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Principles of Corporate Governance

I have been asked by several people what corporate governance is? I tried to explain over a dinner what it is. Later I was asked to make a speech about it. The concluding remarks were “now we understand it. Thank you!”

Having worked in large corporations you have a good grasp of it. Even if I am nor the greatest expert of the matter, I happy writing about it!. If need to share our knowledge. But if you are a startup or a women owned SME you need to understand why you should try to plan for corporate governance and it is well appreciated when they understand it well. This can be the way towards development.

If we need to go fast, we can go alone. If you we need to go far, you need to go together.

I have divided the principles of corporate governance into two. You need to have some prerequisites or foundation and /or adhere to some basic principles and when you have them all of them you will be walking in the path towards corporate governance. 

I have served in the boards for more than totalling 125 years and chaired a part of them for a total of 25 years in being on the boards of several different companies at the same time. During one particular year, I was serving up to 7 company boards simultaneously. When I looked around, I saw that this is quite a unique experience that I should be able to give back to the society what I know. 

Prerequisites of corporate governance

  1. Acceptance of the entity as a separate corporate identity that is different from the board or the shareholders. 

The first prerequisite is the acceptance of the fact that a corporation is an independent legal entity. This entity is different from the chair of the board or its members or the majority shareholders who have a seat in the board. Even if they have appointed you, the task of a board member should be the recognition of the corporate identity of the corporation which may outlive all the individuals serving in the board. Sustainability of the corporation must be the prerequisite before solving other issues. 

Or the lives of corporations are getting shorter and the life span of human beings are getting longer.

When you talk about a tailor, her name and the legal entity may have the same name. As it is a small or micro enterprise, nobody bothers about it. In this entity you may not be able to establish a board no matter how much you try. Whatever the boss says is the rule and no other ideas or no objections are required or asked. You probably won’t be able to survive in such an entity as a board member. One person’s ideas are enough for the survival of the company, no other ideas or suggestions are needed. However, ideally the corporations are expected to live longer than their founders. 

  1. Awarenessof the risks

Risk calculation for the survival or the sustainability of the corporation is a necessary calculation that needs to be attacked continuously and seriously. The key to a company’s survival or prosperity is to know the landscape of risks that are surrounding the company. Boards are always at the forefront of this risk apprehension effort, not just because they are in a position of responsibility, but because in their roles they usually anticipate the future, if not decades forward but definitely at least some ten years ahead. Board members usually have significant and relevant experience for risk calculation. With this experience comes the ability to pinpoint the risks as possible, and categorize them as immediate, short or long term and whether they are small, medium or large. Of course, no company can eliminate all the risks or evaluate them all precisely.

  1. Transparency and accuracy

This is the most valuable perquisite. It is the role of the CFO within the company. Board members need to know the exact financial situation the corporation. Financial records and all the financial statements need to reflect all the true transactions of the company at any time with utmost accuracy. 

This is essential, but not enough. Board members must also understand and report any conflicts of interest, severe conflicts over strategy and such issues that may have a risk to the company.

This is the most practical principle, and probably involves paperwork. Boards are responsible for documenting and reporting everything that is in their jurisdiction or what is expected from them as clearly and thoroughly. 

  1. Accountability

No matter what decision the board takes, they should be able to explain why they have taken this decision. Why they have done what they done or what decision they had made. What decisions they had made and why they decided that way requires a good secretary general to the board. The record keeping of the board meeting needs to be taken seriously. People may tend not to remember after a time. Everything must be written and signed properly.

Important corporate decisions will inevitably require a set of different expertise and different ideas. But these different ideas are signs of good corporate culture and show that everybody can raise their point of view and everything for the good of the corporation, is discussable around the board table. The members are concerned, engaged and they are diligently putting their views forward at the board table. 

When the above four perquisites are in place then the board can be established, and we can say that corporate governance shall start to flourish. 

Principles of corporate governance

  1. Responsibility

A board is not only responsible for fulfilling shareholders’ wishes but also securing a life term of the corporation for the legal entity and satisfying the wishes of all the stakeholders including the employees’ needs and social requirements of the country they are registered in.

