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What Is Corporate Governance?

• How It Works
• Board of Directors
• Assessing Corporate Governance

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Corporate Governance: Definition, Principles, Models, and Examples

Good corporate governance can benefit investors and other stakeholders, while bad governance can lead to scandal and ruin

James Chen, CMT is an expert trader, investment adviser, and global market strategist.

Amanda Bellucco-Chatham is an editor, writer, and fact-checker with years of experience researching personal finance topics. Specialties include general financial planning, career development, lending, retirement, tax preparation, and credit.

Investopedia / Jessica Olah

Corporate governance is the system of rules, practices, and processes by which a company is directed and controlled. Corporate governance essentially involves balancing the interests of a company's many stakeholders , which can include shareholders, senior management, customers, suppliers, lenders, the government, and the community. As such, corporate governance encompasses practically every sphere of management, from action plans and internal controls to performance measurement and corporate disclosure .

Key Takeaways

• Corporate governance is the structure of rules, practices, and processes used to direct and manage a company.
• A company's board of directors is the primary force influencing corporate governance.
• Bad corporate governance can destroy a company's operations and ultimate profitability.

The basic principles of corporate governance are accountability, transparency, fairness, responsibility, and risk management.

Understanding Corporate Governance

Governance refers to the set of rules, controls, policies, and resolutions put in place to direct corporate behavior. A board of directors is pivotal in governance , while proxy advisors and shareholders are important stakeholders who can affect governance.

Communicating a company's corporate governance is a key component of community and  investor relations . For instance, Apple Inc.'s investor relations site profiles its corporate leadership (the executive team and board of directors) and provides information on its committee charters and governance documents, such as bylaws, stock ownership guidelines, and articles of incorporation .

Most successful companies strive to have exemplary corporate governance. For many shareholders, it is not enough for a company to be profitable; it also must demonstrate good corporate citizenship through environmental awareness, ethical behavior, and other sound corporate governance practices.

Benefits of Corporate Governance

• Good corporate governance creates transparent rules and controls, guides leadership, and aligns the interests of shareholders, directors, management, and employees.
• It helps build trust with investors, the community, and public officials.
• Corporate governance can give investors and stakeholders a clear idea of a company's direction and business integrity.
• It promotes long-term financial viability, opportunity, and returns.
• It can facilitate the raising of capital.
• Good corporate governance can translate to rising share prices.
• It can reduce the potential for financial loss, waste, risks, and corruption.
• It is a game plan for resilience and long-term success.

Corporate Governance and the Board of Directors

The board of directors is the primary direct stakeholder influencing corporate governance. Directors are elected by shareholders or appointed by other board members and charged with representing the interests of the company's shareholders.

The board is tasked with making important decisions, such as corporate officer appointments, executive compensation, and dividend policy. In some instances, board obligations stretch beyond financial optimization, as when shareholder resolutions call for certain social or environmental concerns to be prioritized.

Boards are often made up of a mix of insiders and independent members. Insiders are generally major shareholders, founders, and executives. Independent directors do not share the ties that insiders have. They are typically chosen for their experience managing or directing other large companies. Independents are considered helpful for governance because they dilute the concentration of power and help align shareholder interests with those of the insiders.

The board of directors must ensure that the company's corporate governance policies incorporate corporate strategy, risk management, accountability, transparency, and ethical business practices.

A board of directors should consist of a diverse group of individuals, including those with matching business knowledge and skills, and others who can bring a fresh perspective from outside the company and industry.

The Principles of Corporate Governance

While there can be as many principles as a company believes make sense, some of the most common ones are:

• Fairness : The board of directors must treat shareholders, employees, vendors, and communities fairly and with equal consideration.
• Transparency : The board should provide timely, accurate, and clear information about such things as financial performance, conflicts of interest, and risks to shareholders and other stakeholders.
• Risk Management : The board and management must determine risks of all kinds and how best to control them. They must act on those recommendations to manage risks and inform all relevant parties about the existence and status of risks.
• Responsibility : The board is responsible for the oversight of corporate matters and management activities. It must be aware of and support the successful, ongoing performance of the company. Part of its responsibility is to recruit and hire a chief executive officer (CEO) . It must act in the best interests of a company and its investors.
• Accountability : The board must explain the purpose of a company's activities and the results of its conduct. It and company leadership are accountable for the assessment of a company's capacity, potential, and performance. It must communicate issues of importance to shareholders.

Corporate Governance Models

Different corporate governance models may be found throughout the world. Here are a few of them.

The Anglo-American Model

This model can take various forms, such as the Shareholder, Stewardship, and Political Models. The Shareholder Model is the principal model at present.

The Shareholder Model is designed so that the board of directors and shareholders are in control. Stakeholders such as vendors and employees, though acknowledged, lack control.

Management is tasked with running the company in a way that maximizes shareholder interest. Importantly, proper incentives should be made available to align management behavior with the goals of shareholders/owners.

The model accounts for the fact that shareholders provide the company with funds and may withdraw that support if dissatisfied. This is supposed to keep management working effectively.

The board will usually consist of both insiders and independent members. Although traditionally, the board chairperson and the CEO can be the same, this model seeks to have two different people hold those roles.

The success of this corporate governance model depends on ongoing communications among the board, company management, and the shareholders. Important issues are brought to shareholders' attention. Important decisions that need to be made are put to shareholders for a vote.

U.S. regulatory authorities tend to support shareholders over boards and executive management.

The Continental Model

Two groups represent the controlling authority under the Continental Model. They are the supervisory board and the management board.

In this two-tiered system, the management board is composed of company insiders, such as its executives. The supervisory board is made up of outsiders, such as shareholders and union representatives. Banks with stakes in a company also could have representatives on the supervisory board.

The two boards remain entirely separate. The size of the supervisory board is determined by a country's laws and can't be changed by shareholders.

National interests have a strong influence on corporations with this model of corporate governance. Companies can be expected to align with government objectives.

This model also greatly values the engagement of stakeholders, as they can support and strengthen a company's continued operations.

The Japanese Model

The key players in the Japanese Model of corporate governance are banks, affiliated entities, major shareholders called Keiretsu (who may be invested in common companies or have trading relationships), management, and the government. Smaller, independent, individual shareholders have no role or voice. Together, these key players establish and control corporate governance.

The board of directors is usually made up of insiders, including company executives. Keiretsu may remove directors from the board if profits wane.

The government affects the activities of corporate management via its regulations and policies.

In this model, corporate transparency is less likely because of the concentration of power and the focus on the interests of those with that power.

How to Assess Corporate Governance

As an investor, you want to select companies that practice good corporate governance in the hope that you can thereby avoid losses and other negative consequences such as bankruptcy.

You can research certain areas of a company to determine whether or not it's practicing good corporate governance. These areas include:

• Disclosure practices
• Executive compensation structure (whether it's tied only to performance or also to other metrics)
• Risk management (the checks and balances on decision-making)
• Policies and procedures for reconciling conflicts of interest (how the company approaches business decisions that might conflict with its mission statement)
• The members of the board of directors (their stake in profits or conflicting interests)
• Contractual and social obligations (how a company approaches issues such as climate change)
• Relationships with vendors
• Complaints received from shareholders and how they were addressed
• Audits (the frequency of internal and external audits and how any issues that those audits raised have been handled)

Types of bad governance practices include:

• Companies that do not cooperate sufficiently with auditors or do not select auditors with the appropriate scale, resulting in the publication of spurious or noncompliant financial documents
• Executive compensation packages that fail to create an optimal incentive for corporate officers
• Poorly structured boards that make it too difficult for shareholders to oust ineffective incumbents.

Examples of Corporate Governance: Bad and Good

Bad corporate governance can cast doubt on a company's reliability, integrity, or obligation to shareholders. All can have implications for the financial health of the business.

Volkswagen AG

Tolerance or support of illegal activities can create scandals like the one that rocked Volkswagen AG starting in September 2015. The details of "Dieselgate" (as the affair came to be known) revealed that for years, the automaker had deliberately and systematically rigged engine emission equipment in its cars to manipulate pollution test results in the U.S. and Europe.

Volkswagen saw its stock shed nearly half its value in the days following the start of the scandal. Its global sales in the first full month following the news fell 4.5%.

VW's board structure facilitated the emissions rigging and was a reason it wasn't caught earlier. In contrast to a one-tier board system common to most U.S. companies, VW had a two-tier board system consisting of a management board and a supervisory board, in keeping with the Continental Model of corporate governance.

The supervisory board was meant to monitor management and approve corporate decisions. However, it lacked the independence and authority to carry out these roles appropriately.

The supervisory board included a large portion of shareholders. Ninety percent of shareholder voting rights were controlled by members of the board. There was no real independent supervisor. As a result, shareholders were in control and negated the purpose of the supervisory board, which was to oversee management and employees, and how they operated. This allowed the rigged emissions to occur.

Public and government concern about corporate governance tends to wax and wane. Often, however, highly publicized revelations of corporate malfeasance revive interest in the subject.

For example, corporate governance became a pressing issue in the United States at the turn of the 21st century, after fraudulent practices bankrupted high-profile companies such as Enron and WorldCom .

The problem with Enron was that its board of directors waived many rules related to conflicts of interest by allowing the chief financial officer (CFO) , Andrew Fastow, to create independent, private partnerships to do business with Enron.

These private partnerships were used to hide Enron's debts and liabilities. If they'd been accounted for properly, they would have reduced the company's profits significantly.

Enron's lack of corporate governance allowed the creation of the entities that hid the losses. The company also employed dishonest people, from Fastow down to its traders, who made illegal moves in the markets.

The Enron scandal and others in the same period resulted in the 2002 passage of the Sarbanes-Oxley Act . It imposed more stringent recordkeeping requirements on companies and stiff criminal penalties for violating them and other securities laws. The aim was to restore confidence in public companies and how they operate.

It's common to hear examples of bad corporate governance. In fact, it's often why companies end up in the news. You rarely hear about companies with good corporate governance because their corporate guiding policies keep them out of trouble.

One company that seems to have consistently practiced good corporate governance, and adapts or updates it often, is PepsiCo. In drafting its 2020 proxy statement, PepsiCo sought input from investors in six areas:

• Board composition, diversity, and refreshment, plus leadership structure
• Long-term strategy, corporate purpose, and sustainability issues
• Good governance practices and ethical corporate culture
• Human capital management
• Compensation discussion and analysis
• Shareholder and stakeholder engagement

The company included in its proxy statement a graphic of its current leadership structure. It showed a combined chair and CEO along with an independent presiding director and a link between the company's "Winning With Purpose" vision and changes to the executive compensation program.

What Are the 4 Ps of Corporate Governance?

The four P's of corporate governance are people, process, performance, and purpose.

Why Is Corporate Governance Important?

Corporate governance is important because it creates a system of rules and practices that determines how a company operates and how it aligns with the interest of all its stakeholders. Good corporate governance fosters ethical business practices, which lead to financial viability. In turn, that can attract investors.

What Are the Basic Principles of Corporate Governance?

Corporate governance consists of the guiding principles that a company puts in place to direct all of its operations, from compensation, risk management, and employee treatment to reporting unfair practices, dealing with the impact on the climate, and more.

Corporate governance that calls for upstanding, transparent behavior can lead a company to make ethical decisions that will benefit all of its stakeholders, including investors. Bad corporate governance can lead to the breakdown of a company, often resulting in scandal and bankruptcy.

Apple. " Investor Relations. Leadership and Governance ."

BBC. " Scandal Cuts VW Sales by 4.5% This Year ."

Dibra, Rezart. " Corporate Governance Failure: The Case of Enron and Parmalat ." European Scientific Journal , vol.12, no. 16, June 2016, pp. 283-290.

Corporate Secretary. " PepsiCo Finds Governance Success Through Evolution ."

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How to build a strong governance model

There has been a recent emphasis in the corporate world on best practices for corporate governance. The increased focus on governance has many boards of directors looking for ways to enhance their governance practices. Many of them are committed enough to the governance process that they're allocating financial resources to improving governance practices within their companies. Boards that focus on governance are starting by re-evaluating their policies, establishing board-level risk committees and clarifying the goals of all their committees. One of the newer strategies of boards is to appoint a Chief Risk Officer (CRO), and the preference is for the CRO to be an independent director. For many boards, it's back to square one with comparing their current governance model with how it functions in today's marketplace, finding gaps and working toward optimizing it. >> Learn More On Our "Modern Governance: The How-To Guide" Whitepaper

What Is a Governance Model?

