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Governance 101

There are many places we can start here, but at its core, a governance system is one that directs and controls an organization independent from an operating system. What this means is a business will operate and execute according to a set of rules and processes, but the oversight of the organization’s health, direction are independent of that operating system. This provides reasonable assurance that the business is doing what it says its doing and heading in a direction that provides short and long term stability.

To manage this, many companies have a board of directors, of which there are different structures (for a future article perhaps). The board’s role is really twofold. First it ensures an organization has direction and is prepared for potential risks. There are a few key tools for this:

  1. Strategic Plan – do we have a plan and strategy for where we want to go?
  2. Risk Tolerances and Appetites – are we prepared for what we might face along the way?
  3. People, Key Roles, Succession, Authority – who can do what and are they the right people?
  4. Budget – what resources do we need, where, and when to align with our strategy?

Second, the board provides oversight through control measures. Tools in this include:

  1. Financial Statements (Interim and final) – are we aligned with expectations and targets?
  2. Performance Dashboards – how are we doing on various metrics and against risks?
  3. Leadership oversight – hiring, evaluating, compensating, firing the CEO

At the end of the day, a board need to gain a level of assurance that the company is doing what is expected and moving in a direction that is best for the corporation and stakeholders. This last word “stakeholders” is one you’ll hear me mention often in governance. Some context, Canada and the USA have different definitions and perspectives on the role of a company and board. In the US, you’ll often hear that a business exists to maximize shareholder value. In Canada however, its a much broader approach. In Canada, per the Canada Business Corporations Act, a board has the duty to “act honestly and in good faith with a view to the best interests of the corporation”. Note that it doesn’t say “shareholder value” here. It goes on further to clarify “best interests of the corporation” and specifically lists all the stakeholders that should be considered when assessing if something is in the best interests of the corporation. These include shareholders, employees, retirees, creditors, consumers, governments, environment, and long term interests of the organization.

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