Good Governance – Due Diligence and Its Five Principles

Why good governance is important and why you should commit to it!

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Too often when it comes to making key decisions (both strategic and tactical) they are either executed far too quickly i.e. for expediency’s sake, or not at all. The other issue here is that, more often than not, there is a substantial delay from when the decision is made to its actual execution and/or implementation.

So, why does this happen, particularly in organisations that have reached a certain mass where just popping over to see Nigel, no longer cuts it (or Zooming, Skyping, Teaming etc)? Answer: It all comes down to governance!

Governance is the suite of systems and processes used to make decisions. Good governance then, is how we go about about making good decisions.

The cornerstone of good governance is due diligence. In short: doing your homework so that you maintain an open mind before making a decision on a matter, regardless of how hard pushed you are to make that decision.

Due diligence is traditionally seen as a legal principle and also as a business principle. Normally, it is the list of key items that need to be ticked off regarding the status of an organisation’s finances, debts, customer base, the prospect for additional clients and the like. However, due diligence goes way beyond understanding those factors that primarily impact an organisation’s balance sheet.

The Diligence Principle – The Five Principles Checklist

When it comes to good governance, there is a need to understand how keeping an open mind is the underpinning principle regarding effective decision making.

Yours truly preparing to deliver a workshop to the Master Plumbers Management Group re Good Governance

There are five principles you can use to assist you keep an open mind right up to the point of making a decision:

1. Separation of Powers

The separation of powers is important i.e. the boundary between the Board and the CEO. Why?

Essentially, this is about the Board and its responsibility when it comes to adopting policies and strategic decisions, and occasionally, dealing with “appeals.” Although the CEO and the executive provide advice on these matters to the Board, the CEO is there to run the organisation – not the Board chair or other board member (unless an executive director of course, which is generally the CEO or equivalent).

Clear boundaries are essential as they lead to the best outcome. In particular, clear boundaries minimise lobbying and self interest. I was watching the documentary: Grant recently. In their first meeting, President Abraham Lincoln makes a suggestion to Lt. General Ulysses S Grant, as the newly formed head of the Union Army, on how he should conduct the required campaigns to close out the American Civil War. Grant simply responds “I will take your suggestion under advisement.” Imagine yourself saying that to the most important person around (okay, I know some of you do that anyway). However, both understood that Grant was in the right regarding what he said to his President. He was the professional soldier and needed to run the war machine on a day to day basis. Lincoln’s role was to ensure that Grant had the resources he needed to close out the war effort.

Those of us who have been CEOs certainly have had similar experiences with our boards, committees and councils i.e. as CEO, I need to remind you where the line in the sand is! Despite the separation of powers, both the CEO (and the Executive) and the Board are still there to work as a team, it’s just that each component has its own role to play regarding a number of key responsibilities.

2. Natural Justice (And Legal Concepts)

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In short, you do need to determine or verify the legal concepts or principles that may be applicable to a matter under your consideration. You do not need to be a legal expert here, but at least understand key legal concepts when “doing business.” That being said, the underpinning principle of all legal concepts should be natural justice.

The cornerstone of natural justice is that everyone has the right to be heard! In other words, the right to a fair hearing. Kangaroo courts of opinion are out. Gossip and presupposition are not welcome. Take note social media – I think I have said this somewhere before!

When a decision is made, there should be a “basic right” in place to allow a review of that decision. The Board, like you and the CEO, has three options when it comes to reviewing a decision:

  • Upholding the original decision;
  • Varying the original decision;
  • Making a different decision altogether.

In the first instance, the CEO will be responsible for most decisions made by you and others. However, there are those decisions that the Board is required to make regarding matters handled by the CEO and even possibly, yourself if there isn’t an appropriate policy or procedure in place.

3. Policies and Procedures

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Ask yourself whether there is effective policies and procedures in place to help guide you through making an effective decision. Many organisations do have effective policies and procedures in place. However, just as many do not.

One of the most confusing factors for our employees are policies that are also procedures! In other words the policy somehow also tells the reader how to carry out a particular task. The organisation needs to understand they are two separate guidelines and should be treated as such.

Policies are a key guiding statement binding on you. The key to a good policy is making sure it is realistic. Many policies are strategic in nature. An example of a policy is a dress code or the use of technology at work. In short: they are not the process.

Procedures, on the other hand are about the process. An example of a procedure is an instruction on how to go about processing a customer’s claim. Many places now use flow charts to plot out the process. However, you need to understand how your employees like to receive and absorb information. I use software that once I have constructed the flow chart will also provide detailed text or a numbered list of the steps to be undertaken. In other words it caters for those who like to follow diagrams and those who are more comfortable with reading text.

