The What, The Why, The How of Corporate Governance

By Kerry Gray

If you're reading this introduction, I can only assume you're thinking of joining the world of corporate governance or wondering if your organization's governance practices are providing maximum value.
Perhaps you've been asked to join a board on one of the over two million non-profit organizations. Perhaps you're considering letting your name stand for election to a cooperative or a publicly traded for-profit corporation.
Alternatively, you've worked hard and climbed the corporate ladder and are moving into a position that involves the executive suite, with governance responsibilities and direct contact with a board of directors. Regardless of how you arrived at this junction, it's flattering, exciting and an opportunity to make a positive impact or a significant difference, but it's also a serious responsibility.
Some issues to consider include: understanding the purpose and importance of corporate governance, your role, responsibilities, and legal obligations. In addition, you're likely asking yourself, "Do I have the knowledge or experience in the skills needed, such as strategic planning, budgeting, financial and management accounting, internal controls, performance management, organizational culture and general management knowledge or business acumen?" In today's environment, the position of a board member or member of the executive suite requires knowledge in multiple disciplines.
The information provided here will provide a solid base on which your organization can gauge their current Corporate Governance practices, or if you're just beginning your excursion into this world it will get you off to a great start and allow you to hit the ground running with confidence.

• Language: English
• Publisher: Tellwell Talent
• Release date: Jun 2, 2020
• ISBN: 9780228821076

Kerry Gray

Kerry D. Gray CPA (CMA), MBA has enjoyed a successful career in financial services and government finance. During this time, he planned implemented and survived significant merger transactions and it was apparent to him that there was a huge gap in the benefits expected from those planning these transactions and the actual benefits delivered in the final implementation.“Given the potential impact these transactions have on shareholders, employees, suppliers and communities I felt it was important to provide the information that will allow you to take advantage of this strategy appropriately and implement or integrate it successfully.”

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The What, The Why, The How of Corporate Governance

Copyright © 2020 by Kerry D. Gray

All rights reserved. No part of this publication may be reproduced, distributed, or transmitted in any form or by any means, including photocopying, recording, or other electronic or mechanical methods, without the prior written permission of the author, except in the case of brief quotations embodied in critical reviews and certain other non-commercial uses permitted by copyright law.

Tellwell Talent

www.tellwell.ca

ISBN

978-0-2288-2108-3 (Paperback)

978-0-2288-2107-6 (eBook)

Disclaimer:

Corporate governance practices have developed and changed significantly over the past 100 years, not only in North America but around the world. In this book, I have focused on North American (Canadian and American) jurisdictions. I have applied the concepts in a generic manner; for specific local jurisdiction legal interpretations or applications, you must seek the advice of qualified local legal representation. The information provided here is not and should not be considered legal advice and should not be substituted for the advice and counsel of qualified legal representatives that can deal with your specific questions or issues.

Table of Contents

Introduction

The What

The Evolution of Corporations / Corporate Governance

Types or Models of Board Structures

Governance versus Operational Boards

Legal or Technical Requirements of Corporate Governance

The Why

The Good

The Bad

Berkshire Hathaway

Olympus

Academic Findings

The How

Understanding Organizations

An Organization’s Lifecycle

Environment, Strategy, Organization

Organizational Culture

Strategic Planning

Strengths, Weaknesses, Opportunities, Threats (SWOT)

Scenario Planning

Other or Supplementary Strategic Planning Tools

Strategic Plan Evaluation

Other Essential Considerations on Corporate Governance

Ethical issues for Corporations

Group Dynamics

Financial and Management Accounting & Internal Controls

Miscellaneous Nuts and Bolts of Board Operations

Outside Resources and Succession Planning

Board Performance Evaluations

Summary / Conclusion

APPENDIX I - Robert’s Rules of Order (Summary Version)

APPENDIX II - Sample Terms of Reference (Board)

APPENDIX III - Sample Mandate of the Finance/Audit Committee

APPENDIX IV - Sample Terms of Reference (Executive Committee)

