The Three Pillars of Corporate Governance

The three pillars of corporate governance are: transparency, accountability, and security. All three are critical in successfully running a company and forming solid professional relationships among its stakeholders which include board directors, managers, employees, and most importantly, shareholders.

What is corporate governance?

Corporate governance encompasses the rules and practices that guide how an organization is managed and operated. It aims to enhance leadership, decision-making, and operational excellence within a company, as well as promote long-term sustainable growth.

At its core, the purpose of corporate governance is to ensure that the interests of all stakeholders are taken into account, from shareholders, management, customers, and employees. It also helps maintain a balance among different stakeholders, avoiding any undue concentration of influence or power within any specific group.

Effective corporate governance forms the foundation for promoting responsible management practices, upholding ethical behavior, and supporting robust expansion. The purpose of corporate governance also lies in empowering businesses to meet the high expectations of their stakeholders while ensuring unwavering integrity and clear transparency.

What are the corporate governance structures?

Corporate governance is typically structured through several key components and mechanisms that collectively ensure effective oversight, transparency, and accountability. The main corporate governance structures include:

• Board of Directors: This pivotal structure is responsible for strategic decision-making, oversight, and accountability. It comprises independent directors and executives who provide guidance, set policies, and monitor management’s actions.
• Executive Management: The CEO and other top executives are in charge of day-to-day operations and implementing the strategic direction set by the board.
• Committees: The board often forms specialized committees that are focused on specific areas like financial reporting, executive compensation, and board composition.
• Shareholders: Shareholders play a role in corporate governance by voting on major decisions, electing directors, and expressing concerns during annual general meetings.
• External Auditors: Independent auditors review the company’s financial statements and provide assurance to stakeholders about their accuracy and compliance with accounting standards.
• Regulatory Authorities: Government bodies and regulatory agencies establish rules and guidelines that companies must adhere to, ensuring legal compliance and ethical behavior.
• Stakeholders: Beyond shareholders, other stakeholders like employees, customers, suppliers, and the community influence corporate governance through their interests and expectations.

Such corporate governance structure examples collectively create a framework that balances the stakeholders’ interests while promoting responsible management and sustainable growth.

First Pillar of Corporate Governance: Transparency

In simplest terms, transparency means having nothing to hide. For a company, this means it allows its processes and transactions observable to outsiders. It also makes necessary disclosures, informs everyone affected about its decisions, and complies with legal requirements. After the financial scandals in the early 2000s, transparency has played a bigger role in preventing fraud from happening again, especially at such a large scale.

But aside from stopping the next illegal moneymaking scheme, transparency also builds a good reputation for the company in question. When shareholders feel they can trust a company, they are willing to invest more, and this greatly helps in lowering the cost of capital. Therefore, a company gets its ROI on the money it spends on improving transparency.

Transparency is a critical component of corporate governance because it ensures that all of a company’s actions can be checked at any given time by an outside observer. This makes its processes and transactions verifiable, so if a question does come up about a step, the company can provide a clear answer. Following cases such as the PwC tax transparency scandal, transparency is becoming a more crucial legal obligation for companies worldwide.

But although transparency is a necessity for the whole company, its presence is even more important at the top where strategies are planned and decisions are made. Shareholders expect that the corporate board reports about their actions; otherwise, distrust will form. And when trust breaks, shareholders tend to stay away and invest somewhere else.

Keep in mind that all stakeholders — from employees to investors — have the right to know about the direction your company is headed for. Transparency should have no exceptions, especially when your company’s goals are involved.

Second Pillar of Corporate Governance: Accountability

It takes more than transparency to build integrity as a company. It also takes accountability, which can also mean answerability or liability. Shareholders are deeply interested in who will take the blame when something goes wrong in one of a company’s many processes. And even when everything goes smoothly as expected, knowing that someone will be held accountable for future mishaps increases shareholders’ confidence, which in turn increases their desire to invest more.

Accountability can have a negative connotation because many people associate it with blame. “Who’s responsible for when something goes wrong?” is just one of the many questions that accountability seeks to answer. But accountability i

s more than that. It’s about having ownership over one’s actions whether the consequences of those actions are good or bad. Thus, accountability covers not only failings but also accomplishments. When the idea of accountability is approached with this positive outlook, people will be more open to it as a means to improve their performance. This applies from the staff all the way up to the corporate board.

How can accountability improve performance? People who have no sense of ownership over their tasks don’t feel the motivation to do more than what’s expected of them. There’s no incentive to work hard and achieve something. But when they understand the weight of their responsibilities, they’re more inclined to make sure that they carry out their tasks properly. And when they’re successful in this regard, they’re likely to feel a sense of accomplishment, and this further fuels their desire to do better.

So how’s the level of accountability in your corporate board? Are you directors there to simply fill in a seat while leafing through their board packs and board books, or are they actively engaged in decisions and strategies for your company?

Third Pillar of Corporate Governance: Security

A company is expected to make its processes transparent and its people accountable while keeping their enterprise data secure from unauthorized access. There is simply no compromise for this. Companies that experience security breaches involving the exposure of their clients’ personal information quickly lose their credibility.