Deloitte's guide to governance models, 'Developing an Effective Governance Operating Model,' outlines in detail how to build and improve governance models. Every company has unique circumstances and needs, and their governance models will reflect the uniqueness of their companies. There are four major components of a governance model, and each has important key subcomponents:

• Structure . The subcomponents under structure are organizational design and reporting structure and the structure of the committees and charters.
• Oversight Responsibilities . Key subcomponents under this component are board oversight and responsibilities, management accountability and authority, and the authority and responsibilities of the committees.
• Talent and Culture . Subcomponents under this section are performance management and incentives, business and operating principles, and leadership development and talent programs.
• Infrastructure . Policies and procedures, reporting and communication, and technology are the key subcomponents under this section.

Turning the Framework Into an Operating Model

Deloitte developed their Governance Framework as a tool to help corporations review and improve their governance frameworks. The governance processes they developed highlight the various elements of governance, clarify roles, and explain the relationships between governance, risk management and organizational culture . The infrastructure surrounds all elements of Deloitte's governance framework. The infrastructure includes the people, processes and systems that management puts in place every day. The infrastructure includes communication processes to transfer information to the board, stakeholders and management. In addition to overseeing the company's governance processes, boards need to play a role in developing parts of the operating model and participating in activities. The board's role in development should focus on governance issues such as strategy, integrity, talent, performance and risk governance. Thus, the governance framework and operating model is a process for turning the framework components into policies and protocols.

What Are the Components of a Governance Operating Model?

The main components of a governance model contain some important key aspects: Board Oversight and Responsibilities The governance model offers boards a way to articulate the oversight process, engage management in communication about governance matters, and learn where governance activities occur at various junctures in the company. Committee Authorities and Responsibilities Much of boards' work happens in committees. The governance model helps define the work and authority of its committees and outlines how committees communicate and report their efforts to the board and management team. Organizational Design and Reporting Structure Governance models should establish the authority that presides over compliance, risk, legal, finance and audit matters. The model should also define how the board will oversee risks across all regions and businesses. The organizational design and reporting structure should be made clear to employees and stakeholders. Management Accountability and Authority The governance model should specify authority and accountability for key roles and identify a governance process for managing disagreements. Governance models should bring balance and improved communication between those making decisions about risks and risk managers. The model should also ensure that individuals know the rights and limits associated with their decisions. Boards should acknowledge the control functions at the regional and global levels. Performance Management and Incentives Incentives can enhance performance, but boards need to assess when incentives interfere with preserving assets and taking risks. A governance model should establish goals for performance, with the goal of getting the best value while considering risks and preserving assets. The goals should reflect the corporate tone and culture.

Three-Part Approach to Enhancing or Establishing a Governance Operation Model

Deloitte recommends a three-part approach to establishing a new governance operating model or enhancing an existing model. They're not suggesting that the board take responsibility for every part of the governance model.

What they are suggesting is that boards are uniquely positioned to form the governance model and to delegate duties to the appropriate parties to carry it out. The three parts are as follows: Part I Define the operating requirements for your governance model. Look for frameworks that will work best for your organization or design your own. Factor in any applicable regulatory, governance or legal requirements. Consider the scope of your operations and how governance factors in all aspects of it. Understand your current state of governance, including its strengths and weaknesses. Part II Design the governance operating model and its components. Define the key accountabilities, decision rights, and path for escalating matters up the levels of authority. Part III The final part is implementing the governance operating model. The completed model should define how boards will measure their success using standards and metrics. The model should tie governance requirements, organizational functions and business requirements together and allocate resources accordingly.

Implementation should include a schedule of how often the board reviews the governance operating model and may suggest that a third party participate in reviewing the plan. The review process should include the components, the plan and the implementation.

Concluding Thoughts About Building Strong Governance Models

With so much at stake and so much to oversee, boards need the assistance of electronic board management systems to help them address the issue of improving governance practices. Diligent Boards and the integrated suite of governance tools in Governance Cloud is the perfect solution for boards working on their governance models.

Governance Cloud boasts high-level security in each of its programs, including the board portal, secure messaging, minutes program, board evaluations, D&O questionnaires and entity management software programs.

Having a fully integrated Enterprise Governance Management system will aid board directors in developing governance frameworks that work for the benefit of the board, the managers, shareholders and stakeholders.

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Corporate Governance Plan Template

What is a Corporate Governance Plan?

A Corporate Governance Plan provides a framework for how a company or organization is managed and operated. It outlines the roles and responsibilities of key stakeholders, such as the board of directors, management, and shareholders, as well as rules and regulations that must be adhered to. The Corporate Governance Plan also outlines the company's commitment to ethical and responsible business practices, as well as its commitment to corporate social responsibility.

What's included in this Corporate Governance Plan template?

• 3 focus areas
• 6 objectives

Each focus area has its own objectives, projects, and KPIs to ensure that the strategy is comprehensive and effective.

Who is the Corporate Governance Plan template for?

This Corporate Governance Plan template is designed for organizations of all sizes and industries who need to create a comprehensive plan to define and implement their corporate governance. The template provides a structure to help organizations develop the policies and procedures necessary to ensure good governance and effective management.

1. Define clear examples of your focus areas

The first step in creating a Corporate Governance Plan is to define clear focus areas. These focus areas should be aligned with the organization's goals and objectives, and should be specific and measurable. Examples of focus areas could include increasing board effectiveness, increasing risk management strategies, and increasing transparency and governance.

2. Think about the objectives that could fall under that focus area

Once the focus areas have been identified, the next step is to identify objectives that support each focus area. Objectives should be specific, measurable, and achievable. Each objective should be broken down into smaller, more specific tasks. Examples of some objectives for the focus area of Increase Board Effectiveness could be: Improve Board processes and procedures , and Increase Board's understanding of the company.

3. Set measurable targets (KPIs) to tackle the objective

To measure progress towards each objective, organizations should set measurable targets or Key Performance Indicators (KPIs). KPIs should be specific, measurable, and actionable. Examples of KPIs could include an increase in the percentage of board processes and procedures that are formalized, or an increase in the percentage of risks monitored.

4. Implement related projects to achieve the KPIs

Once the KPIs have been identified, the next step is to identify and implement related projects or actions that will help the organization meet its objectives. Examples of projects could include creating a risk management policy, or implementing a training program for the board.

5. Utilize Cascade Strategy Execution Platform to see faster results from your strategy

Cascade Strategy Execution Platform is a powerful software solution designed to help organizations implement their strategy and reach their KPIs faster. The platform automates the process of tracking objectives, projects, and KPIs. It also provides powerful analytics and reporting tools to help organizations measure and monitor their progress in real-time.

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Principles of Corporate Governance

The following post is based on a Business Roundtable publication.

Business Roundtable has been recognized for decades as an authoritative voice on matters affecting American business corporations and meaningful and effective corporate governance practices.

Since Business Roundtable last updated Principles of Corporate Governance in 2012, U.S. public companies have continued to adapt and refine their governance practices within the framework of evolving laws and stock exchange rules. Business Roundtable CEOs continue to believe that the United States has the best corporate governance, financial reporting and securities markets systems in the world. These systems work because they give public companies not only a framework of laws and regulations that establish minimum requirements but also the flexibility to implement customized practices that suit the companies’ needs and to modify those practices in light of changing conditions and standards.

Over the last several years, the external environment in which public companies operate has become increasingly complex for companies and shareholders alike. The increased regulatory burdens imposed on public companies in recent years have added to the costs and complexity of overseeing and managing a corporation’s business and bring new challenges from operational, regulatory and compliance perspectives. In addition, many U.S. public companies have a global profile; they interact with investors, suppliers, customers and government regulators around the world and do so in an era in which instant communication is the norm. Further, in the recent past, Congress has abandoned strict adherence to the fundamental principle of materiality, a central tenet of the disclosure requirements of the federal securities laws. Instead, Congress has sought to use the securities laws to address issues that are immaterial to shareholders’ investment or voting decisions. For example, Congress has required public companies to disclose information relating to conflict minerals and payments to foreign governments for resource extraction and mine safety, information that may be relevant in a social context but has little relevance to material information that a shareholder would need to make an investment decision.

The current environment has also been shaped by fundamental changes in shareholder engagement, which has become a central and essential topic for public companies and their boards, managers and investors in the early 21st century. Public companies have undertaken unprecedented levels of proactive engagement with their major shareholders in recent years. Many institutional investors have also increased their engagement efforts, dedicating significant resources to governance issues, company outreach, the development of voting policies and the analysis of the proposals on the ballots of their portfolio companies. In addition, overall levels of shareholder activism remain at record highs, imposing significant pressures on targeted companies and their boards.

Further, many of today’s shareholders—and not only those typically viewed as “activists”—have higher expectations relating to engagement with the board and management than shareholders of years past. These investors seek a greater voice in the company’s strategic decisionmaking, capital allocation and overall corporate social responsibility, areas that traditionally were the sole purview of the board and management. Moreover, some shareholder-driven campaigns to change corporate strategies (through spin-offs, for example) or capital allocation strategies (through share repurchase programs) suggest that in some cases, at least, shareholder input on these matters has been heard in the boardroom. Some commentators view this rise in shareholder empowerment as appropriate, arguing that shareholders are the ultimate owners of the company. Others question, however, whether activists’ goals are overly focused on short-term uses of corporate capital, such as share repurchases or special dividends. Capital allocation strategies focusing on short-term value may be entirely appropriate for a shareholder, regardless of the length of its investment horizon. The board, however, has a very different role when considering the appropriate use of capital for the company and all of its shareholders. Specifically, the board must constantly weigh both long-term and short­ term uses of capital (for example, organic or inorganic reinvestment, returns to shareholders, etc.) and then determine the appropriate allocation of that capital in keeping with the company’s business strategy and the goal of long-term value creation.

Business Roundtable CEOs believe that shareholder engagement will continue to be a critical corporate governance issue for U.S. companies in the years to come. Further, it is our sense that there is a growing recognition in corporate America that an increase in shareholder access to the boardroom cannot come without a corresponding increase in shareholder responsibility. Here, as in many areas of corporate governance, transparency is a basic but essential element—for example, in this “age of information,” a shareholder that wishes to influence corporate behavior should be encouraged to publicly disclose the nature of its identity and ownership, even in cases where the federal securities laws may not specifically require disclosure.

More fundamentally, we believe that the responsibility of shareholders extends beyond disclosure. We sense that there is a rising belief that shareholders cannot seek additional empowerment without assuming some accountability for the goal of long-term value creation for all shareholders. Moreover, we believe that shareholders should not use their investments in U.S. public companies for purposes that are not in keeping with the purposes of for-profit public enterprises, including but not limited to the advancement of personal or social agendas unrelated and/or immaterial to the company’s business strategy.

We believe that this concept of shareholder responsibility and accountability will—and should­—become an integral part of modern thinking relating to corporate governance in the coming years, and we look forward to taking a leadership role in discussions relating to these important issues.

In light of the evolving landscape affecting U.S. public companies, Business Roundtable has updated Principles of Corporate Governance. Although Business Roundtable believes that these principles represent current practical and effective corporate governance practices, it recognizes that wide variations exist among the businesses, relevant regulatory regimes, ownership structures and investors of U.S. public companies. No one approach to corporate governance may be right for all companies, and Business Roundtable does not prescribe or endorse any particular option, leaving that to the considered judgment of boards, management and shareholders. Accordingly, each company should look to these principles as a guide in developing the structures, practices and processes that are appropriate in light of its needs and circumstances.

Guiding Principles of Corporate Governance

Business Roundtable supports the following core guiding principles:

• The board approves corporate strategies that are intended to build sustainable long-term value; selects a chief executive officer (CEO); oversees the CEO and senior management in operating the company’s business, including allocating capital for long-term growth and assessing and managing risks; and sets the “tone at the top” for ethical conduct.
• Management develops and implements corporate strategy and operates the company’s business under the board’s oversight, with the goal of producing sustainable long-term value creation.
• Management, under the oversight of the board and its audit committee, produces financial statements that fairly present the company’s financial condition and results of operations and makes the timely disclosures investors need to assess the financial and business soundness and risks of the company.
• The audit committee of the board retains and manages the relationship with the outside auditor, oversees the company’s annual financial statement audit and internal controls over financial reporting, and oversees the company’s risk management and compliance programs.
• The nominating/corporate governance committee of the board plays a leadership role in shaping the corporate governance of the company, strives to build an engaged and diverse board whose composition is appropriate in light of the company’s needs and strategy, and actively conducts succession planning for the board.
• The compensation committee of the board develops an executive compensation philosophy, adopts and oversees the implementation of compensation policies that fit within its philosophy, designs compensation packages for the CEO and senior management to incentivize the creation of long-term value, and develops meaningful goals for performance-based compensation that support the company’s long-term value creation strategy.
• The board and management should engage with long-term shareholders on issues and concerns that are of widespread interest to them and that affect the company’s long-term value creation. Shareholders that engage with the board and management in a manner that may affect corporate decisionmaking or strategies are encouraged to disclose appropriate identifying information and to assume some accountability for the long-term interests of the company and its shareholders as a whole. As part of this responsibility, shareholders should recognize that the board must continually weigh both short-term and long-term uses of capital when determining how to allocate it in a way that is most beneficial to shareholders and to building long-term value.
• In making decisions, the board may consider the interests of all of the company’s constituencies, including stakeholders such as employees, customers, suppliers and the community in which the company does business, when doing so contributes in a direct and meaningful way to building long-term value creation.