APPENDIX V - Sample Code of Conduct for Board Members (Provided by National Council of Non-profits)

APPENDIX VI - Individual Board Member Evaluation

APPENDIX VII - Organizational Culture Matrix

Introduction

If you’re reading this introduction, I can only assume you’re thinking of joining the world of corporate governance. Perhaps you’ve been asked to join a board on one of the more than two million non-profit organizations in North America. Perhaps you’re considering letting your name stand for election on a cooperative or a publicly traded for-profit corporation. Possibly peers, colleagues or community business leaders have recognized you as a subject-matter expert (SME) with expertise related to their core business, or they recognize your leadership skills and your potential or ability for strategic thinking and are recruiting you for a seat on the board?

Alternatively, maybe you’ve been on another path to the world of corporate governance. You’ve worked hard, climbed the corporate ladder and are now moving into an executive position that includes governance responsibilities and direct contact with a board of directors.

Regardless of how you arrived at this junction, it’s flattering and exciting and it’s an opportunity to make an impact or a significant improvement in your organization. On the other hand, it’s also a significant responsibility. The decisions made at the governance level can have serious consequences for shareholders, stakeholders, employees and the wider community.

Historically, the oversight function in organizations has been referred to as ‘board governance’. However, this term has never really captured the full scope of what governance entails and who is responsible. Ultimately, governance in any organization is about ensuring enduring financial and organizational success but with the introduction of legislation and evolution of governance best practices over the past 50 years the responsibility for oversight has clearly been assigned to both the board and to senior management (CEO and CFO). As a result, I think you will agree that a more appropriate descriptor of this function is now ‘corporate governance’.

In considering your possible entry onto a board or your responsibilities as a senior executive in an organization you will need to have an understanding of: the purpose and importance of corporate governance; your role and responsibilities; potential legal liabilities and related regulations; board operating rules, politics, and overall business acumen or understanding of organizations. Consequently, you might be asking yourself, Do I have the knowledge, experience and skills needed for a role in corporate governance? Such as an understanding of; strategic planning, business processes, performance management, organizational culture, finance, human resources, technology, and risk management, to name only a few of the important disciplines required in today’s boardrooms. Board and executive members require multi-disciplinary knowledge and an ability to apply multi-faceted strategies or approaches to a variety of situations.

In addition, the wide-ranging skills required to be a valuable and productive member of this elite group are likely not the same specialized or technical skills that got you noticed for this opportunity. For example, consider the election of someone with excellent sales knowledge and experience to the board of a regional co-operative. This person may have been noticed for their people skills, success in sales and likely has in-depth knowledge of their company’s products and an ability to clearly present information in a clear and concise manner. He or she may also be persistent and able to deal with rejection and even conflict without losing their resolve—but that doesn’t mean they have the strategic perspective, leadership abilities, broad organizational understanding or general business acumen that are required by today’s board members.

These skills must be cultivated in order for the individual to be successful in the world of corporate governance, which is my motive for writing this book. It will guide the uninitiated through the what, why and how of corporate governance and help you deal with potential knowledge gaps that could result in less than optimal decisions that could result in serious consequences for the individual, the organization and its stakeholders.

To be successful good corporate governance requires leaders who have open minds, wide-angle perspectives on societal trends, above average communication and leadership or people skills and an ability to anticipate the future. Today’s competitive market combined with a litigious society both in Canada and the United States complicated by provincial, state and federal corporate legislation, consumer, labour and environmental legislation requires a board and corporate leaders to get the most out of every individual member. Successful corporate governance practices help organizations find ways to engage all board members and combine the individual strengths to provide guidance and leadership that results in success today and into the future.

As a new board member, you hopefully won’t be expected to have all the multi-discipline knowledge and strategic skills on day one, but ask yourself: Are you willing to accept the challenge to contribute in your area(s) of expertise but also be responsible for learning the new disciplines required? There will be a lot to learn, and a commitment to learning should be considered your core or primary responsibility, for either a board member or an executive leader. The perspective from this level requires you to consider viewpoints, trends, and societal changes that in today’s environment evolve quickly and as a result the commitment to learning and personal growth is perhaps more important today than at any other time in history.

