A simple method that firms can utilise to outline the mitigants and avenues to address challenges is tabulation of aspects crucial to the governance test such as Spheres of Risk, Risk Label (here, the spheres can be tagged as either low, intermediate, or high) as well as the Mitigants and/or Covenants deemed preferable to confront these convolutions.
| Sphere of Risk | Risk Label (High, Intermediate, Low) | Mitigant(s) & Covenant(s) |
| Insufficient Financial Disclosure | Intermediate | M: Preparation and Publishing of Audited Financials; IFRS/GAAP Adherence C: Formulate & Implement Audit Committee |
| Corporate Governance Commitment | Low | M: Internal Policies and Procedures, e.g. Charter, Committee ToRs present C: None |
| Ineffective Board Structure and Function | High | M: Member Independence; Member Experience; Thorough Board Discussions/Meetings C: Formulate & Implement Audit Committee |
We shall consider an example of this for an organisation named XYZ Limited.
We first consider concise definitions of the three main headings or aspects tied to this undertaking. The first aspect, โSphere of Risk,โ refers to the risk areas identified by agents participating in the governance test as posing a threat whilst simultaneously being instrumental to and having an impact on the organisationโs success and sustainability, particularly in the context of corporate governance.
Secondly, the โRisk Labelโ section affords the parties to the process an opportunity to conclude on and describe the particular Sphere of Risk in terms of its actual effect on the organisation, e.g. High, Intermediate or Low. In essence, the risk area is tagged according to its perceived potential or level of threat to the organisation. Simply put, High would imply excessively injurious, Intermediate would mean moderately harmful and Low would constitute minimal danger potential. Lastly, the Mitigant/Covenant section would outline possible defence mechanisms and resolutions to ensure improvement.
We then venture into possible examples of the tableโs constituents. Firstly, during the governance test, the parties to the undertaking may have identified Insufficient Financial Disclosure as a corporate governance sphere of risk within the organisation. It is thereafter crucial to decide on the potential threat such inadequate disclosure poses from a corporate governance perspective.
There are numerous negative effects that this can have on the organisation from a regulatory and compliance perspective as well as from the perspective of goodwill and stakeholder perception of the organisation. If it is tagged as Intermediate, for instance, governance designates can then consider possible mitigant measures, such as ensuring that financial statements are well prepared and audited in line with international standards, and a covenant can be made for the establishment of an independent Audit Committee.
Another example would be the teamโs identification of Commitment to Corporate Governance as a Sphere of Risk in the organisation. Parties involved in the exercise can then decide on how much of a threat this poses, from directorship and control perspectives and from operational perspectives.
In our example, we have labelled this risk area as low for XYZ Limited. This is due to the organisation already having possible mitigants for this in the form of well thought out Terms of Reference (ToR) documents for all of its board committees and due to the existence of a comprehensive Board Charter. Respecting always that there are numerous aspects that can be used to determine commitment, our study organisation, XYZ Limited, has these (Charter and ToRs) as the only aspects used in the exercise to measure commitment. There would consequently be no need for a covenant to improve in this area. Low risk implies a plausible commitment position in this instance.
A third example is the identification of Ineffective Board Structure and Function as a Sphere of Risk in the organisation. This has been labelled as High by XYZ Limitedโs governance designates. Despite XYZ Limited having internal documents that would reflect formidable commitment to corporate governance, it may be the case that the current board structure and function erode the robustness of the overall governance framework. Mitigants for this can include ensuring the independence of board members, as well as balancing the mix of skills and experience of the board members.
Furthermore, effectiveness of meetings must be ensured, and this can be underpinned by having comprehensive meeting agenda and knowledge of discussion documents prior to meetings to ensure thorough and vigorous discussions and solid resolutions. As with financial disclosure, a covenant in this regard would be the implementation of an independent audit committee that is unafraid of alerting the current board of the identified inconsistencies that cause this to be a risk area.
Overall, undertaking such mitigant/covenant exercises after testing the effectiveness of governance structures can aid substantially in the strengthening of the organisationโs corporate governance frameworks. It can also reflect plausible commitment to robust corporate governance.
The views and opinions expressed in this article are those of the author, Dumisani F. Ntini – Governance and Strategy Practitioner. Contact info@governancegroup.org.