This post is intended to assist public company boards and management in their efforts to implement appropriate and effective corporate governance practices and serve as spokespersons for the public dialogue on evolving governance standards. Although there is no “one size fits all” approach to governance that will be suitable for all U.S. public companies, the creation of long-term value is the ultimate measurement of successful corporate governance, and it is important that shareholders and other stakeholders understand why a company has chosen to use particular governance structures, practices and processes to achieve that objective. Accordingly, companies should disclose not only the types of practices they employ but also their bases for selecting those practices.

I. Key Corporate Actors

Effective corporate governance requires a clear understanding of the respective roles of the board, management and shareholders; their relationships with each other; and their relationships with other corporate stakeholders. Before discussing the core guiding principles of corporate governance, Business Roundtable believes describing the roles of these key corporate actors is important.

• The board of directors has the vital role of overseeing the company’s management and business strategies to achieve long-term value creation. Selecting a well-qualified chief executive officer (CEO) to lead the company, monitoring and evaluating the CEO’s performance, and overseeing the CEO succession planning process are some of the most important functions of the board. The board delegates to the CEO—and through the CEO to other senior management—the authority and responsibility for operating the company’s business. Effective directors are diligent monitors, but not managers, of business operations. They exercise vigorous and diligent oversight of a company’s affairs, including key areas such as strategy and risk, but they do not manage—or micromanage—the company’s business by performing or duplicating the tasks of the CEO and senior management team. The distinction between oversight and management is not always precise, and some situations (such as a crisis) may require greater board involvement in operational matters. In addition, in some areas (such as the relationship with the outside auditor and executive compensation), the board has a direct role instead of an oversight role.
• Management , led by the CEO, is responsible for setting, managing and executing the strategies of the company, including but not limited to running the operations of the company under the oversight of the board and keeping the board informed of the status of the company’s operations. Management’s responsibilities include strategic planning, risk management and financial reporting. An effective management team runs the company with a focus on executing the company’s strategy over a meaningful time horizon and avoids an undue emphasis on short-term metrics.
• Shareholders invest in a corporation by buying its stock and receive economic benefits in return. Shareholders are not involved in the day-to-day management of business operations, but they have the right to elect representatives (directors) and to receive information material to investment and voting decisions. Shareholders should expect corporate boards and managers to act as long-term stewards of their investment in the corporation. They also should expect that the board and management will be responsive to issues and concerns that are of widespread interest to long-term shareholders and affect the company’s long-term value. Corporations are for-profit enterprises that are designed to provide sustainable long-term value to all shareholders. Accordingly, shareholders should not expect to use the public companies in which they invest as platforms for the advancement of their personal agendas or for the promotion of general political or social causes.
• Some shareholders may seek a voice in the company’s strategic direction and decisionmaking—areas that traditionally were squarely within the realm of the board and management. Shareholders who seek this influence should recognize that this type of empowerment necessarily involves the assumption of a degree of responsibility for the goal of long-term value creation for the company and all of its shareholders.

Effective corporate governance requires dedicated focus on the part of directors, the CEO and senior management to their own responsibilities and, together with the corporation’s shareholders, to the shared goal of building long-term value.

II. Key Responsibilities of the Board of Directors and Management

An effective system of corporate governance provides the framework within which the board and management address their key responsibilities.

Board of Directors

A corporation’s business is managed under the board’s oversight. The board also has direct responsibility for certain key matters, including the relationship with the outside auditor and executive compensation. The board’s oversight function encompasses a number of responsibilities, including:

• Selecting the CEO. The board selects and oversees the performance of the company’s CEO and oversees the CEO succession planning process.
• Setting the “tone at the top.” The board should set a “tone at the top” that demonstrates the company’s commitment to integrity and legal compliance. This tone lays the groundwork for a corporate culture that is communicated to personnel at all levels of the organization.
• Approving corporate strategy and monitoring the implementation of strategic plans. The board should have meaningful input into the company’s long-term strategy from development through execution, should approve the company’s strategic plans and should regularly evaluate implementation of the plans that are designed to create long-term value. The board should understand the risks inherent in the company’s strategic plans and how those risks are being managed.
• Setting the company’s risk appetite, reviewing and understanding the major risks, and overseeing the risk management processes. The board oversees the process for identifying and managing the significant risks facing the company. The board and senior management should agree on the company’s risk appetite, and the board should be comfortable that the strategic plans are consistent with it. The board should establish a structure for overseeing risk, delegating responsibility to committees and overseeing the designation of senior management responsible for risk management.
• Focusing on the integrity and clarity of the company’s financial reporting and other disclosures about corporate performance. The board should be satisfied that the company’s financial statements accurately present its financial condition and results of operations, that other disclosures about the company’s performance convey meaningful information about past results as well as future plans, and that the company’s internal controls and procedures have been designed to detect and deter fraudulent activity.
• Allocating capital. The board should have meaningful input and decisionmaking authority over the company’s capital allocation process and strategy to find the right balance between short-term and long-term economic returns for its shareholders.
• Reviewing, understanding and overseeing annual operating plans and budgets. The board oversees the annual operating plans and reviews annual budgets presented by management. The board monitors implementation of the annual plans and assesses whether they are responsive to changing conditions.
• Reviewing the company’s plans for business resiliency. As part of its risk oversight function, the board periodically reviews management’s plans to address business resiliency, including such items as business continuity, physical security, cybersecurity and crisis management.
• Nominating directors and committee members, and overseeing effective corporate governance. The board, under the leadership of its nominating/corporate governance committee, nominates directors and committee members and oversees the structure, composition (including independence and diversity), succession planning, practices and evaluation of the board and its committees.
• Overseeing the compliance program. The board, under the leadership of appropriate committees, oversees the company’s compliance program and remains informed about any significant compliance issues that may arise.

CEO and Management

The CEO and management, under the CEO’s direction, are responsible for the development of the company’s long-term strategic plans and the effective execution of the company’s business in accordance with those strategic plans. As part of this responsibility, management is charged with the following duties.

• Business operations. The CEO and management run the company’s business under the board’s oversight, with a view toward building long-term value.
• Strategic planning. The CEO and senior management generally take the lead in articulating a vision for the company’s future and in developing strategic plans designed to create long-term value for the company, with meaningful input from the board. Management implements the plans following board approval, regularly reviews progress against strategic plans with the board, and recommends and carries out changes to the plans as necessary.
• Capital allocation. The CEO and senior management are responsible for providing recommendations to the board related to capital allocation of the company’s resources, including but not limited to organic growth; mergers and acquisitions; divestitures; spin-offs; maintaining and growing its physical and nonphysical resources; and the appropriate return of capital to shareholders in the form of dividends, share repurchases and other capital distribution means.
• Identifying, evaluating and managing risks. Management identifies, evaluates and manages the risks that the company undertakes in implementing its strategic plans and conducting its business. Management also evaluates whether these risks, and related risk management efforts, are consistent with the company’s risk appetite. Senior management keeps the board and relevant committees informed about the company’s significant risks and its risk management processes.
• Accurate and transparent financial reporting and disclosures. Management is responsible for the integrity of the company’s financial reporting system and the accurate and timely preparation of the company’s financial statements and related disclosures. It is management’s responsibility—under the direction of the CEO and the company’s principal financial officer—to establish, maintain and periodically evaluate the company’s internal controls over financial reporting and the company’s disclosure controls and procedures, including the ability of such controls and procedures to detect and deter fraudulent activity.
• Annual operating plans and budgets. Senior management develops annual operating plans and budgets for the company and presents them to the board. The management team implements and monitors the operating plans and budgets, making adjustments in light of changing conditions, assumptions and expectations, and keeps the board apprised of significant developments and changes.
• Selecting qualified management, establishing an effective organizational structure and ensuring effective succession planning. Senior management selects qualified management, implements an organizational structure, and develops and executes thoughtful career development and succession planning strategies that are appropriate for the company.
• Risk identification . Management identifies the company’s major business and operational risks, including those relating to natural disasters, leadership gaps, physical security, cybersecurity, regulatory changes and other matters.
• Crisis preparedness . Management develops and implements crisis preparedness and response plans and works with the board to identify situations (such as a crisis involving senior management) in which the board may need to assume a more active response role.

III. Board Structure

Public companies employ diverse approaches to board structure and operations within the parameters of applicable legal requirements and stock market rules. Although no one structure is right for every company, Business Roundtable believes that the practices set forth in the following sections provide an effective approach for companies to follow.

Board Composition

• Size . In determining appropriate board size, directors should consider the nature, size and complexity of the company as well as its stage of development. Larger boards often bring the benefit of a broader mix of skills, backgrounds and experience, while smaller boards may be more cohesive and may be able to address issues and challenges more quickly.
• Diversity . Diverse backgrounds and experiences on corporate boards, including those of directors who represent the broad range of society, strengthen board performance and promote the creation of long-term shareholder value. Boards should develop a framework for identifying appropriately diverse candidates that allows the nominating/corporate governance committee to consider women, minorities and others with diverse backgrounds as candidates for each open board seat.
• Tenure . Directors with a range of tenures can contribute to the effectiveness of a board. Recent additions to the board may provide new perspectives, while directors who have served for a number of years bring experience, continuity, institutional knowledge, and insight into the company’s business and industry.
• Characteristics. Every director should have integrity, strong character, sound judgment, an objective mind and the ability to represent the interests of all shareholders rather than the interests of particular constituencies.
• Experience. Directors with relevant business and leadership experience can provide the board a useful perspective on business strategy and significant risks and an understanding of the challenges facing the business.
• Definition of “independence.” An independent director should not have any relationships that may impair, or appear to impair, the director’s ability to exercise independent judgment. Many boards have developed their own standards for assessing independence under stock market definitions, in addition to considering the views of institutional investors and other relevant groups.
• Assessing independence . When evaluating a director’s independence, the board should consider all relevant facts and circumstances, focusing on whether the director has any relationships, either direct or indirect, with the company, senior management or other directors that could affect actual or perceived independence. This includes relationships with other companies that have significant business relationships with the company or with not-for-profit organizations that receive substantial support from the company. While it has been suggested that long-standing board service may be perceived to affect director independence, long tenure, by itself, should not disqualify a director from being considered independent.
• Election. Directors should be elected by a majority vote for terms that are consistent with long­ term value creation. Boards should adopt a resignation policy under which a director who does not receive a majority vote tenders his or her resignation to the board for its consideration. Although the ultimate decision whether to accept or reject the resignation will rest with the board, the board and its nominating/corporate governance committee should think critically about the reasons why the director did not receive a majority vote and whether or not the director should continue to serve. Among other things, they should consider whether the vote resulted from concerns about a policy issue affecting the board as a whole or concerns specific to the individual director and the basis for those concerns.
• Time commitments. Serving as a director of a public company requires significant time and attention. Certain roles, such as committee chair, board chair and lead director, carry an additional time commitment beyond that of board and committee service. Directors must spend the time needed and meet as frequently as necessary to discharge their responsibilities properly. While there may not be a need for a set limit on the number of outside boards on which a director or committee member may serve—or for any limits on other activities a director may pursue outside of his or her board duties—each director should be committed to the responsibilities of board service, and each board should monitor the time constraints of its members in light of their particular circumstances.

Board Leadership

• Approaches. U.S. companies take a variety of approaches to board leadership; some combine the positions of CEO and chair while others appoint a separate chair. No one leadership structure is right for every company at all times, and different boards may reach different conclusions about the leadership structures that are most appropriate at any particular point in time. When appropriate in light of its current and anticipated circumstances, a board should assess which leadership structure is appropriate.
• Lead/presiding director. Independent board leadership is critical to effective corporate governance regardless of the board’s leadership structure. Accordingly, the board should appoint a lead director, also referred to as a presiding director, if it combines the positions of CEO and chair or has a chair who is not independent. The lead director should be appointed by the independent directors and should serve for a term determined by the independent directors.
• Lead directors perform a range of functions depending on the board’s needs, but they typically chair executive sessions of a board’s independent or nonmanagement directors, have the authority to call executive sessions, and oversee follow-up on matters discussed in executive sessions. Other key functions of the lead director include chairing board meetings in the absence of the board chair, reviewing and/or approving agendas and schedules for board meetings and information sent to the board, and being available for engagement with long-term shareholders.

