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Implementing an Effective Governance Model
Corporate governance is a system with a basic structure that acts as a foundation for all its distinct parts. This is where the idea of a strong governance model comes into play.
What is a Governance Model?
The recent increase in focus on corporate governance and its best practices has drawn many business owners to start re-evaluating their governance policies, establishing board-level risk committees and clarifying the goals of all their committees.
For many companies, this means reworking the entire way they go about approaching corporate governance itself. A governance model serves as a representation of the many possible ways that a governance system could work if you were to change one or more of its parts.
The Importance of Governance Models
Because of the unique set of attributes that apply to every single organization, the complex concept of governance is never a one-size-fits-all application. Governance systems are complex and multi-faceted, with individual components being unique to individual businesses.
Similarly, every component tends to be interconnected, which means that when any part of a governance system is changed according to the uniqueness of a company, it has a resulting effect on many other parts of the structure. This includes the individuals and groups that make up the system.
The main function of a governance model is to organize the operational, financial, risk management, and reporting processes that exist in a company, so that the board receives all the information it needs to put good governance into practice. It also serves to help business units within a company conduct their work in compliance with regulations and strategic goals. So, it is ultimately this adaptability and interconnectedness of a governance system that benefits the company. A governance operating model defines the mechanisms and interactions through which governance is put into action, which is an extremely important tool if boards want to enhance their oversight capabilities, while also enabling management to implement governance initiatives themselves.
Models exist to provide a structure that can be mirrored, modified, or changed, according to the needs of the user. They provide a starting point, which can then be used by organization to identify which areas they need to focus on improving. A governance model also demonstrates the consequences that can be expected, and the risks that can be associated with, the model.
Establishing an Effective Governance Model
From Governance Framework to Operating Model
For many organizations, a great starting point is to evaluate the governance framework and rework it to better suit the organization’s goals, according to the criteria mentioned earlier. A governance framework articulates the elements of a particular governance program (i.e. the roles of the board and management, the relationship between governance, risk management, and organization culture), which are encircled by the corporate governance infrastructure. This is the company’s collection of all the governance operating models – people, processes, and systems – that govern the day-to-day organizational activities.
The Components of a Governance Model
Every organization has unique circumstances and needs, which are in turn reflected in the uniqueness of their governance model. There are, however, four general components that exist in every governance model, each with its own set of important and critical subcomponents:
1. Structure – the subcomponents of structure are organizational design and reporting structure, and the structure of the committees and charters.
2. Oversight Responsibilities – the key subcomponents under this are board oversight and responsibilities, management accountability and authority, as well as the authority and responsibilities of all committees.
3. Talent and Culture – the subcomponents under this component are performance management and incentives, business and operating principles, and leadership development and talent programs.
4. Infrastructure – the key components under this section are policies and procedures, reporting and communication, and finally, technology.
The Three-Part Approach to Establishing a Governance Model
When establishing a new governance model, or even enhancing an existing one, it is important to keep in mind that the board should not take full responsibility for setting up every single part of the governance model. Rather, while boards are uniquely positioned to form the governance model, they also have the ability to effectively delegate duties to appropriate parties to carry out its execution.
In general, when establishing or enhancing a governance model, it can be useful to follow the three-step approach:
1. Define the operating requirements for your organization’s governance model.
This means researching frameworks that will best suit your organization, or even designing your own. It is here that you want to factor in any applicable regulatory, governance, or legal requirements that you should be meeting. Carefully assess the actual scope of your operations, and how governance will factor into all aspects of it. Understand what the current state of your governance is like, and identify its existing strengths and weaknesses.
2. Design the governance operating model and its components.
It is in this step that you should define the key accountabilities that will exist in your governance model, as well as any decision rights, and the path for escalating matters up to the relevant levels of authority.
3. Implement the governance model.
When it is completed, the governance model should define how the company’s boards will measure their success using defined standards and metrics. It should tie governance requirements, organizational functions, and business requirements together, and allocate necessary resources accordingly.
Part of implementing a governance model includes setting up a schedule for regular reviews of the model by the board and may even suggest third parties that can participate in reviewing the plan. This review process should include examining the components and how they are working for the organization in action, as well as the plan, and determining any further implementation efforts that could be beneficial.
Modern Governance Models Require Modern Governance Tools
Today’s business world is highly complex, and components of corporate governance are as interconnected as they are integral to the success of an organization’s governance system itself. This makes the concept of governance models, and the effectiveness of the governance model that exists in your company, even more important.
With so much at stake and so much to oversee, boards need the assistance of strong, regularly reviewed governance model management systems that can help them address the issue of improving their governance practices on a regular basis. This task can be made easier through the use of electronic tools that streamline this management process.
SpriggBoard and its integrated suite of software tools can help organizations that are trying to improve their governance models.