Shareholders’ benefits cannot be different from the long-term profitability of the entity but there are also obligations of the company not only towards employees but also towards the environment. The responsibility lies in protecting the company against all risks, challenges, and towards success while staying true to its mission, respecting the law of the land, and the sensitivities of the politics around them. It’s a difficult job and it involves a broad range of responsibilities. The overall strategy focus lies with the board. Market trends and major risk expectations in the market need to lie on the table and discussed before it is clear to everybody in the market. In order to figure out what the composition of the next board must be or who the CEO should be and what the next board member should be lies in the functions and strengths and weaknesses of the present board. 

  1. Impartiality

Boards must strike a careful balance between their various responsibilities. The people who answer to them, and the people they answer to needs to be identified properly. 

They should approach every decision with an independent mindset, ensuring without neither personal interest nor interest of those of who are close to them in order to attain correct business decisions.

While impartiality is easy to agree to in principle, it’s easy to slip out of practice. Personal beliefs and friendships can cloud a board member’s objectivity. A board must know how this can happen – and how subtle it can be. They should take good care that the decision they have taken is not under the influence of the people who will be benefiting from this decision.

Boards must also report any conflicts of interest, any conflicting views s over strategy or anything that brings risks to the company with decision. 

  1. Human resource orientation culture 

This is a principle necessary for success of the corporations. You need to have an idea, a process and some capital to make all the above principles work. For a successful corporation you need have people or in other words employees. We need to remember at every count that the human resources are scarce resources as well.

Especially after great resignation, corporations cannot effort to see that they lose their key employees. Many people have already left and some others are planning leaving. The concept of employee attrition has reached to an unprecedented level.

Generally, company success comes from personal touches. For example, the success in accounting and planning requires detail orientation and if you have a right person with right outlook in this position you can make a difference in the corporations’ competitive edge. People with professionalism can make their companies score better than their competitors. Whether the corporation is a small and large corporation, human resources are key to make a difference in the marketplace. Companies more and more becoming interested in creating a human resource culture for themselves in order to make a difference in their respective markets. 

  1. Environment orientation culture

Many corporations have inputs and outputs or products or services. The process in creating these outputs needs to be environmentally friendly. Globally we have one earth and any environmental hazards we create are being detected globally and all discussions or decisions should involve a review of the environmental aspect or the outlook of the board towards environment. Sustainability of the corporation lies on how environmentally friendly the output is produced. 

  1. Digital and AI focus

When we are trying to cut our costs everywhere, digital orientation and artificial intelligence are quite operative tools for corporate savings.

Lately when we say digitalisation, we remember that banks are asking us to do what their clerks have been doing for us in the past. This is a correct route. If you are digitally connected, you enter an information once in the same corporation, and even share this information with your suppliers or customers, it is clear that you will eventually save time and costs. 

When we say artificial intelligence, we unfortunately remember hearing a tape especially, when are we in need for a solution to our problem with the services or products of a corporation: If you are asking for copy of your invoice, please dial 1, if you want an explanation of this issue, please dial 2 and if you are inquiring for another issue, dial 3 and the tape goes on until 8, if you didn’t follow up the choices please dial hashtag or star to listen again, and if you want to talk to the operator dial 9. All this means in some way that “Please don’t occupy our operators unnecessarily, solve it yourself with our AI.” However, customers are also needed for our corporate success. We need our customers as well as our employees. The blend of this issue needs to be given good attention. We need to have careful look into every case in our corporations. We wish to create solution, and we need to see that solution doesn’t become a burden.

Of course, artificial intelligence (AI) is more than this. We want to save costs. It will be great if we can save on the number operators or put less burden on our operators, we must also consider the issue from the perspective of our customers.

In concluding the above points, where I have four prerequisites (recognition of the separate corporate identity, awareness of the risks, transparency and accuracy, and accountability) for a good corporate governance. 

Still, we need more principles for good corporate governance. I identified that I have five working principles to adhere to (responsibility, impartiality, human resource orientation culture, environmental orientation, and digital and AI focus) on the path for a good corporate governance.

Without the first four prerequisites in place and the success of the last five working principles it will unfortunately be a rocky road.

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