Board Committee Structure

• An effective committee structure permits the board to address key areas in more depth than may be possible at the full board level. Decisions about committee membership and chairs should be made by the full board based on recommendations from the nominating/corporate governance committee.
• The functions performed by the audit, nominating/corporate governance and compensation committees are central to effective corporate governance; however, no one committee structure or division of responsibility is right for all companies. Thus, the references in Section IV to functions performed by particular committees are not intended to preclude companies from allocating these functions differently.
• The responsibilities of each committee and the qualifications required for committee membership should be clearly defined in a written charter that is approved by the board. Each committee should review its charter annually and recommend changes to the board. Committees should apprise the full board of their activities on a regular basis.
• Board committees should meet all applicable independence and other requirements as to membership (including minimum number of members) prescribed by applicable law and stock exchange rules.

IV. Board Committees

Audit committee.

• Financial acumen . Audit committee members must meet minimum financial literacy standards, and one or more committee members should be an audit committee financial expert, as determined by the board in accordance with applicable rules.
• Overboarding . With the significant responsibilities imposed on audit committees, consideration should be given to whether limiting service on other public company audit committees is appropriate. Policies may permit exceptions if the board determines that the simultaneous service would not affect an individual’s ability to serve effectively.
• Selecting and retaining the outside auditor . The audit committee selects the outside auditor; reviews its qualifications (including industry expertise and geographic capabilities), work product. independence and reputation; and reviews the performance and expertise of key members of the audit team. The committee reviews new leading partners for the audit team and should be directly involved in the selection of the new engagement partner. The committee oversees the process of negotiating the terms of the annual audit engagement.
• Overseeing the independence of the outside auditor . The committee should maintain an ongoing, open dialogue with the outside auditor about independence issues. The committee should identify those services, beyond the annual audit engagement. that it believes the outside auditor can provide to the company consistent with maintaining independence and determine whether to adopt a policy for preapproving services to be provided by the outside auditor or approving services on an engagement-by-engagement basis.
• Financial statements. The committee should discuss significant issues relating to the company’s financial statements with management and the outside auditor and review earnings press releases before they are issued. The committee should understand the company’s critical accounting policies and why they were chosen, what key judgments and estimates management made in preparing the financial statements, and how they affect the reported financial results. The committee should be satisfied that the financial statements and other disclosures prepared by management present the company’s financial condition and results of operations accurately and are understandable.
• Internal controls. The committee oversees the company’s system of internal controls over financial reporting and its disclosure controls and procedures, including the processes for producing the certifications required of the CEO and principal financial officer. The committee periodically reviews with both the internal and outside auditors, as well as with management, the procedures for maintaining and evaluating the effectiveness of these systems. The committee should be promptly notified of any significant deficiencies or material weaknesses in internal controls and kept informed about the steps and timetable for correcting them.
• Risk assessment and management. Many audit committees have at least some responsibility for risk assessment and management due to stock market rules. However, the audit committee should not be the sole body responsible for risk oversight, and the board may decide to allocate some aspects of risk oversight to other committees or to the board as a whole depending on the company’s industry and other factors. A company’s risk oversight structure should provide the full board with the information it needs to understand all of the company’s major risks, their relationship to the company’s strategy and how these risks are being addressed. Committees with risk-related responsibilities should report regularly to the full board on the risks they oversee and brief the audit committee in cases where the audit committee retains some risk oversight responsibility.
• Compliance. Unless the full board or one or more other committees do so, the audit committee should oversee the company’s compliance program, including the company’s code of conduct. The committee should establish procedures for handling compliance concerns related to potential violations of law or the company’s code of conduct, including concerns relating to accounting, internal accounting controls, auditing and securities law issues.
• Internal audit. The committee oversees the company’s internal audit function and ensures that the internal audit staff has adequate resources and support to carry out its role. The committee reviews the scope of the internal audit plan, significant findings by the internal audit staff and management’s response, and the appointment and replacement of the senior internal auditing executive and assesses the performance and effectiveness of the internal audit function annually.

Nominating/Corporate Governance Committee

• Director qualifications. The committee should establish, and recommend to the board for approval, criteria for board membership and periodically review and recommend changes to the criteria. The committee should review annually the composition of the board, including an assessment of the mix of the directors’ skills and experience; an evaluation of whether the board as a whole has the necessary tools to effectively perform its oversight function in a productive, collegial fashion; and an identification of qualifications and attributes that may be valuable in the future based on, among other things, the current directors’ skill sets, the company’s strategic plans and anticipated director exits.
• Background and experience . In connection with renomination of a current director, the nominating/corporate governance committee should review the director’s background, perspective, skills and experience; assess the director’s contributions to the board; consider the director’s tenure; and evaluate the director’s continued value to the company in light of current and future needs. Some boards may undertake these steps as part of the annual nomination process, while others may use a director evaluation process.
• Independence . The nominating/corporate governance committee should ensure that a substantial majority of the directors are independent both in fact and in appearance. The committee should take the lead in assessing director independence and make recommendations to the board regarding independence determinations. In addition, each director should promptly notify the committee of any change in circumstances that may affect the director’s independence (including but not limited to employment change or other factors that could affect director independence).
• Tenure limits . The committee should consider whether procedures such as mandatory retirement ages or term limits are appropriate. Other practices, such as a robust director evaluation process, may make these tenure limits unnecessary, but they may still serve as useful tools for ensuring board engagement and maintaining diversity and freshness of thought. Many boards also require that directors who change their primary employment tender their resignation so that the board may consider the desirability of their continued service in light of their changed circumstances.
• Board leadership. The committee should conduct an annual evaluation of the board’s leadership structure and recommend any changes to the board. The committee should oversee the succession planning process for the board chair, which should involve consideration of whether to combine or separate the positions of CEO and board chair and whether events such as the end of the current chair’s tenure or the appointment of a new CEO may warrant a change to the board leadership structure.
• Committee structure. Annually, the committee should recommend directors for appointment to board committees and ensure that the committees consist of directors who meet applicable independence and qualification standards. The committee should periodically review the board’s committee structure and consider whether refreshment of committee memberships and chairs would be helpful.
• Board oversight. The committee should oversee the effective functioning of the board, including the board’s policies relating to meeting agendas and schedules and the company’s processes for providing information to the board (both in connection with, and outside of, meetings), with input from the lead director or independent chair.
• Corporate governance guidelines. The committee should review annually the company’s corporate governance guidelines, if any, and make recommendations about changes in those guidelines to the board.
• Shareholder engagement. The committee may oversee the company’s and management’s shareholder engagement efforts, periodically review the company’s engagement practices, and provide to senior management feedback and suggestions for improvement. The committee and the full board should understand the company’s efforts to communicate with shareholders and receive regular briefings on such communications.
• Director compensation. The committee also may oversee the compensation of the board if the compensation committee does not do so, or the two committees may share this responsibility.

Compensation Committee

• Authority. The compensation committee has many responsibilities relating to the company’s overall compensation philosophy, structure, policies and programs. To assist it in performing its duties, the compensation committee must have the authority to obtain advice from independent compensation consultants, counsel and other advisers. The advisers’ independence should be assessed under applicable law and stock market rules, and the compensation committee should feel confident and comfortable that its advisers have the ability to provide the committee with sound advice that is free from any competing interests.
• CEO and senior management compensation. A major responsibility of the compensation committee is establishing performance goals and objectives relating to the CEO, measuring performance against those goals and objectives, and determining and approving the compensation of the CEO. The compensation committee also generally approves or recommends for approval the compensation of the rest of the senior management team.
• Alignment with shareholder interests. Executive compensation should be designed to align the interests of senior management, the company and its shareholders and to foster the long-term value creation and success of the company. Compensation should include performance-based elements that reward the achievement of goals tied to the company’s strategic plan but are at risk if such goals are not met. These performance goals should be clearly explained to the company’s shareholders.
• Compensation costs and benefits. The compensation committee should understand the costs of the compensation packages of senior management and should review and understand the maximum amounts that could become payable under multiple scenarios (such as retirement; termination for cause; termination without cause; resignation for good reason; death and disability; and the impact of a transaction, such as a merger, divestiture or acquisition). The committee should ensure that the proper protections are in place that will allow senior management to remain focused on the long-term strategies and business plans of the company even in the face of a potential acquisition, shareholder activism, or unsolicited takeover activity or control bids.
• Stock ownership requirements. To further align the interests of directors and senior management with the interests of long-term shareholders, the committee should establish stock ownership and holding requirements that require directors and senior management to acquire and hold a meaningful amount of the company’s stock at least for the duration of their tenure and, depending on the company’s circumstances, perhaps for a certain period of time thereafter. The company should have a policy that monitors, restricts or even prohibits executive officers’ ability to hedge the company’s stock and requires ongoing disclosure of the material terms of hedging arrangements to the extent they are permitted.
• Risk. The compensation committee should review the overall compensation structure and balance the need to create incentives that encourage growth and strong financial performance with the need to discourage excessive risk-taking, both for senior management and for employees at all levels. Incentives should further the company’s long-term strategic plans by looking beyond short-term market value changes to the overall goal of creating and enhancing enduring value. The committee should oversee the adoption of practices and policies to mitigate risks created by compensation programs, such as a compensation recoupment, or clawback, policy.
• Director compensation. The compensation committee may also be responsible, either alone or together with the nominating/corporate governance committee, for establishing director compensation programs, practices and policies.

V. Board Operations

• General . Serving on a board requires significant time and attention on the part of directors. Certain roles, such as committee chair, board chair and lead director, carry an additional time commitment beyond that of board and committee service. Directors must spend the time needed and meet as frequently as necessary to discharge their responsibilities properly.
• Meetings . The board of directors, with the assistance of the nominating/corporate governance committee, should consider the frequency and length of board meetings. Longer meetings may permit directors to explore key issues in depth, whereas shorter, more frequent meetings may help directors stay current on emerging corporate trends and business and regulatory developments.
• Overboarding . Service on the board of a public company provides valuable experience and insight. Simultaneous service on too many boards may, however, interfere with an individual’s ability to satisfy his or her responsibilities as a member of senior management or as a director. In light of this, many boards limit the number of public company boards on which their directors may serve. Business Roundtable does not endorse a specific limit on the number of directorships an individual may hold, recognizing that decisions about limits on board service are best made by boards and their nominating/governance committees in light of the particular circumstances of individual companies and directors.
• Executive sessions . Directors should have sufficient opportunity to meet in executive session, outside the presence of the CEO and any other management directors, in accordance with stock exchange rules. Time for an executive session should be placed on the agenda for every regular board meeting. The independent chair or lead director should set the agenda for and chair these sessions and follow up with the CEO and other members of senior management on matters addressed in the sessions.
• Agenda. The board’s agenda must be carefully planned yet flexible enough to accommodate emergencies and unexpected developments, and it must be structured to maximize the use of meeting time for open discussion and deliberation. The board chair should work with the lead director (when the company has one) in setting the agenda and should be responsive to individual directors’ requests to add items to the agenda.
• Access to management. The board should work to foster open, ongoing dialogue between management and members of the board. Directors should have access to senior management outside of board meetings.
• Information. The quality and timeliness of information that the board receives directly affects its ability to perform its oversight function effectively.
• Technology. Companies should take advantage of technology such as board portals to provide directors with meeting materials and real-time information about developments that occur between meetings. The use of technology (including e-mail) to communicate with and deliver information to the board should be accompanied by safeguards to protect the security of information and directors’ electronic devices and to comply with applicable document retention policies.
• Confidentiality. Directors have a duty to maintain the confidentiality of all nonpublic information (whether or not it is material) that they learn through their board service, including boardroom discussions and other discussions between and among directors and senior management.
• Director compensation. The amount and composition of the compensation paid to a company’s non-employee directors should be carefully considered by the board with the oversight of the appropriate board committee. Director compensation typically consists of a mix of cash and equity. The cash portion of director compensation should be paid in the form of an annual retainer, rather than through meeting fees, to reflect the fact that board service is an ongoing commitment. Equity compensation helps align the interests of directors with those of the corporation’s shareholders but should be provided only through shareholder-­approved plans that include meaningful and effective limitations. Further, equity compensation arrangements should be carefully designed to avoid unintended incentives such as an emphasis on short-term market value changes. Due to the potential for conflicts of interest and the duty of directors to represent the interests of all shareholders, directors or director nominees should not be a party to any compensation­ related arrangements with any third party relating to their candidacy or service as a director of the company, other than those arrangements that relate to reimbursement for expenses in connection with candidacy as a director.
• Director education. Directors should be encouraged to take advantage of educational opportunities in the form of outside programs or “in board” educational sessions led by members of senior management or outside experts. New directors should participate in a robust orientation process designed to familiarize them with various aspects of the company and board service.
• Reliance. In performing its oversight function, the board is entitled under state corporate law to rely on the advice, reports and opinions of management, counsel, auditors and expert advisers. Boards should be comfortable with the qualifications of those on whom they rely. Boards are encouraged to engage outside advisers where appropriate and should use care in their selection. Directors should hold advisers accountable and ask questions and obtain answers about the processes they use to reach their decisions and recommendations, as well as about the substance of the advice and reports they provide to the board.
• Board and committee evaluations. The board should have an effective mechanism for evaluating its performance on a continuing basis. Meaningful board evaluation requires an assessment of the effectiveness of the full board, the operations of board committees and the contributions of individual directors on an annual basis. The results of these evaluations should be reported to the full board, and there should be follow-up on any issues and concerns that emerge from the evaluations. The board, under the leadership of the nominating/corporate governance committee, should periodically consider what method or combination of methods will result in a meaningful assessment of the board and its committees. Common methods include written questionnaires; group discussions led by a designated director, employee or outside facilitator (often with the aid of written questions); and individual interviews.