Although this book is generally addressed to new executives and to new or inexperienced board members; seasoned professional managers and experienced board members may also find this information useful. Using a combination of personal experience and research I wrote this book to address the technical or operational issues of governance, but also to help both new or inexperienced leaders and experienced corporate leaders to improve or develop their strategic perspective, knowledge, skills and compare your current governance practices against what are considered today’s best practices. As a result, I have included information on strategic perspective, tactics, tools and issues for consideration that will assist the reader to become a more than average member of this elite leadership group. My goal is to help you to hit the ground running and provide a guiding hand on your journey to becoming a corporate citizen who adds extraordinary value to their organization’s achievements and success.

Regardless of whether you’re new to corporate governance or a veteran of the boardroom, understanding the what, why, and how of corporate governance will help you to go beyond the basics of your corporate oversight responsibilities and add significant value to your organization.

Corporate governance is not a matter of right or wrong—it is more nuanced than that.

- Advocate Johan Myburgh

A director is bound to take such precautions and show such diligence in their office as a prudent man of business would exercise in the management of his own affairs.

- Trustees of the Orange River Land &

Asbestos Company vs King (1892)

We’ve seen over time that countries that have the best economic growth are those that have good governance, and good governance comes from freedom of communication. It comes from ending corruption. It comes from a populace that can go online and say, ‘This politician is corrupt, this administrator, or this public official is corrupt’.

- Ramez Naam

The What

Corporate governance is considered by some as nothing more than a necessary evil, mundane, and a non-value adding administrative activity. Something that is required to meet industry or legal requirements, to pacify regulators, analysts, or as an activity required to pacify outside stakeholders. If this is your perspective, you’re missing the point.

Corporate governance should be viewed as a program that will help ensure an organization’s success. It is a way to ensure ethical practices are followed, it safeguards assets, protects reputations, and leads to long-term financial success. Corporate governance provides a structure where board and management work together to add significant value to the organization.

Regardless of your current perspective on this topic, by the end of this book, not only will you understand the principles behind, and the mechanics of, corporate governance, but you will also understand its importance and how this activity—when applied correctly—adds value to your organization. Which in turn, adds value to shareholders, stakeholders, and by extension, to your community and society.

The What: To start, I’ll provide definitions on relevant concepts and basic knowledge of corporate governance. I’ll review the history and evolution of organizations, corporations, and corporate governance principles and legislation. This historical review will outline significant events that helped shape current governance environment and provide an understanding of the underlying principles. I will describe approaches and philosophies used by boards (agency theory versus stewardship theory); and examine types of governance (operational versus governance). I will provide background outlining why corporate governance has gained prominence in the media over the past 50 years and why it’s important—regardless of an organization’s size, purpose, incorporation status—for profit or non-profit designation.

The Why: I will provide case studies of real organizations, highlighting the positives of good corporate governance and pointing out the consequences of unsuccessful governance. These examples will clarify the nuances, importance and impact that both good and bad governance has on the success of organizations. Throughout the book I define success in terms that should be the goal of every board; to achieve both long-term and short-term success. Long-term success defined as a long lifespan for an organization, short-term success defined as meeting immediate financial and/or social objectives.

The How: Finally, I will provide information on recognizing and responding to issues from a strategic perspective; organizational lifecycle or evolution, culture, strategic planning methods and tools, group dynamics, ethical issues, financial reporting and internal controls. Finally, I introduce tools and templates to assist in the organization and activities or day-to-day operation of governance.

By combining these three components—history and principles (the what); real world examples (the why); and a strategic perspective with tools and templates (the how), you will be prepared for your responsibilities as a corporate leader. However, if you’re already a leader, this information will provide further insight and tools that will help with implementing, operating and/or improving your corporate governance program.

Defining ‘corporate governance’ is relatively easy. A simple Google search provides several very similar definitions.

Corporate Governance is the system of rules, practices, and processes by which a firm is directed and controlled. Corporate governance essentially involves balancing the interests of a company’s many stakeholders, such as shareholders, management, customers, suppliers, financiers, government and the community.

