Corporate Governance measurement

Good governance practices should be promoted so that companies keep improving in small steps. It’s important to have ‘small wins’ in terms of policies,processes, disclosures and then actual implementation of these measures to achieve sustainable development. In 2011 and 2012 I used a Corporate Governance Assessment tool to measure the level of disclosures and transparency in sharing good practices with the shareholders. We should start measuring the quality of governance practices within the companies. Because, what is not measured, cannot be improved. Hence, there is a need for a model to measure the quality of corporate governance.

The method used for the BUSINESS TODAY assessment focussed on compliance-related issues, such as the composition of boards and the separation of the CEO and chairman roles, independence of directors, disclosures, etc.  However, it did not pay sufficient attention to the quality of information, decision-making processes, nor link the effectiveness of governance to output measures such as the brand image, employee and customer satisfaction indices, or profitability and value creation. Profitability, value creation and growth aspects were covered separately in rating these companies.

A measurement method should evaluate the relevance of the experience of board members to address challenges the company is likely to face. Another important issue is that the quality of information that the board gets. Whether relevant and timely information is presented with the benchmarks and alternatives identified along with potential effects of various alternatives on stakeholders. Whether there is adequate discussion on the information and if challenge by members is encouraged during the discussions are important for good governance.

Governance is important for the sustainability of value creation. Boards should be focusing not only on the business results, but also how business results are obtained. As an outstanding performance could sometimes be due to excessive risk-taking, resulting in a relatively good performance during a particular period and may not be sustainable. Disclosure of interests of related parties and sustainability of business with such parties would be considered a good practice.

Finally, the purpose of measuring the effectiveness of governance should be to improve it continuously. Therefore, assessing how a board learns and invests in developing its own performance should be an important dimension of the model.

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About surenraj

“Views expressed are my own”
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