Corporate governance principles determine how your company conducts itself—and how it’s viewed by outsiders. Investors and potential acquirers can tell a lot about a company based on whether it follows corporate governance principles, either formally or informally, or ignores them. Here are some core principles of good corporate governance and best practice recommendations as you consider setting up new policies or refine what you already have in place.
What Is the Main Objective of Corporate Governance?
Good corporate governance instills trust among those who work, manage, oversee, and invest in a company. Is the company forthcoming with important information? Can others rely on the information the company does share—namely its financial statements and reports?
For companies that have any plans of going public or already are, their corporate governance practices tend to center around compliance with the Sarbanes-Oxley Act, which, among other changes, created the Public Company Accounting Oversight Board, expanded corporate board oversight, and required companies to have a strong internal controls over financial reporting (ICFR) system, in order to prevent a material misstatement of financial statements. Indeed, a company’s credibility can be tied to its SOX compliance and any of its corporate governance principles.
It’s not enough, however, to have guidelines in place for employees to follow. They also need to be enforceable—and followed—by management. Are they also practical and efficient, and tailored to the company? Good corporate governance entails having policies and practices that are appropriate for each company—in ways that work for the employees, the company’s size and its complexity. With “rightsized” internal controls, for example, companies have manageable solutions for ensuring the inputs, systems, and methods for recording and reporting financial information is sound and can be relied upon by internal and external stakeholders. Another core principle of good corporate governancethat companies need to address is a clear code of conduct, with expectations around what is and isn’t acceptable behavior, no matter where an employee is domiciled (i.e., as a U.S. company, you follow the Foreign Corrupt Practices Act and prohibit bribes).
The principles that underlie a good corporate governance program guide employees to act properly, to do the right thing, and to be on the same page when it comes to understanding how they should operate while acting in the company’s best interest. They evolve as the company expands and its risks change.
What Are the Principles of Good Corporate Governance?
Accountability: SOX strengthened accountability by creating a new dynamic between audit committees and external auditors while also requiring the ICFR auditor attestation. Before an almost public or newly public company has to undergo that first ICFR audit, however, they can ease the process by working closely with SOX experts who can make sure the company’s internal controls address current risks and create a smooth-running SOX program.
Strong leadership: Smart leaders recognize they can’t possibly know everything and that they can get stuck in a state of tunnel vision. Outside expertise can bring valuable perspective on corporate governance best practices and evaluate where improvements could be made to current processes and procedures. Companies can greatly benefit from new efficiencies and better ways of doing things when they can take a proactive and open-minded view to financial statement and internal control audits.
Transparency: When companies clearly have corporate governance issues, they are less than forthcoming on what is truly happening. Such companies may share questionable non-GAAP figures, make unrealistic valuation claims, or fail to promptly update stakeholders on information material to its financial statements. Lack of transparency has caught investors off guard for major fraud violations in the past, so this is one area in particular that is considered to be one of the top financial governance principles a company can follow.
Culture: The tone at the top has a wide reaching effect on ethical behavior and management’s ability to establish a culture of compliance. High-pressure environments that emphasize earnings results over all other priorities can lead to undesirable behavior and can affect a company’s level of fraud risk. The tone needs to be consistent throughout the company, even as employees work remotely.
Communication: Are there clear lines of communication between management and others in the company? Are the lines of communication open for the internal audit team, as they work to understand the company’s current risks? Is the company communicating appropriately with investors and meeting SEC disclosure requirements?
Wondering how your corporate governance principles match up to other companies? Curious how our SOX experts can create a more efficient, seamless SOX program for your IPO-bound company? Reach out today to find out more about our Sarbanes-Oxley solution.