(Investopedia Staff, 2018)

"The framework of rules and practices by which a board of directors ensures accountability, fairness, and transparency in a company’s relationship with all stakeholders (financiers, customers, management, employees, government, and the community).

(BusinessDictionary.com, 2018)

Some differences of note in other definitions (not included here) of corporate governance included reference to governance as being the act of externally directing a corporation or a process of evaluating an organization. The distinction these definitions suggest is that governance is independent and done outside the typical roles of senior management. In other words, the board governs and sets limits or policies for managers, while managers manage and are accountable for results and how they are achieved. Unfortunately, corporate governance isn’t that simple, and the complexity of these seemingly clearly separate responsibilities multiply when they overlap, which in today’s complex and sophisticated organizations not only happens but is often required. In today’s environment, boards and management have a shared obligation for corporate governance. As a result, they must learn to work together and although share responsibility for some decisions, they must also assign and accept accountability when required.

In addition to these definitions there are some basic concepts of corporate governance (CG) that every board member should have a working knowledge, these concepts include:

•what constitutes a corporation (profit and non-profit);

•fiduciary duty;

•reasonable person doctrine;

•legal liability;

•due diligence;

•conflict of interest;

•oversight;

•critical thinking; and

•accountability.

The challenge for board members and senior management comes not in the simple understanding of these individual components but in blending and applying these concepts to create an effective CG structure and processes. A structure that can understand and respond to the environment, to competitors, and other situations faced by the organization. To create a basic understanding of CG structure in a language we can share, I provide the following definitions:

Corporation – an association of individuals, created by law or under authority of law, having a continuous existence independent of the existences of its members, and powers and liabilities distinct from those of its individual members/owners (shareholders). Can be ‘for-profit’, to carry on business activities for the purpose of making profits for its owners (shareholders), or ‘non-profit’, pursuing social or societal changes. For-profit and non-profit corporations may operate under different laws and regulations, dependent on jurisdiction, and may be taxed differently.

Board of Directors – a group of people who manage or direct a company or organization, elected by shareholders (stakeholders in non-profit organizations) or appointed by other board members. The board is the primary group responsible for the company or organization and it directs CG and represents the interests of shareholders or stakeholders of the organization.

Fiduciary Duty – A legal obligation, whereby one individual or party is required to act in the best interest of another person or legal entity. The ‘fiduciary’ is the individual entrusted with the care of assets (money and/or property). Board members are fiduciaries and are required to act in accordance with duties of care, loyalty, and obedience.

Duty of care – Each board member has a legal responsibility to actively participate in making decisions on behalf of the organization and to exercise their best judgement while doing so.

Duty of Loyalty – Each board member must put the interests of the organization before their personal and professional interests when acting on behalf of the organization in a decision-making capacity. The organization’s needs come first.

Duty of Obedience – Board members bear the legal responsibility of ensuring that an organization complies with the applicable federal, state (or provincial), and local laws and it adheres to its mission.

Reasonable Person Doctrine – A legal concept, whereby a standard of care/decision making has been established through case law and precedent. Can be described as actions of a prudent individual to ensure a reasonable or prudent act has been taken in similar situations and context. Alternatively, it is seen as negligence by way of omission if someone does not take the prudent action a reasonable person in a similar situation or context would take.

Legal Liability – Lawful accountability or obligations established under law arising from civil actions (torts). Legal liability can only be decided by courts, even if a settlement is made out of court" by mutual agreement. Liability insurance normally covers only a liability arising from torts, not that from contractual obligations.

Due Diligence – Measure of prudence, responsibility, and diligence expected from, and ordinarily exercised by, a reasonable and prudent person under similar circumstances. It is the duty of a firm’s directors and officers to act prudently in evaluating associated risks of all transactions.

Conflict of Interest – A situation in which the concerns or aims of two different parties are incompatible e.g. the conflict of interest that may occur between elected boards (maximize profit) and corporate lobbyists (maximize