Why good governance counts

It is described as essential. It is the ‘G’ in ESG.

But what is ‘good governance’ and why is it so important to businesses whatever their size?

Experts stress that when it comes to running a business, good governance can be the key to unlocking a brighter future for both its workforce and its supply chain.

Corporate governance is the system of rules, practices and processes by which a company
is directed and controlled.

Put simply, it refers to the way in which companies are governed and to what purpose.

It identifies who has power and accountability, and who makes decisions.

 And it is described by The Chartered Governance Institute as “a toolkit that enables management and the board to deal more effectively with the challenges of running a company”.

Lila Thomas, restructuring advisory partner at consultancy FRP, based in Preston, explains that having good governance in place is essential for the “sound running” of any business.

“This helps the company deliver against its fundamental purpose, and manage risk,
preventing any nasty surprises.

“Accountability means board members are diligent in reporting and, if necessary, explaining
progress against these principles, whether that’s to internal or external stakeholders.

“This is critical to fostering all-important trust in the business, which itself can underpin the
value that stakeholders place in them.”

Ian McCullough, Preston based partner at advisory firm Opus Restructuring and Insolvency, describes good governance as being like ‘the brakes on a car’.

He explains: "It isn’t there to stop the business, but to let it go faster but safely

"Bad management is the primary or underlying cause of more business failures than any
other single cause, mostly because of poor commercial judgement.

“Good governance is there to improve that judgement. It can become an obsession and a
barrier to the progress of a business if it is too rigid and too formulaic, but it is an essential
ingredient of success.”

He adds: “The trick is finding an approach which fits the culture of the business. What works in a large insurance company would be a disaster in a rapidly expanding tech start up.

“The bigger the company, the more bureaucracy the governance regime will tend to generate, so that certainly needs to be curbed. Principles are more important than paperwork.”

Sue Hutchinson is audit partner with Blackburn headquartered accountants and business
advisors Beever and Struthers.

She says that for businesses transparency is “paramount” in order to explain “their progress and achievements against their strategic objectives”.

She says: “Doing this in a balanced way, including the negative as well as positive outcomes, helps demonstrate a board’s accountability to customers and stakeholders and creates public trust in society.

“Many organisations are not only reporting on their financial performance, but also on their
Environmental, Social and Governance (ESG) organisational impact on society.

“To do this effectively, those same  organisations, from small charities through to multinational companies have ESG as part of their strategic objectives.

"Doing so is also enabling businesses to reduce risk and inform direction and enhance overall company performance.”

Sue adds: “The best boards regularly discuss what value they add to their organisations and
how they are doing.

“Whether a family business or a National Health Service board, developing skills individually and collectively helps to embrace diversity and enhance performance and decision making.

"Reviewing the effectiveness of the board is therefore essential, to inform of skills gaps as well as help with succession planning.”

Meanwhile, the Financial Reporting Council’s updates to the UK Corporate Governance Code have added new requirements for listed companies to which the code applies too.

Lila Thomas at FRP, says: “Most will apply from January 1, so boards need to make sure they’ve reviewed the changes if they haven’t already, along with the accompanying guidance – or be ready to explain why they don’t need to comply.”

Helen Clayton, managing partner at Lancashire headquartered accountants and business advisors PM+M, adds that the introduction of updated corporate governance codes, such as the UK Corporate Governance Code 2018, presents both challenges and opportunities for businesses in the county.

She says: “These codes emphasize greater board accountability, transparency, sustainability, diversity, stakeholder engagement and focus on long-term success over short-term gains.

“They also highlight the importance of stakeholder engagement and workforce considerations.

"For businesses of all sizes, these changes mean greater scrutiny and higher expectations from regulators, investors, and the public.

“However, by aligning with these codes, companies can better manage risks, foster innovation, and ensure sustainable growth, benefiting both the business and wider society.”