Conducting such tests reflects commitment to strengthened and plausible directorship and control mechanisms. The tests – which may be undertaken by independent/external entities if the organisation so wishes – also yield opportunities for recalibration and recourse where discrepancies between set policy and actual operations are identified.
Having established internal governance frameworks that underpin activities and operations, it is important to test alignment of activities on the ground and progress towards sustainable profitability and value creation against the set frameworks. These tests have features that reflect the said alignment. We will consider the general features or measures that shed light in this regard.
In undertaking their governance tests, firms can consider five overarching themes to investigate. The first of these is board structure (and function). Having set the initial board structure, governance designates can regularly appraise aspects such as composition, including the balance between executive and non-executive members, as well as the effectiveness thereof.
Another measure relating to board structure and function would be that of board member independence as well as diversity. With specific regard to function, an assessment of the current skills and expertise of the board, vis-à-vis the initial requirements set out when expressions of interest to serve were publicised, can be made. This may also highlight collective and individual competence when set against variances in expected and actual performance. Another functional element relates to the fruitfulness of meetings at board level and inherent factors such as appropriateness of resolutions and deliberations, including consideration of just how vigorous the high-level discussions that are taking place are.
A subsequent aspect that can be probed during the test is risk management (and control). Here questions can be asked pertaining to the board’s effectiveness in the identification and assessment of (as well as readiness for) 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 tainted business activity. Investigation of any covenants that the corporation has 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 the organisation has outsourced services crucial to its operations.
Financial disclosure consideration is of utmost significance where governance tests are concerned. In reviewing the firm’s performance in this respect, emphasis can be placed on 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. An assessment of the Audit Committee, its Terms of Reference as well as adherence thereto, may also be made to ensure that it has accomplished its mandate.
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 consider 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.
In concluding governance tests, the aspect of overall commitment to robust governance is considered. How satisfied are the participants of the review with the board’s adherence to its Charter and other pertinent policy documents relating to directorship and control? The effectiveness of management and executives can also be assessed with reference to internal operational codes such as 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 achievement to set objectives. Overall, the factors mentioned are vital elements to consider when undertaking governance tests. Their regular review is consequently of the utmost importance.
The views and opinions expressed in this article are those of the author, Dumisani F. Ntini – Governance and Strategy Practitioner. Contact info@governancegroup.org
