Why are governance frameworks important?

Why are governance frameworks important? What makes them so crucial to a well-functioning boardroom? This guide explains all. 

Cautionary stories about the failures of big businesses like Enron and Blockbuster rightly focus on how corporate blunders led to the company’s demise. Whenever there’s a story about a ‘too big to fail’ business, analysts dig in and find a company culture that’s weakest at the core. 

How do these failures happen? What can proactive board members and executives do to prevent them from affecting their organisations? 

It comes down to governance frameworks. Organisations that adopt a strong corporate governance framework — and ensure that everyone is kept accountable — have the strength to resist market tumult. Strong corporate governance prevents ill-intentioned stakeholders from wreaking havoc on business assets and operations.

Sometimes called a governance model, a corporate governance framework is designed to lay out accountability guidelines and responsibilities for board members and directors. Aligning key stakeholders’ interests is one of a framework’s primary goals. This alignment often takes the shape of crafting a vision or mission statement that the organisation will follow moving forward. 

Governance frameworks also consider all the smaller details, practices, and procedures that build an organisation’s success. Successful governance models clearly describe how stakeholders, including executives, board members, employees, and shareholders, are expected to behave. These guidelines are designed to protect the interests of the stakeholders and a company’s customers as well.

Regardless of how large or profitable a business is, operating without a governance framework is a recipe for disaster. Boards and executives that follow guidelines for finance, risk analysis, and reporting in a governance model can avoid regulatory missteps. They can answer even the hardest stakeholder questions because they’ve already established processes to gather the needed information. 

It’s quite the opposite for businesses that don’t follow governance guidelines. Organisations with boards operating outside of a well-defined structure aren’t able to respond to shareholder or employee concerns. 

They have to rush to gather data and can’t ensure their reports are accurate. Because they don’t operate with regulatory demands in mind, these organisations often find themselves on the wrong side of the law.

There are five principles of corporate governance that board members and directors should always keep in mind. Each of these areas should be clearly outlined in framework documents.

Board members have a responsibility to ensure the well-being of an organisation and steer it away from risks. In essence, a board is part of a checks-and-balances system. It’s responsible for checking that a company’s decisions are in line with its vision and mission. 

If you were elected to a board by shareholders, you are also responsible for ensuring that shareholder desires are met whenever possible. Remember that you ultimately answer to shareholders.

A board should always be able to back up its decisions with sound reasoning. As a board member, you’ll often be asked about why you made certain choices. Keep yourself accountable by providing clear, honest answers. The more you connect your decisions to an organisation’s mission, the easier answering these questions will be.

Board members must be aware of the risks that a company faces. Tap into your prior industry experience to identify risks as well as areas of opportunity. Staying aware of the risk landscape that surrounds your organisation is essential to being an effective board member.

As a corporate leader or a board member, you’re not in it for yourself. You’re there to ensure that the interests of stakeholders are met and all regulatory laws are followed. That means that you must put your own personal interests aside and think only of what is in the best interests of the organisation.

Boards that operate in secrecy rightly draw suspicion from shareholders and regulators. A board must present reports and financial disclosures to stakeholders on a regular schedule. Doing so ensures that your organisation is transparent and trustworthy.

Understanding an existing governance framework can be challenging for new and aspiring board members. Studying governance models as part of a programme in corporate governance can be especially helpful. If you study with the corporate governance institute, you’ll have the opportunity to learn about frameworks from respected executives. You’ll learn the ins and outs of governance frameworks so that you’re able to identify your key responsibilities as a board member.  

Crafting a new governance framework poses unique challenges, too. Even experienced board members may find the task of laying out guidelines and complying with ever-changing regulations difficult. Training in corporate governance will provide you with helpful insights and practical advice on crafting an effective governance framework. 

Of course, the right corporate governance framework for your organisation depends on many factors, including industry-specific regulations and practices. Prepare to lead for the future by enhancing your understanding of frameworks through a diploma programme in Corporate Governance.