How to Create and Implement an Effective Governance Model

Your board of directors needs adequate guidance to ensure they’re making the right decisions and avoiding risk. But without a solid framework to back their decision-making processes, how can they accomplish their goals?

A strong corporate governance structure is an essential component of any risk management program.

Understanding Governance in the Modern Enterprise

Corporate governance is a broad term that refers to all the processes, policies, standards and practices your organization uses to make and implement decisions. The board has a fiduciary duty to ensure that these processes are in place and effectively managed.

Good governance is more than just making the right decisions all the time. It’s optimizing your risk management and business intelligence processes so you have the data you need to make decisions that will have the best possible impact on your stakeholders.

Essentially, good governance enables you to be proactive in your project decisions rather than reactive — this proactivity is key for managing risks before they can escalate into serious problems.

What Makes an Effective Governance Model?

Regardless of the specific structure your company uses, the cornerstones of good governance are always constant:

• A clear code of ethics: A formal document outlining the standards of behavior for your board members helps ensure everyone understands what is expected of them. This code should include policies for whistleblowers, harassment, company culture and any other ethical concerns.
• Straightforward shareholder voting rules: You should create an official statement defining when and how shareholders will vote on key items such as mergers and acquisitions, new board members and executive salaries.
• Director independence: Independence from your company’s management ensures your directors can make autonomous decisions, which is essential for maintaining equitable business practices.
• Regular performance evaluations: Shareholders must evaluate the performance of the board as a whole as well as that of individual directors to ensure key objectives are being met.
• Ongoing compliance monitoring: Your board should develop a strong policy that provides guidance for important compliance activities such as audits and employee training.
• A focus on diversity: Research has shown that a board composed of directors from varying backgrounds can improve the general effectiveness of your governance model by sparking deeper conversations and bridging gaps between other board members.
• A governance committee: Forming board-level risk committees of three to seven board members can help ensure your company achieves its governance goals by holding the broader board accountable for its decisions.

Creating and Implementing Your Governance Model: A Step-by-Step Guide

Any kind of organizational change can be overwhelming, and you might find it difficult to decide where to start. While establishing and implementing a corporate governance structure can be a long and complex process, it usually follows these four steps.

1. Choose the Right Governance Framework

Also known as your governance structure, your company’s governance framework is the system of rules, processes, policies and standards your company uses to guide project decisions at every level of the organization.

Corporate governance frameworks vary from company to company. For example, the governance structure of a nonprofit will usually look different from that of a corporation.

2. Align Your Framework to Your Mission

The next step is to ensure your chosen structure aligns with your organization’s overall mission. Formal documentation is essential here for future reference and ongoing amendments.

Key items to include in this document include:

• The objectives of your governance project.
• Roles and responsibilities of board members.
• Expectations for relationships with business partners.
• A list of specific, measurable performance metrics.

Establishing a governance committee during this step is extremely important. Experienced, unbiased board members with strong risk management skills can help you ensure your structure makes sense for your company and the specific risks you face on a daily basis.

3. Put the Framework Into Practice

Finally, it’s time to implement your governance framework. Your governance committee will oversee this process and ensure your board is meeting key implementation milestones.

A key step in getting your governance process off the ground is to get buy-in from stakeholders at every level of your organization. When everyone is engaged in the initiative, you’re significantly more likely to implement a robust framework that serves your business and enhances your processes rather than hindering them.

4. Monitor and Evaluate Your Framework

Continuous improvement is the cornerstone of long-term governance implementation success. You can’t take a set-it-and-forget-it attitude to your governance structure — instead, treat it as a living framework that requires regular evaluation and adjustments.

Integrated enterprise risk management (ERM) software like LogicManager can streamline performance monitoring and evaluations with the ability to pull and analyze data from anywhere in your organization. Plus, our interactive dashboards update in real time for accurate, holistic insights and well-informed decision-making.

Common Pitfalls in Governance Implementation and How to Avoid Them

Implementing a corporate governance model, especially if it involves significant changes to your company’s internal structure, can be a challenging process. Here are some examples of the most common mistakes organizations make in governance implementation and some helpful tips for how to overcome them.

Conflicts of Interest

When directors have interests that conflict with the organization’s objectives, it becomes more difficult to make objective and informed decisions regardless of the governance model. Directors should openly disclose potential conflicts — such as personal relationships or financial interests — immediately upon taking a position on the board to prevent scandal from impacting business.

Failure to Plan

While board members may not intend to leave before their term ends, it’s still important to plan for the unexpected. Sudden changes in membership can cause distractions and delays that get in the way of getting work done.

Succession planning ensures that, if member shuffles occur, they won’t interfere with the board’s ability to carry out its duty.

Lack of Clear Strategy

Misalignment between your corporate governance model and your company’s strategic vision can cause miscommunication and make it harder to achieve your goals.

Creating a clear information policy that lays out your reasoning and purpose in implementing your governance framework will help you connect it to your company’s mission and improve your chances of success.

Failure to Adapt to Changing Regulations

The risk management landscape is constantly evolving, and your company’s legal obligations change frequently as a result. You need to keep up with updates to all relevant standards and regulations at the local, state, federal and international levels to avoid noncompliance penalties and potential reputational damage.

A compliance management system helps to keep track of regulations, prove compliance, and stay on top of an ever-changing landscape by providing compliance checklists. This ensures you do not miss key deadlines and responsibilities, so you can maximize risk management effectiveness, maintain your positive reputation and prevent avoidable scandals.

Advance Governance Model Effectiveness in Your Organization With LogicManager

Effective risk management is at the core of any well-functioning corporate governance model, but keeping up with today’s rapidly changing risk landscape can be difficult on your own.

That’s where a robust ERM software solution like LogicManager can help. Our intuitive, all-in-one solution streamlines policy management for more efficient processes, easier change management and more.

Explore how our ERM software and advisory services can help you design and implement an effective governance. Contact our team today for more information.