VI. Senior Management Development and Succession Planning

• Succession planning . Planning for CEO and senior management development and succession in both ordinary and emergency scenarios is one of the board’s most important functions. Some boards address succession planning primarily at the full board level, while others rely on a committee composed of independent directors (often the compensation committee or the nominating/corporate governance committee) to address this key area. The board, under the leadership of the responsible committee (if any), should identify the qualities and characteristics necessary for an effective CEO and monitor the development of potential internal candidates. The board or committee should engage in a dialogue with the CEO about the CEO’s assessment of candidates for both the CEO and other senior management positions, and the board or committee should also discuss CEO succession planning outside the presence of the CEO. The full board should review the company’s succession plan at least annually and periodically review the effectiveness of the succession planning process.
• Management development . The board and the independent committee (if any) with primary responsibility for oversight of succession planning also should know what the company is doing to develop talent beyond the senior management ranks. The board or committee should gain an understanding of the steps the CEO and other senior management are taking at more junior levels to develop the skills and experience important to the company’s success and build a bench of future candidates for senior management roles. Directors should interact with up-and-coming members of management, both in board meetings and in less formal settings, so they have an opportunity to observe managers directly and begin developing relationships with them.
• CEO evaluation. Under the oversight of an independent committee or the lead director, the board should annually review the performance of the CEO and participate with the CEO in the evaluation of members of senior management in certain circumstances. All nonmanagement members of the board should have the opportunity to participate with the CEO in senior management evaluations if appropriate. The results of the CEO’s evaluation should be promptly communicated to the CEO in executive session by representatives of the independent directors and used in determining the CEO’s compensation.

VII. Relationships with Shareholders and Other Stakeholders

Corporations are often said to have obligations to stakeholders other than their shareholders, including employees, customers, suppliers, the communities and environments in which they do business, and government. In some circumstances, the interests of these stakeholders are considered in the context of achieving long-term value.

Shareholders and Investors

• Know who the company’s shareholders are . The nominating/ corporate governance committee and the board should know who the company’s major shareholders are and understand their positions on significant issues relevant to the company.
• Role of management . Members of senior management are the principal spokespersons for the company and play an important role in shareholder engagement. This role includes serving as the main points of contact for shareholders on issues where management is in the best position to have a dialogue with shareholders.
• Board communication with shareholders . When appropriate and in consultation with the CEO, directors should be equipped to play a part from time to time in the dialogue with shareholders on topics involving the company’s pursuit of long-term value creation and the company’s governance. Communications with shareholders are subject to applicable regulations (such as Regulation Fair Disclosure) and company policies on confidentiality and disclosure of information. These regulations and policies, however, should not impede shareholder engagement. Direct communication between directors and shareholders should be coordinated through—and with the knowledge of—the board chair, the lead independent director, and/or the nominating/corporate governance committee or its chair.
• Annual meeting. Directors should be expected to attend the annual meeting of shareholders, absent unusual circumstances. Companies should consider ways to broaden shareholder access to the annual meeting, including webcasts, if requested by shareholders.
• Shareholder engagement. Companies should engage with long-term shareholders in a manner consistent with the respective roles of the board, management and shareholders. Companies should maintain effective protocols for shareholder communications with directors and for directors to respond in a timely manner to issues and concerns that are of widespread interest to long-term shareholders.
• Board duties. Shareholders are not a uniform group, and their interests may be diverse. Although boards should consider the views of shareholders, the duty of the board is to act in what it believes to be the long-term best interests of the company and all its shareholders. The views of certain shareholders are one important factor that the board evaluates in making decisions, but the board must exercise its own independent judgment. Once the board reaches a decision, the company should consider how best to communicate the board’s decision to shareholders.
• Shareholder voting. While some shareholders may use tools such as third-party analyses and recommendations in making voting decisions, these tools should not be a substitute for individualized decisionmaking that considers the facts and circumstances of each company. Companies should conduct shareholder outreach efforts where appropriate to explain the bases for the board’s recommendations on the matters that are submitted to a vote of shareholders.
• Shareholder proposals. The federal proxy rules require public companies to include qualified shareholder proposals in their proxy statements. Shareholders should not use the shareholder proposal process as a platform to pursue social or political agendas that are largely unrelated and/or immaterial to the company’s business, even if permitted by the proxy rules. Further, a company’s proxy statement is not always the best place to address even legitimate shareholder concerns. Shareholders with concerns about particular issues should seek to engage in a dialogue with the company before submitting a shareholder proposal. If a shareholder submits a proposal, the company’s board or its nominating/corporate governance committee should oversee the company’s response. The board should consider issues raised by shareholder proposals that receive substantial support from other shareholders and should communicate its response to all shareholders.
• General. Treating employees fairly and equitably is in a company’s best interest. Companies should have in place policies and practices that provide employees with appropriate compensation, including benefits that are appropriate given the nature of the company’s business and employees’ job responsibilities and geographic locations. When companies offer retirement, health care, insurance and other benefit plans, employees should be fully informed of the terms of those plans.
• Misconduct. Companies should have in place and publicize mechanisms for employees to seek guidance and to alert management and the board about potential or actual misconduct without fear of retribution. As part of fostering a culture of compliance, companies should encourage employees to report compliance issues promptly and emphasize their policy of prohibiting retaliation against employees who report compliance issues in good faith.
• Communications. Companies should communicate honestly with their employees about corporate operations and financial performance.

Communities, the Environment and Sustainability

• Citizenship. Companies should strive to be good citizens of the local, national and international communities in which they do business; to be responsible stewards of the environment; and to consider other relevant sustainability issues in operating their businesses. Failure to meet these obligations can result in damage to the company, both in immediate economic terms and in its longer-term reputation. Because sustainability issues affect so many aspects of a company’s business, from financial performance to risk management, incorporating sustainability into the business in a meaningful way is integral to a company’s long-term viability.
• Community service. A company should strive to be a good citizen by contributing to the communities in which it operates. Being a good citizen includes getting involved with those communities; encouraging company directors, managers and employees to form relationships with those communities; donating time to causes of importance to local communities; and making charitable contributions.
• Sustainability. A company should conduct its business with meaningful regard for environmental, health, safety and other sustainability issues relevant to its operations. The board should be cognizant of developments relating to economic, social and environmental sustainability issues and should understand which issues are most important to the company’s business and to its shareholders.
• Legal compliance. Corporations, like all citizens, must act within the law. The penalties for serious violations of law can be extremely severe, even life threatening, for corporations. Compliance is not only appropriate—it is essential. The board and management should be comfortable that the company has a robust legal compliance program that is effective in deterring and preventing misconduct and encouraging the reporting of potential compliance issues.
• Political activities. Corporations have an important perspective to contribute to the public policy dialogue and discussions about the development, enactment and revision of the laws and regulations that affect their businesses and the communities in which they operate and their employees reside. To the extent that the company engages in political activities, the board should have oversight responsibility and consider whether to adopt a policy on disclosure of these activities.

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Corporate Governance: Purpose, Examples, Structures And Benefits

• Publié le 10 October 2018
• Mis à jour le 25 March 2024

Are you curious about the meaning of the term <corporate governance> in business? Find all its official definitions below, as well as why it is important and what actions can you take to create an effective corporate governance strategy.

Definitions of Corporate Governance in Business

Simple definition of corporate governance in business.

Corporate governance in the business context refers to the systems of rules, practices, and processes by which companies are governed. In this way, the corporate governance model followed by a specific company is the distribution of rights and responsibilities by all participants in the organization.

Governance ensures everyone in an organization follows appropriate and transparent decision-making processes and that the interests of all stakeholders (shareholders, managers, employees, suppliers, customers, among others) are protected.

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OECD Official Definition of Corporate Governance in Business

The purpose of corporate governance is to help build an environment of trust, transparency and accountability necessary for fostering long-term investment, financial stability and business integrity, thereby supporting stronger growth and more inclusive societies.

Corporate Governance Today – What Does It Mean?

Corporate Governance deals with the way the investors make sure they get a fair return on their investment. In Corporate Governance, there is a clear distinction between the role of the owners of a company (the shareholders) and the managers (the executive board of directors) when it comes to making effective strategic decisions.

In today’s market-oriented economy and with the effects of globalization , the importance of corporate governance is growing. This is due to the fact of governance being an important way of ensuring transparency that makes sure the interests of all shareholders (big or small) are safeguarded.

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What Is The Purpose Of Corporate Governance ? What Are Its Benefits?

9 positive impacts of corporate governance in companies.

A good corporate governance system:

• Ensures that the management of a company considers the best interests of everyone;
• Helps companies deliver long-term corporate success and economic growth;
• Maintains the confidence of investors and as consequence companies raise capital efficiently and effectively;
• Has a positive impact on the price of shares as it improves the trust in the market;
• Improves control over management and information systems (such as security or risk management)
• Gives guidance to the owners and managers about what are the goals strategy of the company;
• Minimizes wastages, corruption, risks, and mismanagement;
• Helps to create a strong brand reputation ;
• Most importantly – it makes companies more resilient .

Corporate Governance Models

There are many models of corporate governance in the world and there is no universal best choice. The choice of the best model for a company depends on not only on its goals, motivations, mission and business context but also on their economic, legal, political and social frameworks. Nevertheless, there are 2 dominant governance models. Find them below.

The Anglo-American Model Of Corporate Governance

According to Ooghe and De Langhe , in Anglo-American countries, shareholders hold few percentages of the total number of shares that are publicly traded and most shares are in the hands of the agents of financial institutions. Moreover, in the USA and the UK, many companies are listed and their shares are publicly traded which means that there is little personal contact with their shareholders. Also, blockholders (owners of large blocks of companies’ shares) in the USA are less common than in Europe meaning that the shareholders’ voting power is smaller and therefore it’s not so relevant for companies to consider them.

Because of this greater focus on the interests of independent persons and individual shareholders, this model is commonly referred to as the shareholders model. Hence, in countries where most companies follow this governance model,  there is a higher individual power to hold shares and make investments in the capital markets. As a consequence, there’s a higher dispersion of capital and there isn’t a structured shareholder map. 

In companies with this kind of governance structure, where there may be many shareholders, it is common to hear about the agency or stewardship theory. But what does this theory stand for?

Agency Or Stewardship Theory: What Does It Mean?

“Broadly, agency theory is about the relationship between two parties, the principal (owner) and the agent (manager). More specifically, it examines this relationship from a behavioral and a structural perspective. The theory suggests that given the chance, agents will behave in a self-interested manner, behavior which may conflict with the principal’s interest. As such, principals will enact structural mechanisms that monitor the agent in order to curb the opportunistic behavior and better align the parties’ interests.”

This old but recent excerpt from a paper written in 1991 by Lex Donaldson and James H. Davis provides a holistic view of this theory. Using business vocabulary, this theory means that pursuing the interests of the shareholders (that own a company) may not be of the best interest of the board of directors managing it.

