Good corporate governance and company results
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Applying good corporate governance practices is one of the aspects most closely related to the success or failure of a company’s results. This is shown by the study carried out by the Diligent Institute, which shows how good corporate governance provides a significant competitive advantage over companies in the same sector.
So why are so many companies not spending enough time on good corporate governance practices? The reality is that many leaders do not know which practices to implement or how to implement them, while in other cases the importance of implementing all of them is not directly known.
However, in both cases the performance and competitiveness of the company is affected, and these are two of the many reasons to invest time and money in modernising corporate governance by following practices such as those outlined below.
The importance of modern corporate governance
In recent years, digital disruption, the complexity of the geopolitical landscape and the speed of information have increased, putting greater pressure on companies to perform well in the eyes of shareholders and other stakeholders. And this pressure is even greater when crises or corporate scandals occur, as responsibility for these often falls on the Management Board.
For this reason, the Diligent Institute began to analyse the importance of achieving modern corporate governance, and its most important findings were as follows:
- Companies with strong corporate governance (top 20%) outperformed the bottom 20% by 15% in the most recent two-year period;
- Companies with corporate crises fuelled by corporate governance deficits underperformed other companies in their sector by 35%, on average, one year after the incident;
- Two years after experiencing the corporate crisis, companies underperformed their peers by 45% on average.
You can read more about the results of the Diligent Institute’s report, whose findings reflect the importance of modern corporate governance. But what practices should be applied to achieve this?
Good corporate governance practices
Internal and external analysis, the integration of the vision of each department, the creation of specialised committees and the incorporation of specialists, the clear definition of roles and structure and cybersecurity are some of the most relevant practices in relation to the efficiency of the Management Board, which is undoubtedly key to achieving the established objectives.
However, to these practices we must add the digitisation of corporate governance, transparency and proactive monitoring, so that companies have not only efficient corporate governance, but also modern corporate governance.
Digitisation of corporate governance
The first step in digitising a company is to do the same with the Management Board, since this body has the “obligation” to lead by example, for which it must digitise its processes, incorporating real-time communication tools. As Ana Plaza, a Director on several Spanish boards, said in the webinar on the benefits of board digitalisation: “Now we all talk and we have been talking for many years about digitalisation, about what it means, and I believe that the board has to lead by example. I cannot conceive of a company that is undergoing a digital transformation process and does not have a digital platform to manage from the top”.
However, the tools that are implemented for digitalisation must also comply with a cybersecurity standard, so tools such as email or WhatsApp, which are far removed from the modernisation of corporate governance, should be avoided due to the breaches they cause in the cybersecurity of information.
In addition, to real-time communication we must add other needs of modern corporate governance such as the creation and sending of documentation, preparation of minutes or secure storage.
All of this, with the aim of facing the undeniable digital transformation of our habits and way of working (instant messaging, social networks, opinions on the internet, etc.). Finally, we stress that it is also essential to transform senior management in order to have a strategy and an understanding that corresponds to the challenges of today’s economy.
The proper functioning of the Management Board is one of the aspects most closely related to the success or failure of an organisation, which is why special attention must be paid to the role played by this body.
Its functions include guiding the company towards its objectives and acting as an intermediary between management and shareholders, functions for which full transparency is essential in order to achieve a more efficient, open and democratic administration.
Transparency is therefore very important. In addition, today it is necessary to comply with the new standards brought about by the transformation of mentalities (particularly brought about by social networks). Therefore, managers, or the face of the company, must be exemplary and transparent to ensure employee motivation and limit speculation.
Until just a few years ago, social networks and online information were simple and made up of few elements. Monitoring them was a simple task with hardly any failures, and when it did, they were errors with minimal impact. As a result, network monitoring was not an essential element of business.
However, the world (and therefore business) is changing rapidly, and the discovery, analysis and understanding of new issues is becoming increasingly important. In addition, the networks used today are much more complex, and their audiences are much larger and more demanding, so it is necessary to monitor the sentiment of one’s own company.
In addition, it is also essential to analyse current issues, such as the latest news from the competition or cyber security, which are some of the key topics. In short, the power that the public has today in the results of a company is decisive and corporate scandals can be shared very quickly with the general public and sink companies. This is why pro-active monitoring is one of the good governance practices of successful organisations.
And all these practices contribute to modern corporate governance and gain a competitive advantage, which consequently enables companies to achieve the desired results.