To get back the public’s trust, extensive damage control is called for, particularly to avoid devastating security incidents like the MOVEit Transfer breach and Luxottica data breach. Thus, even with accountability and transparency, a company without adequate security measures will have a hard time attracting shareholders. After all, any scandal — even a breach caused by third-party hackers — can have a negative effect on a company’s stock market performance.

The increasing risk of cybercrime in recent years puts security at a high priority for many companies. Complying with security standards isn’t enough; a company needs to imbibe a culture of security to ensure that trade secrets, corporate data, and client information are all kept safe from unauthorized access from inside and out. Security is not just an IT concern anymore, unlike in the past.

Nowadays, everyone in a company has a responsibility to adhere to strict security standards. Even entry-level staff members usually have their own company email addresses. But are they trained enough to conscientiously keep their accounts safe? And that’s just scratching the surface. Think of how much confidential data there is at the hands of directors on the corporate board, and suddenly, the stakes are much higher.

Thus, directors should be made aware of the seriousness of cybercrime and the gravity of its consequences. A security breach, especially involving client information, can make the public easily lose their trust. Trust is a big factor for shareholders to consider before making an investment in a company.

Combining All Three Pillars of Corporate Governance

Taken together, transparency, accountability, and security define a company’s integrity. Achieving all three isn’t an easy thing to do, but fortunately, companies now have a partner in board management software that also doubles as corporate governance software. The tool doesn’t just digitize the whole board meeting process; it also makes the process more transparent by keeping clear and complete documentation at all times.

For example, a director who wants to review the details surrounding the decision for a recent merger can pull out the meeting minutes from the archive. An outside auditor authorized to request the same kind of documentation will have access to it, too. In short, the information needed by anyone with authorization — whether they’re part of the company or an outsider — can get what they need quickly and easily.

Aside from being readily available, documents and other meeting files are version-controlled and come with audit trails. This means that when different versions of a file exist, each version carries a record of what changes were made and who made those changes. This feature of board software addresses the need for accountability.

As for security, board management software has to adhere to industry standards to keep files safe whether in transmission or in storage. With features such as access right control, authentication procedures, password requirements, encryption (both in transmission and storage), and auto-purge for lost devices, board software turns iPads and Android tablets into the most secure briefcase a director can ever have.

Frequently Asked Questions About Corporate Governance

Navigating the intricate landscape of corporate governance requires a clear understanding of its fundamental principles and structures. Learn more about the essence of corporate governance in these frequently asked questions.

How do the three pillars of corporate governance contribute to an organization’s success?

The three pillars of corporate governance — transparency, accountability, and security — collectively underpin an organization’s success. Transparency nurtures trust through open communication, accountability drives responsible decision-making, and security safeguards stakeholder interests. Thus, forming a robust foundation for sustained growth.

What role does fairness play in corporate governance?

Fairness is pivotal in corporate governance as it helps ensure equitable treatment of all stakeholders. It also fosters trust, collaboration, and respect within the organization. At the same time, fairness enhances the organization’s reputation and contributes to long-term success and positive stakeholder relationships.

How can companies integrate the principles of corporate governance into their daily operations?

One way is to establish transparent communication channels for accurate stakeholder information. Doing so enforces clear accountability mechanisms to ensure responsible behavior and decisions, while also embracing fairness and impartiality. What’s more, regular training, comprehensive policies, and periodic assessments also seamlessly weave these principles into daily operations.

What role does corporate governance play in ensuring diversity and inclusion within an organization?

Corporate governance can be instrumental in fostering diversity and inclusion. Promoting transparent board appointments, equitable policies, and unbiased decision-making also contributes to creating a culture that values different perspectives and talents.

Can corporate governance practices help mitigate conflicts of interest among stakeholders?

Yes, robust corporate governance practices serve as a safeguard against conflicts of interest among stakeholders. Independent board members, a well-defined code of ethics, and comprehensive disclosure policies provide transparency and accountability. This enables the identification and management of potential conflicts, avoiding undue influence that could compromise fairness and equity.

Where can I learn more about best practices in corporate governance?

You can refer to reputable sources such as industry associations, corporate governance institutes, and regulatory bodies. Examples include the International Corporate Governance Network (ICGN), the Global Corporate Governance Forum, and the Organisation for Economic Co-operation and Development (OECD). Or, you can visit our resource page.

Implementing Effective Corporate Governance with Convene

Future-forward businesses today harness board management software to seamlessly integrate and uphold effective corporate governance. Such software streamlines communication, information sharing, and decision-making, facilitating transparency and accountability across the organization.

Convene, the leading board management software, is designed to enhance and operationalize corporate governance practices. Its intuitive interface, secure platform, and real-time collaboration features empower boards to drive prudent decision-making and ensure regulatory compliance.

A valuable modern governance tool, Convene enhances accountability, transparency, and security for the board. Learn more about the essential features of Convene.