This happens because the success of managers is commonly measured according to short-term goals whereas the shareholders are interested in the long-term performance of the company. The capacity for managers to act according to their self-interest is because they are able to influence strategic and investment decisions as they have more information available and are better aware of the context of the company.

On the other hand, shareholders may be many and disperse and sometimes see companies as one among many investments, lacking the knowledge about the situation or business context, being left vulnerable. Because of this, control mechanisms in order to ensure the long-term profitability and success of companies are needed.

Agency Or Stewardship Theory: What Control Mechanisms Exist?

Becht et al.  distinguish five main ways to mitigate shareholders’ collective action problems:

• Election of a board of directors representing shareholders’ interests, to which the CEO is accountable;
• When the need arises, a takeover or proxy fight launched by a corporate raider who temporarily concentrates voting power (and/or ownership) in his hands to resolve a crisis, reach an important decision or remove an inefficient manager;
• Active and continuous monitoring by a large blockholder, who could be a wealthy investor or a financial intermediary, such as a bank, a holding company or a pension fund;
• Alignment of managerial interests with investors through executive compensation contracts;
• Clearly defined fiduciary duties for CEOs and the threat of class-action suits that either block corporate decisions that go against investors’ interests, or seek compensation for past actions that have harmed their interests.

The Continental European Model Of Corporate Governance

On the other hand, in Continental European countries such as Italy, France or Germany, s hareholders groups hold large percentages of the total number of shares that are publicly traded and most shares are held by private companies, followed by financial institutions and in the last place by private persons.

In these countries, fewer companies are publicly traded and people tend to invest their savings on an individual basis, instead of betting on the capital market. This means that in this model there is a high concentration of capital in a few shareholders that made big investments and took big risks too.

This model is often associated with the stakeholder theory, as it also assumes the importance of companies having stakeholder engagement processes to strengthen the firms’ legitimacy to operate. 

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Corporate Governance Structures:

What makes the structure of the Board of Directors?

Boards – and directors – are not all the same. In fact, they face different challenges and their structure is shaped by different factors. A KMPG report synthesized some of the variables that can affect the foundations of a board:

• The legal and regulatory obligations of the relevant geography – which may range from a highly regulated environment that dictates board composition and responsibilities to no applicable laws at all, depending on the country in which the business is based.
• The company’s ownership structure – which may range from a business closely held by a few family members who see each other on a daily basis, to one with numerous, geographically dispersed distant family members, to the inclusion of other investors, either through private equity investment or publicly traded stock.
• The expectations and interests of key stakeholders including owners, other interested family members (such as the owners’ likely heirs), customers, and insurers.
• The company’s attributes – size, resources, maturity, culture, and level of complexity.

In the end, companies with a good corporate governance system, together with an experienced board that has a growth-mindset and sustainability concerns, will be better positioned to prosper both in the short term and on the long run.

Corporate Governance & Sustainable Development

First of all, it is important to clarify what sustainable development is. And according to the Brundtland Commission report, sustainable development is “the one that satisfies the needs of the present without jeopardizing the ability of future generations to meet their needs.” In order to achieve this long-term corporate sustainability goal, the sustainable development concept is built on top of three important “pillars” that must be fulfilled by companies: economic development, social equity, and environmental protection (check our complete sustainable development definition for more information).

Although companies have been working on developing the economic “pillar” that has to do with production, sales, and profit, it hasn’t always been like this for the environmental protection and social responsibility pillars that are nowadays getting inside the companies’ agendas.

The environmental pillar has to do with managing pollution, waste or energy consumption issues and therefore re-optimizing value-chains. The social pillar has an external dimension that means companies making up for the communities where their activities caused some kind of damage or inconvenience. Inside the company’s workplace, it also means taking good care of the employees with fair wages and benefits, ensuring diversity and inclusion and respecting basic human needs and ethics.

Despite the ongoing debate about the meaning and application of sustainable development in a business context, it is common to assume that if a company is able to fulfill these 3 pillars, then it is a socially responsible corporation .

It is usual for these kinds of organizations to voluntarily information concerning their triple bottom line (another expression for the 3 pillars mentioned above) not only to prove they do the talk but also to gain a competitive advantage . By its turn, this information that is provided is often called sustainability reporting and it can be done using standard frameworks like the Global Reporting Initiative (GRI) or ™, or simply by following methods and impact indicators chosen by an organization.

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The Relationship Between Corporate Governance And Sustainable Development

Especially because of climate change , some companies have been working hard on the environmental pillar, trying to prove to consumers that they are environmentally responsible so that their reputation is safeguarded and they can benefit from all that comes with it. This is one of the main reasons for the boards’ interest in the environmental performance of the companies they manage and why they’re disclosing information on these issues. This information is very useful to attract “ socially responsible investors ” that follow closely the behavior of these companies.

These changes in the world of corporate governance, that are indeed needed of the sake of a long-lasting world, show that sustainability is really growing in the companies’ agendas through the mindset of its leaders. In the end, companies that aim to last and thrive in the economic market and in the world need to consider sustainability. They need to report their sustainability practices and live by a sustainable culture that is aware that long-term profits need CSR policies if companies are to thrive and succeed. In this way, sustainable development must take part of the corporate governance of organizations.

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Images credits to Shutterstock on  business people , corporate governance stakeholders , sustainable governance  and governance business.

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How to Improve Corporate Governance: A Guide for Boards and Management

Table of Contents

Corporate governance is a crucial aspect of modern business operations, ensuring transparency, accountability, and effective decision-making within organizations. It involves the framework, processes, and practices that guide the relationships and interactions between a company’s management, its board of directors, shareholders, and other stakeholders. An effective corporate governance structure can enhance the company’s reputation, attract investors, and contribute to long-term sustainability. In this guide, we will delve into key strategies and practices to improve corporate governance, focusing on the roles of both boards and management.

Understanding Corporate Governance

Before delving into strategies for improvement, it’s essential to have a clear understanding of what corporate governance entails. Corporate governance defines the distribution of rights and responsibilities among different stakeholders in the company and outlines the rules and procedures for making decisions on corporate affairs. The primary stakeholders include shareholders, management, customers, suppliers, financiers, government, and the community.

The Role of Boards in Corporate Governance

• Enhance Board Composition and Diversity A well-composed board of directors is vital for effective corporate governance. Diverse perspectives and skill sets contribute to better decision-making. Boards should include individuals with expertise in finance, law, technology, marketing, and industry-specific knowledge.
• Define Clear Roles and Responsibilities Clearly defining the roles and responsibilities of board members is essential to avoid confusion and ensure efficient governance. This includes distinguishing between executive and non-executive directors and outlining the duties of committee members.
• Independent Directors and Committees The presence of independent directors and specialized committees (such as audit, compensation, and nomination committees) can provide unbiased oversight and expertise, ensuring ethical practices, financial transparency, and effective risk management.
• Regular Evaluation and Training Periodic evaluations of board performance and individual director effectiveness help identify areas for improvement. Directors should also engage in continuous learning to stay updated on industry trends, governance best practices, and regulatory changes.

Strengthening Management’s Role in Corporate Governance

• Ethical Leadership and Culture Management plays a critical role in setting the ethical tone of the company. By fostering a culture of integrity and ethical behavior, management sets an example for employees and contributes to a strong governance framework.
• Transparent Communication Open and transparent communication with stakeholders is key to building trust. Management should provide accurate and timely information on the company’s performance, strategy, risks, and challenges.
• Effective Risk Management Identifying and managing risks is a fundamental aspect of corporate governance. Management should establish robust risk management processes, including regular risk assessments , mitigation strategies, and crisis management plans.
• Aligning Incentives Management’s incentives should align with the company’s long-term goals and shareholder interests. Performance metrics and compensation structures should encourage sustainable growth and discourage short-term, risky decision-making.

Collaborative Governance Approach

• Regular Board-Management Interaction Frequent communication and collaboration between the board and management ensure alignment of strategic objectives, effective oversight, and informed decision-making.
• Engaging Shareholders Engaging with shareholders fosters accountability and transparency. Regular shareholder meetings, disclosure of material information, and responsiveness to investor concerns are crucial.
• Staying Abreast of Regulatory Changes Boards and management must remain informed about evolving governance regulations and compliance requirements. This knowledge enables proactive adjustments to governance practices to meet legal and regulatory standards.

Improving corporate governance is an ongoing process that requires commitment from both boards and management. By enhancing board composition, fostering ethical leadership, embracing transparency, and maintaining strong stakeholder engagement, organizations can establish a robust corporate governance framework. Such a framework contributes not only to the company’s success but also to the broader stability and sustainability of the business environment.

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Corporate Governance: Essentials for a New Business Era

Program overview.

Today’s corporate boards face historic and unprecedented challenges. Boards of directors must navigate these sources of unexpected enterprise risk while capably monitoring their firms’ financial performance. For those responsible for filling board seats, the push toward making boards more diverse and inclusive adds complexity. Meanwhile, new opportunities are emerging for those seeking board service.

Corporate Governance: Essentials for a New Business Era provides critical tools for aspiring, newly appointed, and veteran board members, and for executives working with their board or other boards. Participants will gain insight into the duties and nuances of board service and learn to forge partnerships with company officers to strengthen financial return, enterprise risk management, and governance diversity.

Date, Location, & Fees

If you are unable to access the application form, please email Client Relations at [email protected] .

April 22 – 25, 2025 Philadelphia, PA $9,850

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Program Experience

Former guest speakers, who should attend, highlights and key outcomes.

In Corporate Governance: Essentials for a New Business Era , you will:

• Explore board opportunities for C-suite officers in areas including technology, human resources, and sustainability
• Grasp how a director’s role is changing in today’s social, legal, and business environment
• Learn to present yourself as an attractive candidate for boards
• Look inside the process for nominating, selecting, and onboarding directors

Experience and Impact

Traditional board governance is a thing of the past. Today’s directors must be ready and able to handle a wide range of enterprise risks that could impact a large company. Led by top Wharton management faculty, Corporate Governance: Essentials for a New Business Era offers those aspiring to be on boards, recently appointed to a board, or experienced directors and company executives a wide-ranging look at what constitutes successful board service in the current environment. The specific content of the program will also be informed by the most pressing issues facing corporate boards. The focus will include company and legal issues related to diversity and inclusion; environmental, social, and governance (ESG) metrics; and leading in the boardroom.

Participants will explore how to present themselves as candidates for boards against the backdrop of social and legislative efforts to make boards more ethnically diverse and gender inclusive. You will also learn about the functional capabilities that are valued on boards, including strategy, technology, human resources, sustainability, and international experience. You will acquire strategies for marketing yourself to recruiters and come to recognize the value you can bring to a boardroom setting.

Individuals already on boards will gain new insights into managing emerging sources of enterprise risk and how best to diversify their board to address new regulations and investor expectations.

In addition to the outstanding faculty, selected guest speakers will enhance the program’s practical, real-world approach. Speakers may include veteran board chairs and lead directors; a federal prosecutor who has conducted internal investigations for major telecommunications and financial firms; and an executive-search partner experienced in board recruitment and onboarding.

A valuable benefit of this program is the substantial networking opportunity. You will have time to interact with seasoned and board-ready individuals from a wide variety of backgrounds and experience, providing for an expanded peer group. The need has never been greater for board members with new perspectives and experience. Timely and unique, Corporate Governance helps you take full advantage of the rapidly changing environment for both board selection and director responsibilities.

Session topics include:

• Overview of board structure, committees and emerging best practices
• Enterprise challenges and risks including climate change, job displacement, global trade, disease epidemics, and social responsibility
• Creating opportunities for those who have been underrepresented in the boardroom
• Characteristics of successful board leaders
• Overseeing management
• Building diversity, equity, and inclusion in the boardroom
• Leading boards through legal issues and other crises
• Succession planning
• Bringing environmental and social issues into the boardroom
• Designing political and social strategies
• Shareholder activism

Convince Your Supervisor

Here’s a justification letter you can edit and send to your supervisor to help you make the case for attending this Wharton program.

Due to our application review period, applications submitted after 12:00 p.m. ET on Friday for programs beginning the following Monday may not be processed in time to grant admission. Applicants will be contacted by a member of our Client Relations Team to discuss options for future programs and dates.

Janet Foutty

Executive Chair of the Board, Deloitte

Janet Foutty is executive chair of the board, Deloitte. She leads the board in providing governance and oversight on critical business matters including strategy, brand positioning, risk mitigation, talent development, and leadership succession. Janet is also a member of Deloitte’s Global Board of Directors, and chair of Deloitte Foundation, the 90-year old not-for-profit organization that helps develop future talent and promote excellence in teaching, research, and curriculum innovation.