Most complaints you receive are about the process (i.e. how someone has been treated) and not the policy as such. When you sit down and think this through, you will certainly find this is the case.

When making a decision, ask yourself what policies are relevant to the decision you are required to make? If there is no policy, you need to understand how a decision can be made without a policy: Are you empowered to make a decision? Does it need to go to a supervisor/manager/executive or the CEO? Is there a delegation in place that allows for a non policy decision to be made by the CEO? If there isn’t such an arrangement in place, the CEO should, by rights, take the matter to the Board for a determination.

Have you ever read: The One Minute Manager series of books. If you haven’t, take a look. You will get a very good insight into how a board can be towards a CEO when things go wrong in the lower echelons of an organisation when appropriate mechanisms to deal with an issue are not in place.

4. Risk Management

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Do you, your team, management/executive, the CEO and the Board really understand the managing of risk and what it really takes to do it? Also, when it comes to risk analysis, it isn’t just about the negative. There are positive risk factors too.

The most important issue regarding risk is understanding your “risk appetite” – i.e. your organisation’s capacity to absorb or mitigate a risk will make it easier to reach a conclusion and an appropriate course of action. Any report you prepare or consider, regardless of its size should have a risk assessment attached to it.

In terms of who manages the different risks in an organisation, the establishment of the levels of risk (likelihood x consequences) helps determine who has the capacity and capability (along with resourcing) to deal with risks. An example regarding the levels of risk and who has the responsibility to deal with such matters is:

  • Low risk – team member/supervisor
  • Medium risk – supervisor/manager
  • High risk – manager/executive/ceo
  • Extreme risk – ceo/board

Where do you fit in the above list?

There are many ways to assess and mitigate risks. I am not going to list them here. However, where I live and work, all risk management systems are expected to follow the Australian Standard regarding risk.

5. Training and Development

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Governance gurus the world over such as Michael G. Silverman and Richard M. Steinberg now recognise that training and development is not only the basis of keeping a broad and open mind, but fundamental when it comes to developing effective governance, risk management and compliance strategies.

A summary of their books on such matters can be found here:

Compliance Management for Public, Private or Non-Profit Organsations

This book is a complete, hands-on guide to implementing strategies and techniques for developing, managing, and improving the compliance function of any organization. 

From establishing compliance goals and managing education and training programs to operating a whistle-blowing program and addressing staffing and budgeting requirements, this practical resource covers everything compliance officers and risk and organizational managers need to know, including: Where and how to establish a compliance program within an organization, the critical skills and expertise for maintaining an effective compliance program, the pros and cons of making a compliance program a part-time function of an organization and how to deliver bad news to senior management and survive!

Governance Risk Management and Compliance

  • Explains critical factors that make compliance and ethics programs and risk management processes really work;
  • Explores the board’s role in overseeing corporate strategy, risk management, CEO compensation, succession planning, crisis planning, performance measures, board composition, and shareholder communications;
  • Highlights for CEOs, senior management teams, and board members the pitfalls to avoid and what must go right for success;
  • Outlines the future of corporate governance and what’s needed for continued effectiveness.

I have both of these texts, and I admit they cost me far less than what they are available for now. However, I am sure you are aware of how to obtain these texts for a good price.

Finally – Are You A King or Queen That Make’s Unilateral Decisions?

For a number of western cultures, good governance is at quite an advanced stage. With others, they still have a long way to go. Interestingly, eastern cultures are coming around to this way of thinking too.

The quest to implement good governance began with a “review” of the English legal system (Westminster) during 1215AD. It was the time of Magna Carta and the beginning of British monarchs making commitments based on the input of others into their decisions. In short, the barons became part of the decision making process, not just arbitrary advisors to the monarch. Magna Carta was fundamentally (as it became) about ensuring a person’s rights. Everybody, including the monarch (over time) was subject to the law!

A clause from Magna Carta that is still a part of English law to this very day states:

No free man shall be seized or imprisoned, or stripped of his rights or possessions, or outlawed or exiled, or deprived of his standing in any other way, nor will we proceed with force against him, or send others to do so, except by the lawful judgement of his equals or by the law of the land. To no one will we sell, to no one deny or delay right or justice.

The above basic principles are now enshrined in a range of legal systems around the world.

If you were a king or queen for a day, what effective decisions would you make?

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