Is it time to bring order to your fast-moving, fast-growing company’s corporate governance? Could a strategic change in the near future open up the business to more scrutiny and questions about how you operate? With the right practices in place, corporate governance reins in confusion about roles and responsibilities. It introduces structure to startups, and instills organizations of all sizes with financial integrity. For more mature companies, new or enhanced corporate governance measures can prepare the business for meeting compliance obligations, such as Sarbanes-Oxley (SOX), and lead to greater efficiencies in finance, among other benefits.
Corporate governance is continually adjusted as the company grows—to meet the company’s wide-ranging obligations to its many stakeholders while also assuring management that they can stand by its financial information. Stakeholders, including investors, customers, suppliers and lenders, will also want to know they can trust what the company is reporting to them. If there’s uncertainty about a company’s integrity, they’re going to walk away.
Here are some questions that may come up as a company looks to set up, improve or enhance their corporate governance programs.
What Is the Importance of Corporate Governance?
In its most literal sense, governance is “the act or process of governing or overseeing the control or direction of something.” In the business world, the term “corporate governance” covers the rules, procedures, and processes a company follows. Corporate governance is often a work in progress, as the company expands its operations, assesses ongoing risks, brings in new employees, figures out what works and what doesn’t for its culture and people, and as the rules and regulations that they have to follow evolve.
Without clear or defined corporate governance practices, as a company brings in new and more employees, what’s viewed as acceptable behavior and how the company should be properly managed can get lost. In the finance organization, the results can lead to weak internal controls over financial reporting, unreliable financial information, the need to restate financial statements, a rising risk of fraud, and a loss of investor confidence.
Corporate Governance and Finance: What Matters Today?
Depending on the size of the company and where it is in its growth journey, today’s corporate governance programs usually involve assessing financial, operational, and compliance risks under an internal audit function; and setting up internal controls or tightening them up as part of a SOX compliance program.
Corporate finance and corporate governance experts customize appropriate policies and practices for the company—tailored to its industry, its people, its size, and its complexity. Developed and refined (“rightsized”), these efforts will lead to new efficiencies in an existing SOX program; financial statements that can be relied upon by management, investors, lenders, and other stakeholders; readiness for strategic transactions (M&A, IPO); and reduced compliance risk.
What Does Corporate Governance in Finance Entail?
For public companies, and some private companies that know they are IPO bound, corporate governance efforts in the finance organization largely center around SOX, which has significantly evolved since the law was enacted nearly 20 years ago. Companies that have mastered SOX compliance have built in efficiencies into their SOX program, overcome past tendencies to accept a bloated controls system, and know they need to be flexible. Key areas of risk change every year, as do the view of what controls are sufficient.
For instance, we once helped a public tech company with its inaugural SOX program, and for several years, continually updated and simplified its controls until the company went private. Our initial focus was on creating a lean, easy-to-maintain SOX program that worked with the company’s particular workflow. It worked so well that the company continued to keep its Sarbanes-Oxley program in place even when they were no longer obligated to comply with SOX.
What Is the Relationship Between Corporate Governance and Finance?
Corporate governance and finance go hand in hand. Developing or improving corporate governance practices is done for the benefit of the entire company, but at the heart of this effort is the finance organization. Corporate governance in financial management is necessary for ensuring clear roles and responsibilities on the team, segregation of duties, and tight internal controls that can stand up to testing—all of which lead to financial statements that can be relied upon. The need for changes may be driven by strategic plans (going public), or the board of directors may have picked up on lax policies that are affecting the confidence investors have in the company. Finance and accounting experts can help you evaluate what is needed at your company, depending on what the company has in store or what past practices require improvement.
Did this blog post get you thinking about corporate governance and financial management at your company? If it’s time for a new corporate governance structure, you need to tap internal audit expertise, prepare for SOX compliance, or explore how your programs could be more efficient, the RoseRyan team is here for you.