Corporate Governance and Risk Management

THE KEY ROLES OF BOARDS

 Question: Where are Board skills and expertise normally focused?

Introduction

Boards of directors are an essential aspect of the business environment. They consist of professionals recruited by the company’s shareholders to act as their representatives. The success of an organization depends on board members (Naciti, 2019). They work together in the lawful, financial and ethical areas of a company. Public companies often select a board of directors who ensures they follow the business rules and regulations set by the government. It is essential for companies to have a board of directors because they; provide leadership, direction, and assurance that management makes decisions that are best for the business. They also provide strategies from an external perspective and ensure the company is credible.

Leadership and management processes in organizations

A successful business has a combination of good leadership and management. Leadership is the ability to guide and direct people towards a common goal. The management of a company must have a leader who has leadership qualities. Leadership and management processes include:

• Company’s goal setting and planning: Managers and leaders guide the employees towards a common goal. They set achievable goals broken down into steps and phases, including deadlines. They then follow up on developments and confirm that everyone strives for the same objectives. These goals and plans set by managers and leaders give employees direction on what needs to be achieved (Areed et al., 2020).
• Strategic communication: Communication is a crucial aspect of the success of an organization. Managers and leaders communicate their expected goals, the organization’s vision and any required changes from employees. In addition, they are open to receiving feedback from the clients and employees and encourage them to communicate more openly.
• Decision making: Decision-making is an essential process for managers and leaders. Managers make day-to-day decisions that enable the organization to function, while leaders are responsible for making decisions that benefit the overall aims of an organization.
• Employee motivation: Employees who are motivated are more productive. An organization’s leadership and management create a work environment that motivates and encourages teamwork. They reward their work, actively listen to them and provide them opportunities to grow.
• Teamwork and collaboration: A work environment that encourages teamwork and collaboration depends on the management and leaders. Efficient managers and leaders support a workplace built on open communication, trust and integrity. They delegate tasks according to an employer’s strengths and skills and encourage them to collaborate.
• Receiving feedback and change management: Feedback helps organizations’ managers and leaders to make changes where necessary. They address the need for change, engage the employees in the change process and set deadlines for the change duration. For successful change management, managers and leaders must be patient, irrepressible and malleable to change.

The key roles of Boards in a workplace

The board of directors consists of members who play specific roles in the organization. The role of boards includes:

• Direction and strategic planning: The boards of directors are responsible for setting the organization’s goals and objectives. They then set strategic plans and directions that align with the firm’s mission and vision.
• Creating policies: Boards assist in creating policies that oversee the firm’s operations. They guarantee that rules adhere to laws and regulations, encourage moral conduct, and serve the objective of the business.
• Maintaining company resources: Boards do a financial oversight to confirm that the company’s finances are sustainable and healthy. They review and approve financial budgets and invoices. In addition, they work closely to ensure that personnel utilize the company’s resources appropriately (Chams & Garcia-Blandon, 2019).
• Recruiting and dismissal of crucial executive leaders: Key executive leaders, such as the CEO, are evaluated and appointed by boards. They make the final decisions on who is to be appointed. In addition, boards analyze and assess their performances and provide them with necessary feedback. They also determine the critical executive’s compensation.
• Ensure the company complies with ethical and legal laws: There are laws and regulations that companies need to comply with. Boards are there to ensure that the company operates by the rules. They do this by establishing ethics guidelines and codes of conduct that everyone needs to follow. In cases of ethical breach, they take appropriate actions.
• Risk management: The strategies to effectively mitigate risks are developed by boards. They take care of and manage risks that may impact the organization. They work together to identify and analyze risks and ensure that vital mitigation strategies are used to manage the risk.

The focus of Boards skills and expertise

The board’s skills and expertise are relevant to the success of a workplace and are often focused on the following:

• Management and leadership area

Board members who possess management and leadership skills have an understanding of the significance of good leadership practices, staff engagement and the culture of an organization. They provide insightful information about managerial leadership, talent acquisition, and human resource administration—their skills and expertise help guide their decision-making processes (Beji et al., 2021).

• Accounting and financial area

It is essential for boards to have accounting and financial skills and expertise. With these skills, they promote effective financial decision-making and oversights. They can decide on the company’s key executives’ compensation rates. In addition, they understand financial reporting and statements that enable them to pass informed financial decisions and effective budgeting.

• Legal and Ethical management

A board of directors that comprises members with legal expertise or skills is vital. The legal expertise ensures that the company is operating in accordance with the industry’s legal and ethical procedures and boundaries. They also mitigate legal risks. In addition, they offer advice on management, authorization, and compliance issues.

• Risk Management

Mitigating risks appropriately requires relevant skills and expertise from boards. They assist in the company’s risk oversight efforts. They also have the necessary knowledge about risks and how to control them effectively.

