Companies need order and structure. No one would dispute that—getting to an orderly place, however, often requires constant refinement as a company rapidly grows, hires more employees, builds out its organizations, and takes on bigger challenges, such as pursuing an initial public offering. This is where different types of corporate governance can help the company get a handle on its risks, tamp down inefficiencies that have evolved over time, and ensure that the financial information can be relied upon.
What Are the Different Types of Corporate Governance?
Interpretation of the term “corporate governance” varies. It can apply to the overall structure of a company, from the many organizations within it—Finance, HR, IT and so on—to the makeup of the executive management team and the board of the directors.
Another way to look at this term centers on the controls, procedures and policies that direct how the company’s employees and managers properly and ethically conduct their work. Clearly defined roles and responsibilities, segregation of duties, and documented policies (from code of conduct to expense reimbursement policies) create a uniform understanding of expectations, while also helping the team minimize the risk of making errors, operate as efficiently as possible, and meet compliance obligations.
As a finance and accounting consulting firm, we primarily focus on the corporate governance types that fall under these categories:
- Sarbanes-Oxley compliance: For efficient SOX 404 compliance, companies need right-sized controls over financial reporting, efficient financial and IT processes, and awareness of auditors’ and regulators’ current primary areas of focus.
- Financial integrity: Private companies can also adopt SOX-like procedures to ensure their financials are reliable. Such controls and procedures can lead to financial reports that lenders and investors can trust, and then the company can make an easier (there is no “easy” but easier) transition to full-fledged SOX compliance if they make a public offering.
- Internal audit: This function takes a broad look at operational, financial and compliance risks, including emerging risks that were previously not on management’s radar. They also uncover opportunities. Some companies find that a co-sourcing arrangement, with both in-house and outsourced expertise, can serve their IA needs.
Which Type of Corporate Governance Applies to My Organization?
The types of corporate governance systems or types of corporate governance models vary among companies, depending on their growth stage in the business lifecycle and whether they are publicly traded or plan to be. The corporate governance mechanisms your company adopts should be customized for how the business operates.
One of the standout lessons learned from early implementation of SOX 404 was that one size does not fit all. Many companies ended up with bloated internal control systems in an attempt to get through their audits of internal controls—but those systems turned out to be incredibly difficult to manage and ineffective.
The right internal controls—personalized to your company size, the way you operate, and your people—are preferable. You want a workable solution, not compliance for compliance’s sake.
For companies not yet needing to comply with SOX, getting to the point of a practically developed corporate governance structure can be challenging, particularly if no one on staff previously dealt with SOX or has any public-company experience. Outside experts can help them take a look at their documentation methods, IT systems, risks, and policies and procedures to see where there any gaps or inefficiencies, and where streamlining and orderliness could occur.
Corporate governance practices related to the finance function are typically designed not only to bring “order to the chaos”, but to ensure that everyone can have faith in what the company is reporting about its financial situation. With the right internal controls in place, management can keep their attention on running the business and have confidence when it comes time to certify annual and quarterly reports.
When to Take a Look at Your Corporate Governance System
Many companies are prompted to take a hard look at their corporate governance system when they consider a major strategic transaction, such as going IPO or trying to attract the attention of a special purpose acquisition company (SPAC). Unfortunately, though, some companies try to do a lot all at once, with limited resources, to get ready for the changes and improve their valuation. Under a crunched time frame, they start tackling projects they have long put off, such as upgrading their finance and accounting systems, introducing financial integrity measures that will result in more reliable financial statements, and also help them have as smooth a first audit as possible. Expert help becomes indispensable to get this done properly.
Is Now the Time?
As companies mature and the complexity of the business expands, so does the outside scrutiny and the expectations of shareholders, regulators, and other interested parties. As you look out toward your company’s strategic goals, are your financial operations on the up and up, or have cracks started to show that could affect the reliability of your financial statements? Can others trust what you are putting out? Do you trust what you are putting out? With a monitored and properly-managed corporate governance system, you should be able to. When the time comes to review your corporate governance or put new financial policies in place, turn to experts who know corporate governance mechanisms and best practices, and can customize their solutions to work effectively for your company.