Governance Test Factors For Boards And Executives

Boards and executives of private establishments, non-governmental organisations and state-owned entities must exhibit their commitment to strengthened and plausible directorship and control mechanisms.

It is consequently of utmost importance for governance designates to undertake regular internal reviews (hereinafter termed ‘tests’) in order to assess adherence to their set policies. Regularised governance tests – which may be outsourced to external governance consulting firms – present governance designates with avenues for recalibration and recourse where variances in predetermined policy and operations on the ground are noted.

It is crucial to ascertain alignment of actual operations with set objectives and to assess progress of business activity towards sustainable profitability and value creation. Governance tests entail elements that reflect this congruence (or lack thereof). We will therefore examine the wide-ranging factors or measures for boards and executives to be alive to.

When performing their governance tests, organisations can focus on five all-encompassing or ‘umbrella’ themes. The first of these themes is board structure (and function). With leadership having set the initial board structure, governance designates can regularly appraise factors such as board composition, i.e. the balance between executive and non-executive members, as well as their efficacy.

Another factor relating to board structure and function would be board mem- ber independence and diversity. With particular emphasis on function, it is important to assess board member expertise and skills against the initial requirements stipulated in the expressions of interest for individuals to serve on the board that were publicized in media and online.

This can furthermore reflect individual as well as collective competence when discrepancies in expected and actual performance are spotted. Other fundamental functional elements relate to the fruitfulness of meetings at board level, including inherent factors such as appropriateness of resolutions and deliberations, as well as the nature and comprehensiveness of the high-level discussions occurring during board meetings.

An ensuing test element to be probed is the all-important theme of risk management (and control). Just how effective is the board in the identification and assessment of (as well as readiness for) contingencies and unforeseen eventualities. Emphasis can be placed on the board’s performance with respect to implementation of mitigants where risks, be they financial, operational, hazard or strategic, have compromised operations.

Investigation of any covenants that have been committed to is important in this regard, as it will expose potentially harmful loopholes that augment risk exposure and/or may be difficult to control. These covenants are generally tied to related party transactions and, in many instances, where crucial operational services have been outsourced.

Governance designates can then shift to the aspect of financial disclosure. This is of utmost significance. Here, particular attention can be paid to assessing alignment (and qualification of) the firm’s financial statements with international accounting standards such as International Financial Reporting Standards (IFRS) and Generally Accepted Accounting Principles (GAAP).

Listed companies may also have provisions to respect as set out by the Stock Exchanges of their respective operational jurisdictions. Examination of these reports is also important as it will reflect the extent to which material information has been included. This is crucial for transparency. The Audit Committee, its Terms of Reference documents (and adherence thereto) can be assessed to ensure mandate accomplishment.

Having considered the above, emphasis can then be placed on shareholder rights and the protection thereof. Most likely at the end of the year, a review can be undertaken to assess the extent of protection and exercise of voting rights where important decisions were being made for the organisation.

Governance designates may also con- sider any changes in ownership, where the right to transfer ownership was exercised. They may also investigate shareholder inspection of corporate documents and note any significant contributions offered to the firm during the said inspections. Respecting always that shareholders have the right to sue for actions they consider wrongful, governance designates may identify any such instances, consider the outcomes, and decide on the extent to which parties involved in the legal action were protected.

As boards and executives conclude their governance tests, they consider the aspect of overall commitment to robust governance. Are the participants of the review content with the board’s adherence to its Charter and other pertinent policy documents relating to directorship and control? Management and executive effectiveness can also be ascertained by referring to internal operational guides which may include Conditions of Service documents and Codes of Conduct. Upon receipt of feedback with respect to these factors, conclusions can be made regarding the contribution of all organisational actors and agents to the achievement of set objectives. Overall, the regular examination of the factors mentioned is vital for governance tests and for attaining a picture of overall efficacy.