• Business development and strategic planning

The business development, strategic planning skills, and expertise of boards play a vital role in a firm’s long-term goals and objectives.

Conceptual, contextual and ethical issues in corporate governance and risk management decisions

• Conceptual issues

An example includes a lack of agreement concerning corporate governance. The lack of agreement can lead to variations in governance practices. It also involves the debate on prioritizing shareholders, employees, suppliers and clients’ interests. In risk management, conceptual issues include decisions in categorizing risks, their latitude, and how to mitigate them.

• Contextual issues

This includes the legal and regulatory frameworks that impact corporate governances and risk management, which vary in different organizations. It also includes an organization’s complexity, size, and culture that shapes and affects its governance structures and risk management strategies. In addition, contextual issues include the organizations’ ownership structure, such as; whether it is a public, private or government organization. Each ownership structure impacts the firm negatively or positively.

• Ethical issues

Ethical issues can occur in corporative governance decision-making processes. It includes conflict of interest in executive compensation and transparency in the organization. For the smooth governance of a firm, boards should ensure they prioritize ethics standards. In risk management, ethical issues involve assuring accountability, equality, and openness to maintain trust and integrity in the organization.

Corporate governance and risk management

Corporate governance and risk management play a crucial role in the success of organizations. Corporate governance is the practices, procedures and rules that control and directs a company. Efficient corporate governance ensures there are transparency, credibility and accountability in a firm (Adrian-Cosmin, 2020). Risk management refers to detecting, evaluating, and reducing risks that could have a consequence on the company’s goals being met.

Corporate governance creates procedures to guarantee accountability and openness in a company’s decision-making operations. It is responsible for creating responsibilities and structures that enable effective control. They also create policies that comply with ethical laws and regulations. Corporate governance encourages boards to be effective in planning, setting goals and overseeing the company’s financial reports. It ensures that the board comprises members with different skills and expertise required for the organization’s success. In addition, corporate governance protects the interests of clients, stakeholders, society and suppliers and promotes ethical behaviours among them. Risk management is also included in corporate governance. They identify risks and implement risk management structures and processes.

Risk management involves risk identification and evaluation. These risks may harm the organization’s ability to attain its goals. Identifying risks assists firms in evaluating and understanding possible threats allowing them to make necessary adjustments. In addition, Risk identification leads to risk control and prevention. Risk management focuses on creating and implementing strategies to help prevent and control risks. It also helps business continuity by preparing and controlling any potential threat to the organization. Business performance can improve due to risk management as it increases operational effectiveness.

Ethical Perspectives in Informed decision making

Recommendations to enhance the board processes:

• Create and implement an ethical framework: To enhance the board processes, they should establish clear ethical standards that describe the behaviours and principles expected from them.
• Draw attention to ethical leadership: They should encourage and emphasize board members leading as an example in practising and upholding ethics and integrity. This will encourage the staff to behave ethically.
• Carry out regular ethics reviews: Boards should carry out frequent ethical reviews to evaluate, identify and address areas that need improvements according to the ethical standards.
• Develop ethical risk management: A breach of ethics can impact the performance of a company. The board should develop strategies to mitigate ethical risks to enhance the board’s processes.
• Analyze reports on ethical performances: This helps to identify the ethical performances’ of an organization that promotes accountability and credibility.

Conclusion

A board of directors is essential for an organization’s success. They are responsible for decision-making, risk management, policy development, maintaining the organization’s resources and strategic planning. The board’s skills and expertise enable an efficient governance team. In addition, corporate governance and risk management play a critical role in the productivity and performance of a business. To enhance board processes concerning ethical implications, board members should implement ethical frameworks to guide their actions and behaviours.

References

Areed, S., Salloum, S. A., & Shaalan, K. (2020). The role of knowledge management processes for enhancing and supporting innovative organizations: a systematic review. Recent advances in intelligent systems and smart applications, 143-161.

Adrian-Cosmin, C. (2020). THE STAGES OF THE RISK MANAGEMENT PROCESS IN CORPORATE GOVERNANCE. Annals of’Constantin Brancusi’University of Targu-Jiu. Economy Series, (3).

Beji, R., Yousfi, O., Loukil, N., & Omri, A. (2021). Board diversity and corporate social responsibility: Empirical evidence from France. Journal of Business Ethics, 173, 133-155.

Chams, N., & García-Blandón, J. (2019). Sustainable or not sustainable? The role of the board of directors. Journal of cleaner production, 226, 1067-1081. https://doi.org/10.1016/j.jclepro.2019.04.118

Naciti, V. (2019). Corporate governance and board of directors: The effect of a board composition on firm sustainability performance. Journal of Cleaner Production, p. 237, 117727. https://doi.org/10.1016/j.jclepro.2019.117727