What Is Good Governance, and Why Do We Care?
Steven Minsky | April 25, 2017
Governance is defined by the organizational processes used to make and implement decisions. Good governance is not necessarily making only the “correct” decisions. It’s using the best possible risk management process to inform decision-making, which has the potential to impact employees, customers, other stakeholders, and the community at large.
Optimizing organizational governance is not just recommended, it’s a moral and legal obligation. Every company, no matter its industry, product, or service, impacts every party mentioned above. Good governance – by holding each part of the organization to a high standard and by enabling surprises to be managed before they happen — ensures this impact is positive.
The consequences of bad governance are manifold. Corporate scandals have dominated headlines in recent years. These failures would have been prevented if companies had governed themselves more responsibly. Instead, poor risk management and inadequate governance led to scandals including those at Wells Fargo, Volkswagen, Plains All American Pipeline, Dwolla, Chipotle, Wendy’s, and Target.
This trend can and must change. Poor governance affects all of us and is never excusable. It’s negligence, and a company that allows a scandal to unfold through negligence is not just being unjust, it’s violating its moral obligation to its stakeholders and community.
Tragedies will inevitably happen, but tragedies are unforeseeable realities of life. Scandals, on the other hand, evoke the outrage they do because (unlike tragedies) they are avoidable.
We’re fighting to make a change. LogicManager was founded on the belief that enterprise risk management is the key to implementing and sustaining good governance. Our mission is to provide the tools and services that make this possible. Below, we’ll outline the important characteristics of good governance.
What Are the Main Characteristics of Good Governance?
Good governance creates accountability.
Accountability is a fundamental requirement of good governance. Businesses have an obligation to identify and assess risk, implement appropriate controls, monitor their effectiveness, and regularly report to the board. Managers throughout the company need to be answerable for the consequences of risks, which impact customers, employees, and investors the organization serves.
Good governance is transparent.
As part of the risk management process, any employee should be able to escalate a concern, issue, or complaint for review. This means they’ll be able to clearly see:
- The status of an identified risk
- What risk assessment and mitigation activities were reviewed
- Which standard(s) were followed
Good governance saves money.
Scandals are caused by negligence, and are therefore 100% preventable. Good governance protects the organization’s reputation, avoiding consequences such as lost revenue, higher operating costs, and even class action lawsuits. Such lawsuits, initiated by customers and investors, are often accompanied by regulatory scrutiny and penalties.
Good governance is responsive.
Corporations must focus on customer needs while balancing competing interests in a timely, appropriate, and responsive manner. Companies who utilize integrated risk management services are successful in achieving goals as well as preventing scandals.
Good governance is equitable and inclusive.
A customer and employee community’s wellbeing results from all of its members feeling their interests have been considered by management in the decision-making process. This means all customers, employees, and investors should have opportunities to escalate concerns as part of the risk management process.
Good governance is effective and efficient.
Corporations should implement decisions and follow processes that make the best use of available people, resources, and time. This ensures the best possible results for customers, employees, and investors.
Good governance is participatory.
Employees, vendors, or contractors performing tasks in a process should have the opportunity to provide subject-matter expertise as part of regular risk, control, and monitoring assessments. This is accomplished by providing a risk assessment to frontline supervisory employees and vendors, which require them to:
- Identify risks in their areas of operations
- Identify what could go wrong
- Provide their expert opinion on impact and likelihood, along with the effectiveness of current controls designed to prevent those risks from happening.