The Three Pillars of Corporate Governance

by Alexandrea Roman on January 30, 2014 and last updated on October 24, 2017

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.

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 of the company in question. When shareholders feel they can trust a company, they are willing to invest more, and this greatly helps in lowering cost of capital. Therefore, a company gets its ROI on the money it spent 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. And after the Enron scandal in 2001, transparency is no longer just an option, but a legal requirement that a company has to comply with.

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 is open about their actions; otherwise, distrust will form. And when trust breaks, shareholders tend to stay away and invest somewhere else.

How transparent is your corporate board? Are directors’ actions readily verifiable by internal and external audit? Is their leadership visible from the top to all the way down? Is transparency applicable to everyone? Transparency should have no exceptions, especially when your company’s goals are involved. All stakeholders — from employees to investors — have the right to know about the direction your company is headed for.

For easy implementation of a transparency policy, consider using board portal software that doubles as corporate governance software.

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. Again, this concern over accountability goes back to the financial scandals in the early 2000s, in which there had been a lot of money stolen, but not enough people to answer for the crime.

Accountability

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 is 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 their processes transparent and their 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 — just look at what had to be done after Neiman Marcus and Target suffered from data leak.age Thus, even with accountability and transparency, a company without inadequate 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.

Three Pillars of Corporate Governance

The increasing threat of cyber crime 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 in the corporate board, and suddenly, the stakes are much higher.

Thus, directors should be made aware of the seriousness of cyber crime 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 would-be shareholders consider before making an investment in a company.

How high is the awareness level of your company’s directors when it comes to security? Don’t let them take their chances — make sure that they’re using board portal software and board governance software to keep meeting documents secure all the time, even when they’re using their iPads or Android tablets for virtual collaborative sessions and electronic board meetings. The system does away with paper-based board packs and board books and digitizes everything, making encryption (both in transmission and storage) as a means of protection possible.

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 an partner in board portal software that also doubles as corporate governance software. A board portal 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, 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 comes with audit trails. This means that when different versions of a file exist, each version carries a record of what changers were made and who made those changes. This feature of board portals address the need for accountability.

As for security, a board portal 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, and auto-purge for lost devices, a board portal turns iPads and Androud tablets the most secure briefcase a director can ever have.

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About Alexandrea Roman

Alexandrea is a social media specialist and blogger for Convene.

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