Janet’s leadership experience includes most recently serving as chair and chief executive officer for Deloitte Consulting LLP where she led a $10B business comprised of over 50,000 professionals in helping Fortune 500 companies and government agencies translate complex issues into opportunity.

She previously led Deloitte’s federal practice dedicated to improving the efficacy and efficiency of US government agencies; as well as Deloitte Consulting LLP’s technology practice, which achieved exponential growth through acquisitions and the launch of businesses including Deloitte Digital. She has also held leadership roles on client programs that span retail, technology, government, energy, and financial services industries. Janet is a frequent author and popular public speaker. She regularly communicates with executive-level audiences about the changing business landscape, technology disruption, and leadership. Janet is a passionate advocate for inclusion in the workplace; women in technology; and the need for science, technology, engineering, and mathematics (STEM) education. She has founded Women in Technology groups in India and the United States. Janet serves on the board of directors of Bright Pink, a nonprofit dedicated to women’s health, and Catalyst, a global nonprofit working to build more inclusive workplaces. She serves on the advisory boards of NYU Stern’s Tech MBA program, Columbia Law School’s Millstein Center for Global Markets and Corporate Ownership, and the executive committee for the Council on Competitiveness.

Janet holds a Bachelor of Science from Indiana University, and a Masters of Business Administration in finance from the Kelley School of Business at Indiana University. She is an inductee of the Kelley School of Business Academy of Alumni Fellows, and a member of the Kelley School of Business Dean’s Council.

Watch the Video: Janet Foutty, Chair of the Board for Deloitte, talks about the key principles of board agility.

Katina Dorton

Chief Financial Officer; Board Director

Katina Dorton is a recognized and internationally experienced financial executive, corporate director, and public company CFO. Dorton's strategic insights, expert perspective, and financial acumen are informed by earlier career experience as a Wall Street investment banker and corporate transactions attorney. Dorton's industry expertise includes health care and life sciences, industrial services, and financial services.

Throughout her career, Dorton has advised executive leaders and boards of directors on capital markets, fund raising, mergers and acquisitions, and other strategic transactions, collectively valued at more than $50 billion. As CFO, Dorton has built financial, legal, and operational functions to support companies through aggressive growth and transition including IPO preparation. Dorton has served on several public company boards and has demonstrated strong leadership as lead director, audit chair and governance committee chair. She meets the qualifications of an SEC financial expert, is a National Association of Corporate Directors (NACD) Corporate Governance Fellow, and serves on the NACD Lead Director Steering Committee. Dorton was named as one of Women Inc's 2019 Most Influential Corporate Directors and a 2020 NACD Directorship 100 Honoree.

William McNabb

Former Chairman and Chief Executive Officer, Vanguard; Senior Fellow, Center for Leadership and Change Management, The Wharton School

F. William McNabb III is the former chairman and chief executive officer of Vanguard. He joined Vanguard in 1986. In 2008, he became chief executive officer; in 2010, he became chairman of the board of directors and the board of trustees. He stepped down as chief executive officer at the end of 2017 and as chairman at the end of 2018. Earlier in his career, he led each of Vanguard’s client-facing business divisions.

McNabb is active in the investment management industry and served as the chairman of the Investment Company Institute’s board of governors from 2013 to 2016. A board member of UnitedHealth Group and the chairman of Ernst & Young’s Independent Audit Committee, he is also chairman of the board of the Zoological Society of Philadelphia, a board member of CECP: The CEO Force for Good, and a board member of the Philadelphia School Partnership.

In addition, McNabb is the executive in residence at the Raj & Kamla Gupta Governance Institute at the Le Bow College of Business and a member of the Advisory Board of the Ira M. Millstein Center for Global Markets and Corporate Ownership at Columbia Law School. He is a member of the Wharton Leadership Advisory Board of the Wharton Center for Leadership and Change Management and a member of the Wharton School’s Graduate Executive Board. He also serves on the Dartmouth Athletic Advisory Board.

McNabb earned an AB at Dartmouth College and an MBA from the Wharton School of the University of Pennsylvania.

Paula Price

Public and Private Company Independent Board Director and Strategic Advisor

Paula A. Price was EVP and chief financial officer of Macy’s Inc. from July 2018 to May 2020, and served as advisor to the renowned retailer until the end of 2020. As CFO, she was also a principal architect of Macy’s transformation journey and, during the COVID-19 pandemic, led its financial restructuring, including raising $4.5 billion to recapitalize and sustain the company.

Price has been a visiting executive with Harvard Business School since July 2018, and was a full-time senior lecturer of business administration in the Accounting and Management Unit, having joined the faculty in July 2014. Until January 2014, Price was executive vice president and chief financial officer of Ahold USA, which she joined in 2009. At Ahold, Price was responsible for finance, accounting, and shared services; strategy and planning; real estate development and construction; and information technology. Price transformed the finance function, delivered a $1 billion cost savings program to fund strategic growth initiatives, and led a team of over 1,000.

Prior to joining Ahold, Price was senior vice president, controller, and chief accounting officer for CVS Caremark Corporation, and a key player in the $26 billion CVS/Caremark merger transaction. Price began her career as an intern in public accounting at Arthur Andersen & Co. before joining full time with clients that spanned financial services, consumer packaged goods, and health care.

Price currently serves as an independent director for public, private, and not-for profit companies. Today, she serves on the boards of the following publicly traded companies: Accenture, chairing its Audit Committee; Bristol Myers Squibb; Western Digital; and Davita, chairing its Audit Committee. She is a qualified audit committee financial expert as defined by the SEC and a certified public accountant.

Price’s career includes senior-level finance, general management, and strategy roles based in New York, Boston, London, and Chicago in the retail, financial services, health care, and consumer packaged goods industries.

Price earned her MBA in Finance and Strategy from the University of Chicago and her BSc in Accountancy from DePaul University.

Price and her family live in Manhattan and on Martha’s Vineyard, where she enjoys painting and outdoor activities.

Mark Turner

President, Chief Executive Officer and Director of WSFS Financial Corporation and WSFS Bank

Mark A. Turner, has been President, Chief Executive Officer and a Director of WSFS Financial Corporation and WSFS Bank since 2007. Mr. Turner was previously both the Chief Operating Officer and the Chief Financial Officer of WSFS. Prior to joining WSFS in 1996, he worked at CoreStates Bank, Meridian Bancorp and at the international professional services firm of KPMG, LLP. WSFS is a multi-billion dollar, publicly-traded financial organization (NASDAQ:WSFS), the largest bank and trust company headquartered in Delaware and the Delaware Valley, and the 7th oldest bank in the U.S. Mr. Turner is privileged to be leading a Company that has been named by an independent survey as a “Top Workplace” in Delaware for the last 11 years in a row (with special recognitions for the Company’s leadership, ethics, and career development), and has also been voted as the “#1 Bank” in Delaware for six years in a row.

Mr. Turner received his MBA from the Wharton School of the University of Pennsylvania, his Master’s Degree in Executive Leadership from the University of Nebraska-Lincoln, and his Bachelor’s Degree in Accounting and Management from LaSalle University (Philadelphia). Among other executive leadership programs, Mr. Turner has studied at National Training Labs, Aspen Institute, Gallup University, Toyota University, Center for Creative Leadership, UC Berkeley, and Buckley School for Public Speaking.

Mr. Turner is an active leader in his community. He has served as: Chairman of the Board of Delaware Business Roundtable (DBRT); a member of U.S. Federal Reserve Board’s Advisory Council; Chairman of the Board of Delaware Bankers Association (DBA); a member of Executive Committee of the Board of Delaware State Chamber of Commerce (DSCC); a member of the Board of Trustees of Delaware State University (DSU); a member of the Board of Directors of Delaware Alliance for Non-Profit Advancement (DANA); a member of the Board of Advisors of Teach for America (TFA), Delaware; and a founding member of both Delaware Talent Live (DTL) and Wilmington Leaders Alliance (WLA).

Corporate Governance: Essentials for a New Business Era prepares executives with diverse backgrounds who aspire to join a board or wish to enhance their knowledge for ongoing board service. This program offers a wide-ranging look at what constitutes successful board service in the current climate with a focus on the fiduciary duties of directors, strategies for filling and seeking board seats, and navigating the politics of board service.

This program is ideal for:

• Senior-level women or minority executives who aspire to board service or have recently joined a board
• C-suite executives including general counsels, chief technology officers, chief financial officers, chief human resource officers, chief risk officers, and chief sustainability officers
• Partner-level attorneys in law firms with experience in corporate investigations, mergers/acquisitions, and compliance
• Leaders of major nonprofit organizations and academic institutions
• Board members who wish to become better informed and more productive in their role
• Members of governance and nominations committees seeking to diversify their boards
• Corporate secretaries
• Institutional investors

Fluency in English, written and spoken, is required for participation in Wharton Executive Education programs.

Group Enrollment

To further leverage the value and impact of this program, we encourage companies to send cross-functional teams of executives to Wharton. We offer group-enrollment benefits to companies sending four or more participants.

Michael Useem, PhD See Faculty Bio

Academic Director

William and Jacalyn Egan Professor Emeritus of Management; Faculty Director, Center for Leadership and McNulty Leadership Program, Wharton School, University of Pennsylvania

Research Interests: Catastrophic and enterprise risk management, corporate change and restructuring, leadership, decision making, governance

Mary-Hunter McDonnell, JD, PhD See Faculty Bio

Associate Professor of Management; Faculty Co-Director, Zicklin Center for Governance and Business Ethics, The Wharton School

Research Interests: Organizational theory (political sociology, institutional theory); nonmarket strategy; corporate governance; corporate misconduct and punishment

Peter Cappelli, DPhil See Faculty Bio

George W. Taylor Professor of Management; Director, Center for Human Resources, The Wharton School

Research Interests: Human-resource practices, public policy related to employment, talent and performance management

Emilie Feldman, PhD See Faculty Bio

Michael L. Tarnopol Professor; Professor of Management, The Wharton School

Research Interests: Corporate governance, corporate strategy, diversification, divestitures, firm scope, spinoffs, mergers and acquisitions

Witold Henisz, PhD See Faculty Bio

Vice Dean and Faculty Director, ESG Initiative; Deloitte & Touche Professor of Management in Honor of Russell E. Palmer, former Managing Partner

Research Interests: Political and social risk management; project management; ESG integration; stakeholder engagement

Nancy Rothbard, PhD See Faculty Bio

Deputy Dean; David Pottruck Professor; Professor of Management, The Wharton School

Research Interests: Emotion and identity, work motivation and engagement, work-life and career development

How does a diverse board of directors help increase organizational performance?

Companies with diverse boards (in terms of race, ethnicity, gender, age, professional experience, and other factors) — and who work to benefit from  that diversity — have been shown to have higher than average ROI, have better than average growth, and pay higher dividends to stockholders. They can better monitor senior leaders, challenge the status quo, be more innovative, and provide more agile leadership in the face of change and disruptions. Diverse boards tend to be more aware of market trends and take steps to improve the company’s brand and overall reputation. They also tend to acknowledge a wider variety of risks and thus are more risk-averse.

How do you measure board diversity? Are there different methods that different companies use to measure it?

Diversity laws that mandate a specific number or percentage of women directors were first passed in Europe (Norway was first in 2003). By 2018, they extended to the United States: California and Illinois have diversity laws, and Hawaii, Massachusetts, Michigan, and New Jersey are currently drafting them. Most of these laws, like those in Europe, focus solely on gender diversity.

Companies are also now facing pressure from institutional and activist investors, as well as social movements, to improve board diversity, but standards for measuring that diversity range widely. Most firms must define and benchmark progress toward diversity for themselves.

What are the qualities of a good board member?

A good board member should bring unique perspectives and sources of information and be willing to share them. They are honest and ethical, exercise discretion, and are cooperative with and respectful of their fellow directors. Good directors are also forward thinking, actively considering new issues to monitor that could become problematic for the firm in the future.

What skills do you need to be a board member?

Directors must be knowledgeable about and able to participate meaningfully in the duties their board is charged with. Those include making strategic decisions about mergers and acquisitions, CEO succession, executive compensation, and other high-level issues. Board members should possess strong critical thinking skills, awareness of the industry and positioning the company within it, and leadership experience. Business acumen in areas such as finance, operations, technology, and marketing is required of the board as a whole, but not every member needs expertise in each area.

What role does the board of directors play in corporate governance?

Corporate governance makes managers accountable to the best interests of their firm. The board acts as the intermediary, monitoring and guiding the firms’ senior leaders. In the United States, because shareholders typically do not own a very large block of shares in a company, the board plays a crucial role in representing those shareholders’ interests by actively working on their behalf.

