This article was written and appeared in GRC Outlook on July 27th, 2022.
The past decade has ushered in a new normal regarding how we maneuver the changing economic landscape. Businesses thrive or collapse based on the rules established to serve their shareholders and stakeholders. Corporate Governance policies and guidelines keep pace with new expectations, economic changes, and technologies that support and feed the corporate vision. Corporate Governance is the driving force behind the vision and sets short-and-long-term goals. The Board of Directors, the champion of Corporate Governance, communicate and monitor the impact on their organization.
The most recent COVID Pandemic has ushered in a new era of Global Trade. Like other periods of economic disruption, businesses are re-evaluating policies and guidelines to keep pace with changes and ensure that the corporate vision remains intact. The economic challenges of the past three years have highlighted inefficiencies not only within the corporate environment, but the employment sector has also seen some significant shifts.
The goal of Corporate Governance is to oversee critical decisions that impact shareholders’ needs. These decisions include ensuring that the business has an effective strategy and the resources needed to thrive during a down-economic period. There are four primary foundational objectives:
- Managing policies for hiring and firing of senior executives
- Ensuring that the business activities follow laws and the ethics outlined by the government and the corporate vision
- Transparent communication with shareholders and other stakeholders
- Establishing corporate strategy, compensation, and risk management
The recent economic changes resulting from COVID have severely impacted all four of these foundational objectives, forcing businesses to rewrite policies and guidelines to fit the new normal way of doing business.
Challenges in Corporate Governance
Businesses across the nation and the world face unprecedented challenges because of the COVID pandemic. The Pandemic caught everyone off guard, and scrambled to respond to the impact of a global health event. However, because of the lack of transparency from the various health organizations and resulting confusion in information sharing, the board of directors could not foresee the coming risks and was therefore unable to develop a risk mitigation strategy.
Introduce the fact the nation and the world disagree on whether to adhere to government intervention and vaccination mandates; the balance of control between employer and employee has shifted. Adding more stress on the board were compliance issues put out by the government and various health organizations. The result is evident in the fact that businesses are finding it increasingly difficult to find employees without providing incentives and benefits to attract and retain qualified workers.
Many US businesses did not have the liquidity to pay employees’ salaries for one month, let alone two years, during the COVID crisis. Many employees furloughed or laid off during the Pandemic quickly came to realize that there might be a positive side to their situation as they got to spend more time with family, save money and live on less, and explore the opportunity to launch their small businesses.
This shift in employee/employer dynamics has forced boards of directors to rewrite employment policies and guidelines to promote employee retention and growth. In addition, businesses focused on more strategic and streamlined hiring processes.
Although many more challenges surfaced because of the Pandemic, the question remains, “Could we have been better prepared?”
Where Did We Go Wrong?
If anything, the recent Pandemic has highlighted gaps in Corporate Governance and the board of directors’ responsibilities regarding risk management, effectiveness, and limitations. Before the pandemic Corporate Governance was skewed very much towards shareholders, ignoring other stakeholders like employees and vendors.
Corporate Governance follows four principles: accountability, transparency, fairness, and responsibility. Each of these principles relies on accurate data and transparent communication to be effective. Failure to follow these principles adversely impacts any business. In an arena of fast-paced news, instant information, and the need to make decisions quickly, any misstep or misguided practice can ruin a business in a heartbeat.
The board of directors’ role shifted from risk mitigation to risk management in favor of the shareholders. As a result, the four principles were ignored in many cases and left the business open to economic ruin.
Understandably, the Pandemic caught everyone off guard. However, Corporate Governance written in favor of shareholders does not promote fairness and transparency. On the contrary, it abuses the power structure and weakens accountability across all factors.
How Can We Prepare for Next Time?
The future of good Corporate Governance is data-driven. It incorporates environmental and social criteria. Environmental performance is an internal process and mechanism that monitors reliable and verifiable environmental information to build a mitigation strategy for changes coming down the pike. Data helps to determine whether it meets the criteria defined under corporate guidelines.
Developing meaningful environmental Key Performance Indicators (eKPIs) and evaluating them against Management and Operational performance indicators will highlight changes in internal management and operations to mitigate repercussions effectively.
Social criteria relate directly to business relationships. For example, how a business treats surrounding communities and engages in social issues is reflected in brand awareness and quality of revenue generation. In addition, it promotes an attractive hiring environment and demonstrates social responsibility and transparency, encouraging customer loyalty.
Technology will be a significant contributor to data analysis and performance metrics. Knowing the data and interpreting it by utilizing the correct data management and visualization tools can transform this data into actionable and strategic decision-making.
For every action, there’s a reaction. Each decision made has long-term effects. Good or bad decisions usually begin as a ripple turning into a tidal wave. For example, reducing costs by cutting quality will eventually impact the bottom line as more and more customers look elsewhere for what they want.
The data will help identify gaps within the market or the business’s position within the market or industry. Some of the areas that will guide forward momentum:
- Understand the importance of stakeholders and their contribution to value creation for shareholders.
- Get intimately familiar with legislation and regulation that promote balanced value among shareholders and all other stakeholders.
- Capitalize on the war for talent by becoming familiar with the driving motivators for job positions.
- Monitor operational disruptions like climate change, commodity shortages, and social unrest and the challenges they pose.
- Understand how sustainability and its contribution improve financial performance.
- Recognize the impact that large conglomerates and asset managers have on the economy and society as inventory and prices are affected.
Over the past three years, corporate governance shortcomings have been front and center. Businesses should address these shortcomings to handle the next crisis. First, companies should closely evaluate board selection to provide balanced oversight. Efforts should concentrate on building a liquidity framework that protects stakeholders during situations. Finally, consider appointing a dedicated team whose responsibilities include developing a mitigation management strategy should another crisis occur.
Finally, move Corporate Governance away from a shareholder focus to a stakeholder focus.
- ACADEMA| Letters “Challenges are thrown in Corporate Governance during COVID 19,” Sonjai Kumar and Purnima Rao, Fortune Institute of International Business.
Danna is a Business Growth Strategist and CEO of MarketAtomy, LLC(Marketatomy.com). Her passion is working with small first-stage entrepreneurs to ensure that they start on the right foot and stay on the path to financial freedom. Known as the Business Birthing Specialist, Danna understands the intricacies of starting and running a successful business. Her efforts extend beyond the initial strategic planning process into the implementation and monitoring phase. She has recently launched the first eLearning environment specifically targeting small micro businesses called MarketAtomy. Academy (marketatomy.academy).
A graduate of the University of Central Florida’s College of Business, Danna holds degrees in both Marketing and Management Information Systems (MIS). She brings more than 40 years of strategic planning experience in business structures, marketing, and business development nationally and internationally.
Danna is not only a professional business growth strategist but is a public speaker and best-selling author on Amazon. She has published 5 books, the latest “Social or Sociopathic,” dropped in 2021.
Danna’s Resume/CV can be found at https://www.linkedin.com/in/dannaolivo/