How do you set up effective internal governance?
Internal governance is a key element in ensuring the smooth running of a company. It defines management rules, supervises activities and ensures that stakeholders’ interests are protected.
Key steps to follow
- Understanding business needs. This involves analyzing the risks and opportunities facing the company, defining short- and long-term objectives, and identifying stakeholders.
- Define roles and responsibilities. Once the company’s needs have been understood, the next step is to define the roles and responsibilities of each stakeholder. It’s important to clarify who’s responsible for what, to avoid misunderstandings and conflicts. Stakeholders can include shareholders, board members, management, employees and customers.
- Establish policies and procedures. It is important to establish policies and procedures to guide the actions of stakeholders. These policies and procedures must be clear, concise and easily accessible to all relevant stakeholders. These may include policies on conflicts of interest, privacy, risk management and communications.
- Set up a monitoring and control system. This system can include internal and external audits, as well as reporting mechanisms to encourage employees to report non-compliant behavior. It can also include sanction mechanisms for policy violations.
- Evaluate and continuously improve internal governance. Establishing effective internal governance is an ongoing process. It is important to regularly evaluate and improve it to ensure that it continues to meet the company’s needs. Evaluations can include stakeholder surveys, regular reviews of policies and procedures, and assessments of the performance of the monitoring and control system.
- Establish clear policies and procedures. This ensures that all stakeholders understand the rules and responsibilities governing the company’s activities. Policies need to be tailored to the size and complexity of the business, but some policies may include a corporate code of conduct, conflict of interest policies, risk management policies, internal control procedures, regulatory compliance policies, complaints management procedures.
- Set up an audit committee. An audit committee is an essential component of any company’s internal governance. He is responsible for overseeing the company’s financial activities, managing risks and ensuring compliance with applicable laws and regulations. Audit Committee members must be independent and have financial and accounting skills.
- Implement a continuous monitoring system to ensure that policies and procedures are followed, and to detect deviations early. Monitoring measures may include regular internal controls, periodic external audits and regular reporting to the Board of Directors.
- Establish open and transparent communication channels. Open and transparent communication is essential for effective internal governance. Communication channels must enable stakeholders to ask questions, raise concerns and report issues without fear of reprisal. Communication channels can include regular reports, stakeholder meetings, satisfaction surveys and employee surveys.
Example of internal governance
Here are some concrete examples of internal governance procedures and their quantified impact:
- Audit committee: setting up an audit committee is a key internal governance procedure for large companies. According to a study by PwC, companies with an audit committee have net profits on average 4.4% higher than those without. What’s more, these companies are less likely to be involved in financial scandals.
- Code of conduct: implementing a clear and transparent code of conduct for employees can help prevent conflicts of interest and questionable business practices. For example, in 2017, Wells Fargo was implicated in a scandal involving the creation of fake bank accounts to meet sales targets. Following this incident, the bank reviewed its code of conduct and introduced measures to encourage the reporting of unethical behavior. This has enabled the bank to restore its brand image and win back the trust of its customers.
- Nominations and remuneration committee: setting up a nominations and remuneration committee can help ensure that board members are chosen on the basis of their skills and not their personal connections. In addition, this committee can help set fair and equitable compensation packages for executives. For example, in 2017 carmaker Tesla has set up a nominations and remuneration committee after investors expressed concern about CEO Elon Musk’s excessive remuneration. Thanks to this internal governance procedure, Musk’s compensation has been reduced and is now more in line with market standards.
- Internal control: internal control is an internal governance procedure designed to ensure that company processes are reliable and comply with laws and regulations. For example, in 2014, the bank JPMorgan Chase has been implicated in a high-frequency trading scandal. Following this incident, the bank strengthened its internal controls by introducing transaction monitoring, risk management and regulatory compliance measures. This has enabled the bank to restore the confidence of its customers and investors.
Conclusion
Effective internal governance is a key factor in the success and sustainability of any company. This involves clearly defining the roles and responsibilities of each stakeholder, setting up appropriate monitoring and control mechanisms, promoting transparency and communication within the company, and complying with applicable laws and regulations.
Effective internal governance can help companies win the trust of investors and external stakeholders, reduce operational and financial risks, improve efficiency and profitability, and foster innovation and long-term growth.
However, establishing effective internal governance is an ongoing process that requires regular assessment and adaptation to changes in the business environment, laws and industry practices. Companies committed to a proactive and thoughtful approach to internal governance are more likely to succeed and prosper in an increasingly competitive and ever-changing business environment.
