The sins of superficial governance practices

More companies are organising themselves to establish or strengthen their corporate governance starting off with the setting up of effective boards of directors, appointing professional and experienced management, improving on internal controls, changing their auditors, and applying more transparency in the way they operate. Many are doing this as they prepare for a listing on the stock exchange or the issue of a bond. Others are embarking on this exercise in the process of succession in a family business. While others are strengthening their governance because they truly believe in its benefits for the company’s performance, development or growth.

Experience has shown us that many companies are still playing lip service to governance as a number of factors play against effective oversight and vigilance of finance, operations and execution of strategy. These include weak controls, no checks and balances mechanisms, absence of policies and procedures, reckless risk-taking (in Malta mostly by over-trading), bullying owners or grandstanding chairmen or chief executive officers, feeble directors who might still be unaware of their responsibilities. 

There are a number of ways to strengthen governance and I would start with the selection of independent and non-executive directors. These have to be chosen not primarily for their standing in the business and administration community and their networks, but for their competence, experience, personality and most importantly, character. There are also great benefits in setting-up board committees where a smaller number of directors, ideally independent and non-executive, are tasked with the study and consideration of issues before they are recommended for approval at board level. In this sphere, audit and nominations and compensation committees take priority. Nominations committees are also given responsibility for the selection of the key positions in the company and their remuneration and these include the top positions in general and financial management. I also give great importance to opportunities for dialogue between the independent directors without the presence of executive directors or even the chairman. A heart to heart conversation on the performance of the company and its management as well as on board leadership and management gives them the chance to identify strengths and weaknesses on the way the company is being managed and supervised. 

Plenty of sins, and bigger risks as companies play lip service to governance. 

About the author(s)

Joseph F.X. Zahra is a Malta based economist with over thirty five years of corporate leadership and business consultancy experience.