What you need for a really effective governance review

The importance of good governance is clear. Numerous corporate collapses have been attributed to governance failings; Australia’s Hayne Royal Commission into the finance and banking sector identified many consequences of poor governance; and academic studies have shown performance is related to governance.

However, what is less clear is how best to achieve good governance.

Increasing diversity on boards or focusing on culture can positively influence governance. But corporate governance is much more complex than such broad approaches address.

Governance of an organisation comprises many elements including individual directors, the board, compliance structures, decision-making control and risk management frameworks, which interact with the broader organisation to influence performance.

How to drive good governance

Driving performance through improved corporate governance requires an understanding of both good governance principles and the broader organisational system.

Chartered accountants can be well placed to make these linkages.

CAs have deep insights into the organisation as a whole and the interaction between various parts. If this is coupled with a deep understanding of governance (either through their own training and experience or by partnering with a governance expert), they can help lead a governance review to make improvements and drive performance.

But what is a governance review, why is it worth doing and how should it be approached?

What is a governance review?

Often people think of a governance review as a survey of directors to evaluate performance. This may be part of the process, and it can provide valuable insights, but governance comprises much more than just the group of directors around the board table.

Corporate governance can be defined as “the framework of rules, relationships, systems and processes within and by which authority is exercised and controlled in corporations” (ASX Corporate Governance Council Principles and Recommendations, third edition).

It encompasses much more than simply the capability and performance of the directors.

A governance review can encompass all the elements of a governance framework. It seeks to analyse and interpret current performance against best practice to identify possible improvements.

It is not about looking for failings per se, but more about finding ways to maximise performance of the governance system.

What benefits can a governance review deliver?

We often hear of the high-profile corporate failures attributed to poor governance (Centro, James Hardie, HIH etc.), however numerous academic studies have also shown that governance is correlated with performance. Board diversity, director independence, remuneration and ownership structure have all been shown to influence performance.

“Board diversity, director independence, remuneration and ownership structure have all been shown to influence performance.”

A governance review can identify areas for improvement to help an organisation meet its compliance and reporting requirements, while also driving strategy and performance.

The benefits of a review process include:

• assessment of how well the current governance structure is helping the organisation meet its compliance and risk management obligations
• indication of whether governance is supporting or hindering performance and strategy
• identification of areas for improvement and a pathway to change
• clarity of roles and responsibilities and reflection of current performance
• review strategic planning and decision-making processes
• assesses the robustness and appropriateness of risk management frameworks.

How to do an effective governance review

To be effective and deliver actionable results, a governance review needs to be well planned and managed. It needs to consider the circumstances of the organisation and have defined objectives. The methodology used must be capable of achieving those objectives and not simply a one-size-fits-all approach.

The four key elements of a good governance review will include:

• Establishing the purpose. It is important to understand why the review is being undertaken. Are there particular circumstances that have required it or is it part of an ongoing commitment to good governance? Understanding why the review is being undertaken will help frame the objectives and approach and will also help ensure participants are engaged in the process and outcomes.
• Set the objectives. The review can have a range of outcomes, from seeking to assess current performance and identifying incremental improvements, through to addressing specific issues and making significant changes. These need to be defined upfront.
• Undertake the process. Having identified the purpose and objectives, a process can be developed to collect and analyse data and meet the objectives. This stage will also identify who will be involved (board, executive, external stakeholders), methodologies (interviews, workshops, surveys, document review, data collection) and approach (internally or externally facilitated).
• Report on findings, create a plan. The review process itself will not deliver benefits, only insights. To make sure the review leads to improvements, a clear implementation plan needs to be developed. This plan will identify and prioritise areas for improvement, assign responsibilities and set timeframes for reporting and achieving objectives.

Reviewing and improving the governance system of an organisation can provide many benefits, from reducing the risk of failure through to improved financial and organisational performance.

However, it must be done in a structured way, taking account of the organisation’s context. It requires a clear set of objectives, a robust and tested process and, ultimately, a clear plan for improvement.