Why Good Corporate Governance Matters

Corporate governance is often spoken about as though it is simply a matter of compliance. In fact, corporate governance is one of the most valuable assets any organisation can possess. It provides the framework through which decisions are made, risks are managed, and accountability is maintained. Most importantly, it ensures that power is exercised responsibly.

No individual, regardless of experience, success or authority, should wield unchecked decision-making power. An organisation’s corporate governance should reflect an understanding that even the most senior and well-respected leaders can benefit from challenge, scrutiny and alternative perspectives. These concerns can be relevant from small local businesses, all the way up to multinational corporations. It is therefore recognised that good governance is often less about the decision itself and more about the process through which it is reached.

Recent events at FIFA provide a timely reminder of why corporate governance matters. FIFA President Gianni Infantino’s proposal to create a new commercial entity and sell a minority stake to private equity investors without stakeholder reference or engagement met with significant resistance from football’s governing bodies and members around the world. It is important to highlight that when viewing this example from a corporate governance perspective, the key issue is not necessarily the proposal itself, but how the decision appears to have evolved, developed and ultimately been presented. Key stakeholders reportedly felt that they had not been adequately consulted and that some senior representatives were unaware of the announcement. These events highlight why robust corporate governance is important and demonstrate the potential consequences when appropriate governance processes are not followed.

In a well-governed organisation, major strategic decisions are rarely driven by one individual acting alone. Significant transactions, restructurings, acquisitions or disposals should be rigorously tested and examined before decisions are made. This challenge function is one of the most important yet most overlooked aspects of governance. Rather than viewing strong boards as obstacles that slow down decision-making, they should instead be seen as a means of improving it. A proposal that survives robust scrutiny is almost always stronger than one that proceeds without it.

Executive management is responsible for running an organisation and developing strategy, but oversight bodies exist to assess those strategies and determine whether they are in the organisation’s best interests. When internal control mechanisms become ineffective, or when decision-making authority becomes concentrated in a small number of individuals, governance risks begin to emerge. This is why checks and balances are so important – they are safeguards designed to protect organisations from poor decision-making, excessive risk-taking and reputational damage. Decisions which are made through the mechanisms of Board approval requirements, shareholder engagement and through risk committees are more likely to promote good decision-making rather than those decisions taken in isolation.

For UK companies, the core principles of corporate governance are embedded throughout corporate law. These principles include accountability, responsible stewardship and the duty to promote the success of the company. These principles are clearly outlined for Directors under their statutory duties in the Companies Act 2006. Despite this, legal duties alone are not enough to create a healthy governance culture.

One common misconception about corporate governance is the belief that it slows organisations down. In practice, good governance frequently enables organisations to make bolder decisions because those decisions are supported by thorough analysis and a clear understanding of the associated risks. Investors, regulators, employees and stakeholders are generally far more willing to support ambitious strategies when they can see that appropriate oversight mechanisms are in place. On the other hand, problems tend to arise when boards become passive, which results in leaders no longer being questioned.

Finally, the most successful organisations are rarely those led by individuals who face no opposition. Rather, they are those that combine strong leadership with strong governance. In doing so, Organisations should therefore have structures in place that recognise the importance of challenging decisions, supported by appropriate control mechanisms that provide effective checks and balances. Corporate governance is not a box-ticking exercise – it is the practices which promote responsible decision-making.

The information and opinions contained in this blog are for information only.  They are not intended to constitute advice and should not be relied upon or considered as a replacement for advice.  Before acting on any information contained in this blog, please seek solicitor’s advice from Gilson Gray.