the business?
- What is the relationship between entities - and does this present any challenges in terms of accountability, authority or responsibility?
- What is the relationship between departments and stakeholders?
- Where does the organization have entities based - and does that influence obligations?
- How does the organization manage compliance risk?
Governance structure for portfolio companies
A strong governance framework is built to guide an organization in how it can achieve accountability, authority and sound decision-making. By contrast, a weak governance framework will cause a breakdown in the stages of the investment process and affect overall economic growth. For portfolio companies, a governance structure should ensure that all shareholders are provided with the opportunity to vote on matters of governance. All shareholders should have a voice and foundational rights. Portfolio companies should conduct business with respect for both the shareholders’ interests and the capital that has been entrusted to them. A portfolio companies’ governance structure should take the following into account and demonstrate:- The company’s ability to create value - and yield long-term profits - in response to demand
- The ability to facilitate investors’ predicted earnings as a result of accurate and timely disclosure
- A commitment to ethical conduct as a member of society
- A commitment to fulfilling corporate social responsibilities including, but not limited to, the organization’s environmental impact.