As you do on a Friday, we have been having another read of the “Wates Corporate Governance Principles for Large Private Companies”, published in December 2018 and which will apply to company reporting for financial years starting on or after 1 January 2019. We should start seeing their impact in Annual Reports being published during 2020. The principles are repeated here:
- Purpose and Leadership. An effective board develops and promotes the purpose of a company, and ensures that its values, strategy and culture align with that purpose.
- Board Composition. Effective board composition requires an effective chair and a balance of skills, backgrounds, experience and knowledge, with individual directors having sufficient capacity to make a valuable contribution. The size of a board should be guided by the scale and complexity of the company.
- Director Responsibilities. The board and individual directors should have a clear understanding of their accountability and responsibilities. The board’s policies and procedures should support effective decision-making and independent challenge.
- Opportunity and Risk. A board should promote the long-term sustainable success of the company by identifying opportunities to create and preserve value, and establishing oversight for the identification and mitigation of risks.
- A board should promote executive remuneration structures aligned to the long-term sustainable success of a company, taking into account pay and conditions elsewhere in the company.
- Shareholder Relationships and Engagement. Directors should foster effective stakeholder relationships aligned to the company’s purpose. The board is responsible for overseeing meaningful engagement with stakeholders, including the workforce, and having regard to their views when taking decisions.
The principles are not especially ground-breaking. But they don’t need to be. They apply good business practice with a sense of conscience and responsibility for the people and environment in which the company operates.
In fact, why are these principles just for large private companies? They should apply to any company – good governance principles are not just the domain of the large and the complex, they apply to the smallest of companies. Okay, you are not going to create a board of directors and sophisticated remuneration structures for that independent corner shop down the road, but you will think about its purpose (perhaps serving the local community and making a profit to live off) and you will still assign roles to the core activities (sourcing and ordering stock, opening up and selling, cleaning the shop, dealing with customer questions and complaints, banking cash, paying suppliers, fixing the internet connection for cardless payments, etc.) and all of these will require some form of governance structure. Of course, these may all be applied the same person! But thought will be given to these governance principles and “who does what, why and when” in the same way a large board of directors with clearly defined responsibilities does. The only difference being that one person wears many hats. Small businesses generally do live by core principles and turn them into practice.
And therein lies the rub – the small business needs to be aware of these principles and operationalise them on an ongoing basis – if it doesn’t then it will quickly go out of business. But big companies are more complex and translating such governance principles into effective action and activities is going to be much harder. In fact, it can be a real headache for those tasked with taking these principles and implementing them on the shop floor. Where do you start?
The implementation of high level governance principles is a journey, and the key to any journey is know what you want your destination to be before you start. And in our experience the “common denominator” destination is always controls are in place and being performed, evidenced and monitored.
Hmmm you think to yourself, I was expecting something much more ground breaking than that!
Well not really.
Regardless of your business size and complexity, it has the same thing in common as that corner shop – they all have processes that seek to generate “value”, and those processes have inherent risks which need controls in place to mitigate them.
Looking at each of those governance principles, you need to think of that end destination, and how you are going to translate those principles into policies, standards of behaviour, processes, activities and tasks. Then assess the risks and define and implement the controls. Once you are clear on that destination, then you can work out how to get there.
You may be sceptical – governance principles are a long way away from performing a bank reconciliation on a wet Wednesday in January. My response to your scepticism is “How do you know that your principles are successfully implemented? What is your objective measure?” You can do this by monitoring your controls, and doing this on a real time basis, highlighting areas of non-performance, issues and deficiencies, failures in control effectiveness and design. You can do this by making your controls environment transparent.
Creating a real time transparent and standardised control environment does require planning and cooperation across the whole business, across all three lines of defence. But isn’t this what you should be doing anyway?
Our roadmap will help any company, large or small, take its first steps to developing a governance framework and control environment that ensures all its governance principles are implemented and operationalised.Roadmap - Principles to Control Environment
At ICE we work with organisations to provide control environment solutions that focuses on engaging and enabling all three lines of defence.