Corporate Governance for Dummies

In business, the term ‘Corporate Governance’ is kicked about like a jargon football (even we’re guilty of doing that too – our tagline is ‘it's time to revolutionise how we do governance’). 

It’s one of those phrases that encompasses so many elements of the day-to-day running of a business that it can mean everything and nothing. So, today we wanted to do a ‘governance 101’ to sweep away some of the business patter and clarify what it really is, and why it matters to you.

It’s all about structure

The top line is that governance is all about the structure that underpins a company. Formulated by the board of a company, governance seeks to set the rules and values that define a company. 

A lot of what makes up governance is very legalistic – for listed businesses in most countries, there is a legal requirement that certain duties to those who have an interest in the company are fulfilled.

Practically, this means that boards will have to put in place the day to day practices that make a business tick. This includes setting clear and objective aims for the business, adopting the strategies to achieve them, appointing the leadership to effect them, and communicating progress to people who own parts of the company – or shareholders.

The vast majority of what corporate governance revolves around is making sure that the mechanism that powers a company is well built and well oiled, and can adapt and change as different opportunities or challenges arise.

This permeates through every level of a business – from making sure that a board makes decisions, communicates and votes at the very top, through to making sure that the management structure works at all levels.

It’s all about balance

At the core of governance is balancing the interests of different groups with a stake in the company. For example, say you run a listed business with 2,000 different shareholders in the company – 2,000 people who each own a small piece of the pie. At the other end of the company, you will usually have a small board of directors who, though they may not own the majority of the company, will control the way that a company runs. 

As is the case in any organisation, it is very rare that 2,000 people will all unanimously agree on the best direction for a business, which poses a serious challenge for the board of a business: how do we find consensus in all those voices, balance all those interests, and produce a set of objectives that satisfies all shareholders? The answer is, of course, you cannot.

As a result, governance is a two way road between stakeholders in a business and its directors – it looks at what shareholders want out of a business, and holds the board to account to ensure that their requests are actions in a way that is satisfactory to the greatest number of shareholders. 

Governance today

Up until relatively recently, there was a bit of an unspoken consensus in the world of business that the only thing shareholders care about is profit – because if a company turns a healthy profit, then shareholders get their dividends at the end of the year and everybody is happy. 

This approach to business would make governance relatively simple. “It doesn’t matter if the products a company sell are sourced ethically, or if workers are underpaid, or if the offices are carbon neutral – it only matters if the company pays out an inflated bonus to shareholders from its profit pot.” 

However, the reality is that it’s not nearly as simple as that. Firstly, investors look for much more in their investments than just a profit (that’s still important, but it’s not the only thing nowadays). Increasingly, people care about things like being environmentally friendly, or socially responsible (or ‘ESG’ to throw more jargon into the pot). 

There’s a business case for it too. Ensuring that a business is run with the environment and social good at the core of its growth strategy is no longer just a feather in a business’ cap. It’s becoming clear that businesses that will survive in the years and decades to come will need to do more than just nod to these topics. It’s not a case of choosing profit or the environment – the environment is the key to long term success. 

It’s all about transparency

Every year, usually between April and July, the headlines in business papers are awash with ‘AGMs’ or Annual General Meetings. These is the big yearly meetings where company boards and senior management present their strategies, successes, failures, profits, losses (etc.) to their shareholders.

They represent the cornerstone of the corporate governance calendar – and usually define the direction of the business for the next 12 months. 

In theory, the AGM should be the moment when a company lays down its cards, warts and all, to all those with a share in the business. A forum where the board can showcase its initiatives, explain its proposed strategy, show how the business is growing, and where it may be shifting towards more ESG-centred goals, for example. 

The problem is that, with more and more investors living internationally, company offices spread across continents and COVID-19 stilting travel internationally, communicating with shareholders, and even between board members, has never been more difficult. 

That’s where Shaparency comes in. We take all the day-to-day grind associated with governance – voting, board meetings, shareholder communications, document management – and put it all on a highly secure cloud. Corporate governance is changing, and Shaparency is helping businesses across the world adapt to the new climate.