Risk Management: Organizational Governance

Organizational governance protocols establish what kind of company you are going to be. They also establish what the community can expect from your company from the standpoint of product and behavior.

Organizational governance encompasses all aspects of how an organization is directed and managed. The International Organization for Standardization (ISO) defines organizational governance as “a system by which an organization makes and implements decisions in pursuit of its objectives.” In other words, organizational governance drives the modern organization.

Governance monitors the decisions made around the production process. But if you dive a little deeper, you see that governance considers more about how decisions are made by setting up the standards by which an organization operates.

Governance doesn’t tell you how fast you can run your machines; it sets up the standards you use to decide how fast you can run your machines. It provides the answer to the situation in which a manger says, “well I can run my machines at 98% capacity, but that would mean I would increase the number of off-spec parts that I produce. Our standard of performance is to operate at a 99.9% on-spec. rate. Would I be able to maintain that rate if I speed up production to 98% capacity?”

Or, if your organization sets a zero-tolerance policy on discrimination in the workplace, and one of our best production employees violates that policy… how do you react? The governance protocols would provide guidance on how to react.

Corporate governance is one of those terms that leads you to an image. All companies have governance protocols; the test is really whether those protocols a.) are followed, and b.) whether those protocols result in a company that is a positive contributor to the community and the marketplace, or not.

The importance of organizational governance

A prime example of the importance of organizational governance, as noted in a blog post by the Volkov Law Group, is the Enron scandal of the early 2000s. Among other unethical business practices, the company used fake accounting to conceal its financial troubles. This ultimately led to its collapse and tarnished reputation. Had Enron followed basic governance rules, it might still be around today.

Not every case of faulty organizational governance is as extreme. For example, if you bring on new leadership and fail to update permits with the name, title and role of a new leader, you could be cited for failure to maintain documentation. This type of issue often goes unnoticed until you are faced with an inspection or regulatory action.

Organizational governance is not a new risk. You’ve probably already addressed it in your risk assessment. But once you conduct your initial risk assessment and take corrective actions, it’s easy to forget about organizational governance. Over time and through various changes, you can fall out of sync with your original governance. This places your organization at further risk.

How to minimize your risk

What steps do you need to take to reduce your organizational governance risk? There is no one-size-fits-all answer. But it’s important for your board and executive management to agree on how they will work together to build a risk-intelligent organization. 

In today’s environment, boards are scrutinized by regulators, shareholders, the media and analysts. Therefore, everyone in your organization must be open, transparent and collaborative. You must also take the time to address your risks with thoughtful action plans.

Volkov Law Group suggests these five steps to prepare for and prevent risk exposure: 

  • Increase the diversity of your board and management team. This will invite broader and differing points of view.
  • Practice due diligence. Choose leaders who are qualified and competent to fulfill their roles and requirements.
  • Share information in a timely manner. Open communication between the layers of leadership will ensure that information is shared and acted on quickly. 
  • Prioritize your risks. You cannot address every known risk, but you can prioritize the most critical ones for your organization.
  • Evaluate your leadership. This will identify strengths in your leadership team that you can capitalize on, and weaknesses that you can work toward improving.

Effective corporate governance and stakeholder management practices can create several benefits for a company and its stakeholders. According to BoardPro, benefits may include:

  • Improved productivity and efficiency
  • Increased transparency and error visibility
  • Faster time to consensus, leading to smoother operations
  • Better performance that leads to reputation-building
  • Better alignment of mission, vision and core values
  • Improved financial sustainability 

To effectively manage your corporate governance risk, your leadership team must actively identify risks and seek ways to reduce them. You must also accept that some risks are inevitable. But you should still consider risk-sharing or risk-reducing measures through outside assistance in your action plans.

Integrating governance, risk management and compliance

In the age of government regulation, public focus on corporate responsibility, and third-party business partnerships, you can no longer afford to operate in silos. One approach that many organizations are taking is to integrate governance, risk management and compliance (GRC). 

Historically, these functions have often worked independently of each other. When that happens, individual departments can become reluctant to share information or resources with each other. This results in miscommunication, redundant tasks and an atmosphere of mistrust, all of which hinder your ability to succeed.

The purpose of GRC is to encourage companywide cooperation. This helps you achieve results that meet internal guidelines while reducing risks, costs and duplication of effort.

Investopedia defines the three integrated functions as:

  • Governance — “the overall system of rules, practices, and standards that guide a business”
  • Risk management — “the process of identifying potential hazards to the business and acting to reduce or eliminate their financial impact”
  • Compliance — “the set of processes and procedures that a company has in place to make certain the company and its employees conduct business in a legal and ethical manner”   

GRC will apply differently to every organization, but it usually involves integrating core business functions like information technology, human resources, finance and performance management, according to Investopedia.

Corporate governance keeps your organization strong

Corporate governance is a necessary part of any organization. It helps you stay on track with your mission, principles, processes and procedures, and keeps you competitive and ethically sound.  Integrating governance with risk management and compliance streamlines the risk process and opens communication between departments. 

By improving your organizational governance, you can secure your reputation within your industry and community, earn the trust of your employees, solidify your position and keep your organization strong. 

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