What is organisational governance?Posted on: April 14, 2022
by David Diaz
Organisational governance is sometimes called corporate governance and is the responsible, effective, and entrepreneurial management of an organisation so that it reaches its goals and experiences long-term success. Good organisational governance is about effectively supervising the management processes of a company so that its integrity is upheld and more open, and that rigorous procedures are achieved, ultimately ensuring legal compliance.
The international standard on social responsibility, ISO 26000, is dedicated to organisational governance and provides the following definition of organisational governance: “A system by which an organisation makes and implements decisions in pursuit of its objectives. Governance systems include the management processes designed to deliver on performance objectives while considering stakeholder interests.”
The UK Corporate Governance Code provides guidance on creating a governance framework. The code has evolved since it was first established, reflecting changes in business culture and stakeholder priorities. The Financial Reporting Council that oversees its publication explains that the 2018 update of the code “places greater emphasis on relationships between companies, shareholders and stakeholders. It also promotes the importance of establishing a corporate culture that is aligned with the company purpose, business strategy, promotes integrity and values diversity.”
The governance principles of the Code are:
- Board leadership and company purpose: A company should have an effective board that is collectively responsible for the sustainable success of the company. The board is responsible for establishing the company’s vision, mission, and values.
- Division of responsibilities: The board is expected to have the appropriate combination of executive and independent non-executive directors, with clear division of responsibilities between leadership of the board (the chair) and the executive leadership of the company.
- Composition, succession, and evaluation: It’s important that the board demonstrates the appropriate balance of skills, experience, and knowledge. Board members must be appointed and evaluated in a formal and transparent way.
- Audit, risk, and internal control: Presenting a fair, balanced and understandable assessment of the company’s position and prospects, the board establishes formal and transparent policies ensuring that external and internal audit, plus risk management, are effective.
- Remuneration: The remuneration of executive directors should be decided with the aim of promoting the long-term sustainable success of the company and should be in line with purpose and values.
The latest version of the Code also includes a requirement for boards to demonstrate how the organisation is improving employee voice at board level. Companies are required to show that they’re actively applying at least one of the following guidelines:
- Giving a non-executive director responsibility over workforce issues
- Establishing a workforce director (so-called ‘worker on the board’)
- Establishing an employee advisory committee or broader stakeholder committee
Other updates include:
- Mandatory reporting of pay ratios between chief executives and workers, including justification of and substantiation on the difference in pay.
- A requirement for directors of large organisations to outline how they are acting in the interests of employees and shareholders and not in personal interest.
- A public register of listed companies which have been faced with significant opposition from shareholders on executive pay packages.
- The Remuneration Committee must review pay across the entire workforce and demonstrate how employees have been involved throughout the process. They must also show how internal and external metrics are used to measure the appropriateness of executive pay.
Governance structures rely heavily on data to inform the decision-making process and to validate strategic planning. Companies will have their own internal data analysis and metrics that they use for measuring success including financial reporting, but the annual report also plays a key role in the public perception of the company and its activities. With a healthy approach to good governance, senior leaders and the management team have more clarity when it comes to decision making and risk management as the aims of the company teams will be aligned.
How does organisational governance influence culture?
Organisational governance has a great effect on company culture, for better or for worse. That’s why it’s so important to get the basics right and understand what the company stands for. When selecting a chief executive officer (CEO), the board of directors must be very clear on the fact that the correct candidate is the one who reflects the company’s values, living and breathing the ethos at the heart of why the company exists. Everything that the CEO does affects how the company is perceived from their use of social media to how they behave in a crisis. It also affects the internal workings of the company, including how senior managers translate everyday policies and practices into the company culture and how performance management is carried out.
Factors that influence how employee stakeholders perceive their employer company increasingly include diversity and inclusion, sustainability and social responsibility, and attitudes to remote working and wellbeing. In what has been dubbed the Great Resignation – with record numbers of employees quitting their jobs in 2021 – the need for effective governance to create appropriate work cultures that attract employees has never been greater. A report published in January 2022 by Deutsche Bank found that people are resigning at the highest rate since 2009 and more than 80% of those resigning don’t want a job – the highest on record since 1993.
Despite some companies increasing salaries, no longer considering location criteria, and bumping up annual leave and parental leave, it seems that many people are totally reassessing their perception of what a job or a career means to them. Business practices and governance processes need to catch up with what principles matter to the workforce and find meaningful and authentic ways to implement them.
The partnership chair of John Lewis & Partners, Sharon White, recently quoted a PwC report stating that almost 90% of millennials want to work with companies whose values they share. A LinkedIn report uncovered a similar figure of 86% of millennials (those between the ages of 22 and 37) would go as far as to consider taking a pay cut to work at a company whose mission and values align with their own. White believes that social purpose and environmental goals are distracting from the role of business to focus on “maximising shareholder returns, creating wealth, and growing jobs.” Whether a growing number of job vacancies can be filled though, is currently a crucial issue for many businesses to consider.
McKinsey’s recent Great Attrition Survey unveiled a sense of belonging as being a key factor that workers regard as important, stating that “employees want stronger relationships, a sense of connection, and to be seen.” As far back as 2015, Google’s People Operations (HR team) used data to answer the question, “What makes a Google team effective?” The number one point was “psychological safety,” meaning that team members feel safe bringing their full selves to work, sharing their ideas, and speaking out when they don’t agree with senior managers.
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