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Developing good governance

developingDeveloping good governance

The biggest casualties of the global financial crisis have been trust and confidence. Both private companies and public institutions now attract much greater scrutiny. They’re expected to explain their business practices, disclose key relationships, justify their remuneration models, discuss their succession plans and make a wider contribution to society.

It’s not just investors they have to satisfy. They also have to answer to regulators and the general public. And, as many organisations move into new markets, they’re engaging with a more diverse mix of stakeholders, each wanting different kinds of information.

The digital technologies are simultaneously transforming the way we communicate. People can see – and say – more about the organisations that serve them than ever before. New risks, including new forms of risk, are also emerging, and the regulatory burden is increasing. So the pressure to be transparent, accountable and socially responsible is greater than at any time in history.

What does this mean for your business?

Any organisation that wants to survive, let alone succeed, will have to embrace new regulations and technologies, manage new risks and prepare for the future with robust succession planning. That means many private companies and public institutions will need new governance models.

Top management will also have to assume more supervisory responsibilities, and simple compliance with the rules won’t be enough. The management team will have to communicate its governance policies, processes and organisational culture to all its stakeholders. It will also have to go beyond traditional reporting and address issues such as sustainability and tax contributions.

Transparent disclosure is the key to building trust and changing the way stakeholders and the external markets view your business. But transparency alone isn’t sufficient. Demonstrating good governance involves creating a true dialogue with stakeholders, not just communicating openly.

Redefining organisational purpose to build and sustain trust

The global financial crisis has already shown just how important trust is, and how easily it can be damaged. But in a world that’s changing beyond all recognition, the very purpose of business – not just its practices – will come into question.

Popular demand for greater organisational transparency is rising. The pressure on the environment is also mounting as the global population grows and becomes more urbanised. And social inequalities are creating discord in some countries.

Meanwhile, social networking has made it much easier for people to air their complaints – a trend that will increase as large swathes of the populace become wealthier and better educated. Some consumers may also decide to get their message across by becoming choosier about how they spend their discretionary income.

Rising consumer expectations will, in turn, give other stakeholders more power. Consumers increasingly care about the impact of business on their local communities, and governments and investors are motivated by what voters want.

What does this mean for your business?

Most executives already recognise that business has social as well as financial responsibilities. They believe it’s important to balance the interests of different stakeholders, rather than focusing solely on investors, employees and customers. But there’s a big gap between what they aspire to do and what they actually do.

Many companies only measure their financial performance, for example. Similarly, they define risk solely in terms of incidents that could upset their finances. That won’t suffice in the future. All organisations will have to factor broader, non-financial considerations into their business decisions.

They will have to measure the full impact of all their activities: not just the fiscal and economic effects, but the social and environmental effects, too. This will enable management to understand the trade-offs between different strategies and make the best decisions for every stakeholder. Making the right decisions and reporting the results will also help companies earn more trust, more custom and thus more profit.

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