Establishing a Governance Framework For Portfolio Companies

Nicholas J Price
5 min read
As regulators and shareholders have taken an increased interest in governance, it has forced boards to take a more critical look at themselves and do the same. Board-level oversight has been particularly dominant in the financial services sector, which isn't surprising since governance for global financial companies is highly complex.

Rules and systems create the framework for governance, and the framework provides the structure that drives the strategic plan. Without a strong governance framework, success can't happen in a meaningful way, if at all. A governance framework helps boards make decisions based on data rather than their own interests or the way they've done things in the past.

Bob Contri, Vice Chairman of Deloitte LLP, states, 'Despite significant recent progress in the area of governance, work remains to be done if the many governance needs of large, complex institutions are to be met.'

Establishing a Governance Framework

Good corporate governance extends past the shareholders' interests ' it defines the systems and interactions that put governance into action. By contrast, a weak governance framework will cause a breakdown in the stages of the investment process and affect overall economic growth. Recent policy discussions have centered around how poor corporate governance could cause inefficiencies in allocating financial resources and cause oversights in monitoring corporate assets.

A good governance framework organizes operational, risk management, reporting and financial processes so that the board gets continually updated. Also, a good framework can expose gaps or weaknesses within the board or management.

Beyond the broad governance processes, a solid framework supports the company at all levels, including the level of roles, responsibilities and reporting, to effectively connect leadership with operations. A governance framework is an important basic tool for effective board oversight. The process of building the framework is often just as important and meaningful as the end result.

In a paper by the Organisation for Economic Co-operation and Development (OECD) called 'Investment, Financing, and Corporate Governance: The Role and Structure of Corporate Governance Arrangements in OECD Countries,' the author describes governance in the following stages of business:

  1. First stage: Define credible provisions for protecting property that can be enforced. Establish secure methods of ownership registration. Have legal teams ready as advisors.
  2. Second stage: Have ready accounts that are transparent and reliable related to corporate happenings and financial updates. Boards need this information to make informed decisions.
  3. Third stage: Establish proper governance processes to enable good decision-making, distribute authority to proper business units or departments, develop compensation that aligns with the long-term strategy, and establish lines of accountability.

These processes concur with the general acceptance of the necessary components of good corporate governance, which are:

  • Transparent ownership and corporate structures
  • Enabling informed shareholder participation
  • Effective minority protection
  • High-quality corporate information

Modern Governance Tools Eliminate the Governance Deficit

Financial experts continue to identify the best strategies that lead to strong corporate performance. Investors and regulators have targeted good governance practices such as board independence, diversity and transparency to pressure corporations into working harder to produce better outcomes. In recent news, research points to good governance as being a central force that drives improved returns. The Business Roundtable also released a statement that makes it clear that maximizing shareholder value can no longer be a company's main purpose and that investments in governance practices will ultimately lead the way to improvement in corporate performance. In a May 2019 report from the Diligent Institute, researchers measured the effect of governance practices using criteria related to shareholder rights, board composition and independence, and compensation. The results showed that the top 20% of companies outpaced the S&P index. The companies outperformed the bottom 20% by 17 points (15%).

These are all signs that governance is entering the modern era. It is becoming increasingly important for board directors to shift their focus to good governance to demonstrate their commitment to investors on the issue of performance, along with the practices of empowering leaders with the technology, insights and processes required to fuel good governance.

As we enter the modern era, boards also need to shift their processes away from paper and digitize their governance systems and processes to maximize efficiency. Today's climate requires boards to make decisions quickly, often in real time, as market conditions are developing. Modern governance solutions bring all the tools that boards need together under one secure product suite with Diligent Corporation.

Diligent Boards digitizes processes for managing agendas, annotating documents, and recording and storing board meeting minutes. Board directors get real-time updates to their board books and can access their materials anywhere using their mobile phone, electronic tablet or computer, and get them offline if they need to.

Board management solutions eliminate risks associated with electronic communications and file-sharing because of strong encryption features and state-of-the-art security. Directors can share their annotations with a peer or with the entire board before, after or even during a meeting.

Governance Cloud offers an entire suite of digital solutions where the modern board director can access tools for voting and resolutions, evaluations, collaboration tools, document sharing, committee intelligence and entity management. These tools and features work together within a single product suite for seamless management and reporting.

In the past, the performance of boards has suffered due to their inability to get the information they need to make good decisions. The lack of data makes it difficult to know what's going on within the company, what's happening in the industry, and to get insight into the future. Boards have been hesitant to move too fast on opportunities because of the overarching risk of data breaches.

With a modern approach to governance and the right tools to fulfill their board duties responsibly, board directors are now able to address the core issues of speed, visibility and security. Real-time insights and predictive analytics put data in the hands of board directors that gets them asking all the right questions.

Having the right technology, insights and processes that are designed for board business supports the governance framework for portfolio companies and all companies.