How does corporate governance affect the image of the company?

Boards that actively monitor senior leadership and that maintain a level of independence can help safeguard a firm’s reputation by preventing or rectifying potentially disastrous situations. Many well-known company failures, such as Enron’s and recent #MeToo-related debacles, can be linked to failures in corporate governance.

Why is board composition important in corporate governance?

A board has to effectively decide on and implement a number of critical, diverse strategic tasks. Those include hostile takeovers, capital allocation strategy, and executive compensation and succession. To perform optimally, the board's composition must match the skill sets needed.

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Lever six: Organization and governance

For the introduction to this seven-part series on why and how companies can improve the effectiveness and efficiency of their business and corporate functions, please see “ Seven levers for corporate- and business-function success: Introduction ”.

The first five levers discussed in this series—demand management, consolidation, smart sourcing, lean management, and IT enablement—focus primarily on the mechanics of how business and corporate functions work. But the improvements will be only temporary unless the enterprise also addresses how the functions set and keep their commitments to the businesses they serve. The functions, businesses, and corporate center will need a carefully designed structure in which lines of authority and decision rights are not only clear, but also consistent with the organization’s overall objectives (exhibit).

In organizations that overlook this important element, dysfunction can quickly emerge. Communication slows down between staff at the functions’ front lines and their leaders. Functions fail to manage the delicate balance between maintaining enterprise-wide standards and accommodating the unique requirements of individual businesses. Senior staff members become bogged down in tasks better suited to junior employees. Confusion and conflict arise over the functions’ role and funding.

Three steps are central to revamping the structure of corporate and business functions. The first step involves identifying and prioritizing those activities that are most important to the way a particular function supports the enterprise’s mission. Separating these points of distinction from activities that merely need to be executed competently allows the company to make fundamental design decisions, such as where to locate authority for particular tasks, how much oversight is needed for effective decision making and coaching, and, consequently, how many direct reports each leader can supervise.

The second step involves deciding how best to align the functional roles—particularly those that interact with the businesses—to the broader enterprise, thereby facilitating smooth interactions between geographic and business divisions.

The third step explicitly allocates decision-making authority between the functions and their “customers” in other parts of the organization. The resulting governance system must give all stakeholders sufficient voice to influence the scope, quality, and cost of the services that the functions provide, while preserving the enterprise’s ability to manage constraints and achieve cost and compliance goals.

Step 1: Reflect strategic priorities in the design of the organization

The ultimate goal of any redesign is to ensure that each function supports the enterprise’s overarching priorities. Accordingly, much as the business units do, each function should focus investment in the areas that offer the greatest strategic value, and design the structure of their teams accordingly.

This judgment may itself require extensive analysis. An industrial conglomerate, for example, discovered that despite its wide range of businesses, the finance needs of its units varied only according to a few essential characteristics. Businesses selling customized products with long development cycles needed deep and specialized capabilities, such as familiarity with project-based accounting rules. By contrast, thinner margins meant that businesses whose products were more standardized put a premium on rapid turnaround and very low finance support costs.

To eliminate redundancies and achieve its cost objectives, the conglomerate sought to centralize its finance function in a way that recognized the very different operational requirements and levels of support the two types of businesses needed. The end product was a hybrid organizational model in which a single finance shared-services organization housed two largely independent divisions, each with a different operating model. The new approach allowed the same organization to serve multiple business units, while still accommodating the most critical differences in support requirements.

In tandem, segmenting the activities that needed more tailoring allowed the organization to set sustainable targets for spans of control. To enable intensive coaching, areas requiring greater oversight—such as project accounting—kept a fairly low ratio of staff to managers. For managers with subordinates who performed more standardized work, however, performance and development could rely more heavily on data-driven techniques; spans could therefore increase to a dozen or more staff per manager.

Step 2: Align functional structure to the larger organization

If the final structure of a corporate and business function is out of sync with the way the business units are organized, friction will eventually erode the initial improvements. To avoid this outcome, the conglomerate declined to push the shared-services idea to its logical conclusion. Instead of a single, global center, it created regional services centers that accommodated time-zone and language differences.

For an emerging-markets basic materials company, achieving the right organizational configurations for its functions was especially complex. The company had grown rapidly through a series of geographic expansions, in which newly-acquired businesses operated mainly on their own. Moreover, although its developed-market businesses were integrated world-wide, several of its emerging-market units operated on a country-by-country basis. The company determined that to support its next growth phase, it needed greater functional coordination at a global level. One of the benefits this ensured, for example, was that leaders could reassign the best talent to the most critical units and geographies, and IT could develop applications with a consistent architecture across the enterprise.

The resulting organization design reallocated control of country-based functional staff from local business leaders to global functional heads. At the country level, local leaders within each function would be evaluated both based on their work with the country business heads and their ability to roll out enterprise-wide solutions. The nature of the relationship with the local BU leadership would also change from hierarchical to a consultative role, with support expectations defined and monitored more formally so that they aligned both with local business requirements and global imperatives.

Step 3: Implement governance mechanisms to separate supply from demand

As well as addressing structural requirements, the enterprise must create governance mechanisms that will focus its corporate and business functions on the most important issues, even when business requirements change. The chief issue concerns decision rights: for a shared HR function, who determines what the performance metrics should be? In finance, who determines what reports are created? Who makes investment decisions and allocates resources?

In most of the examples we have seen, the customer—whether a business unit or another function—takes the lead on demand, defining its needs and budget, while the function takes the lead in deciding how best to obtain the resources to meet that demand. Neither decision, of course, is unilateral: instead, the function and the business collaborate and negotiate within savings targets or other constraints set by the larger organization.

A US-based health insurer provides an example. Most of its functions now operate on a shared-services model. The businesses and functions have negotiated arms-length service-level agreements (SLAs), which precisely describe the services to be provided, the desired performance criteria, and the amount to be charged. The leadership team fosters transparency in this “contracting” process by requiring the functions to compare their pricing, service levels, and related operational data to external benchmarks. If a business proposes terms that the function cannot meet within the stated budget, the benchmarks provide a starting point for the two sides to find alternatives—simplifying the work to be delivered, relying more on lower-cost offshore resources, and so forth.

Occasionally compromise may prove impossible. The insurer therefore established clear procedures to escalate disagreements if, for example, a business requires a type or level of support that would impose a significant unbudgeted cost on the function. A steering group comprising the CFO, COO, the shared-services head, and the leaders of each business unit has the power to break the logjam, evaluate investment proposals, and resolve these types of disputes.

As organizational structures and decision-making processes become more transparent and systematic, leaders can spend less time navigating the organization and focus more time on the core of their jobs. Yet the transition may require a shift in mindsets and capabilities to enable the organization to adapt to new roles, responsibilities, and ways of working. This topic will be addressed in the final part of this series: Lever seven: Capabilities .

About the authors: Dash Bibhudatta is an expert in McKinsey’s Chicago office, Jonathan Silver is a principal in the New York office, and Edward Woodcock is a senior expert in the Stamford office.

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Even Small Businesses Need Corporate Governance

For startups and family businesses, establishing a professionalized, independent board and other aspects of corporate governance tend to be far down the priority list. Two experts explain why investing in corporate governance is critical to long-term success.

• Robb McLarty Chief Investment Officer, Flow Capital
• Sean O'Dowd Managing Director, Silvercrest Asset Management

For a newly minted startup scrambling for funding, staffing, and a product-market fit, best practices of corporate governance tend to be far down the priority list. At the other end of the spectrum, a successful, well-established, privately held family business with 15 years of growth may question the value of an independent board.

But Seán O’Dowd ’03 and Robb McLarty ’03 say that there are important legal, ethical, and fiduciary considerations for companies of any size. A family company should have an independent, professionalized board, not one made up of golf buddies, and a succession plan that allows family members to get the experience they need. As a startup grows, it quickly encounters obligations to investors and employees.

O’Dowd is the managing director and family business advisor at Silvercrest Asset Management Group, an investment advisor and family office service. McLarty is chief investment officer at Flow Capital. He has worked with and invested in emerging growth companies in the U.S. and Canada through venture capital and other forms of investment. Yale Insights talked with them about the pitfalls of poor practices and the benefits of well-structured governance. Q: What is good corporate governance?

Robb McLarty: Much of my work has been with startups, where the companies are privately held and the shareholders are substantially the same individuals as management. In those cases, the role of the directors really is mostly to act as a sounding board, to provide different perspectives, to have a conversation about strategy and deliverables.

With a public company, even a small one, good corporate governance means the board is providing that independent perspective as well as oversight to make sure that the interests of shareholders and the stakeholders more broadly are being appropriately balanced with the day-to-day actions and judgments of the management team.

Seán O’Dowd: I look for a board that functions as an entity almost independent from senior management. My experience is with family businesses. Quite often a good portion of the board is tied to the CEO in one way or another. That doesn’t allow for freedom of thought, for situations to be debated thoroughly.

On a board where it’s the CFO, the CEO’s attorney, and his or her old golfing partner—people who owe the CEO—they’ll rubberstamp proposals. In those circumstances, why have a board to begin with?

On the flip side, a board with independent directors who have specific skill sets and expertise—finance if M&A is important, technology if you’re considering making a technology investment—that professionalizes the board. Meetings have an agenda, things are debated, and if a decision can’t be made in one meeting, there will be follow-ups to hammer it out once people have time to digest the materials. It’s really night and day.

For a family business, that professionalism, knowing a board with independence and expertise has vetted and signed off on big decisions, provides comfort for the entire family. It gives credibility to senior management.

McLarty: It’s an elevated process when the board is composed of super-seasoned directors, maybe even accredited through the Institute of Corporate Directors. They take the importance of governance and the proper processes very seriously.

In contrast, I’ve been on boards of small venture-backed private companies; it has been evident there are board members who don’t really know much about governance.

Q: Are there other components to good governance?

O’Dowd: Ideally, you have a senior management team in place that reflects where the company is in terms of their stage of growth and size. A situation I’ve come across quite often is a family business that has seen 10 to 15 years of terrific growth. It’s obviously successful, but they have outgrown certain positions. The person with the CFO title is really a controller. Or there’s not really a head of HR or a head of operations.

McLarty: I agree. The role of management in executing good governance on a day-to-day basis is just as important as the oversight that’s implemented at the board level.

Q: Does governance have a different role at different points of a firm’s growth?

McLarty: With a startup, the number one job is to survive. The importance of governance is still there, but it is, in a way, demoted when you’re still trying to find a fit in a market.

I tend to think the importance of good governance increases linearly with the size of the business and the number of shareholders. The public company with thousands of shareholders, possibly several different share classes, and lots of different lenders, that is the end state. For a small startup or a business with a sole owner, it’s not unimportant, but it’s less important than other priorities.

O’Dowd: Priorities or needs can also be industry dependent. In an industry that’s consolidating at a rapid pace, you’re going to want someone on the board who has M&A advisory expertise. If you’re making an acquisition a year just to stay afloat, you want someone on the board with a very strong financial background to work closely with the CFO. Maybe they need someone who knows how to access a different level of capital.

Whether turbulence comes from the economy, industry dynamics, or issues within the company, the composition of the board when everything was smooth sailing might have been great, but in survival mode, they may need a whole new group.

Q: Is that hard in family businesses?

O’Dowd: When it’s a question of losing a bit of market share, interpersonal relations will play a real role. When the company has to figure out how to manage cash flows on a weekly basis, it becomes fairly straightforward. I’ve helped a family business hire a restructuring advisor to make those calls, someone who has been through it a million times and know what the board should look like.

Q: Are there skill sets that should be on every board, regardless of the phase the company’s in?

McLarty: I’d recommend always having someone who can chair an audit committee that oversees the CFO and the financial side of the operation. And then someone who can chair the compensation committee. Regardless of the stage of the company, those are critical areas for third-party independent judgment to avoid a conflict of interest for the managers who are running the company.

O’Dowd: I agree. I also think it’s important for every board member to understand why they’re there and what will be expected of them. It’s not just, “Someone just stepped down. We have an open board seat, and you have a professional background in this industry.” While you want independence and expertise, being able to play well in the sandbox matters.

An ex-CEO from an adjacent industry has a track record, contacts, understanding of how to navigate the process, but if their leadership style is to override others or to not listen, it may not be a fit just based on the interpersonal part. Being able to listen to other members, and being able to actually interact, it’s crucial.

McLarty: I describe many small companies as Shakespearean dramas. It’s tongue-in-cheek, but so much of what happens in terms of successes and failures is about the human beings.

That also applies to boards. If you have a good mix of people on a board, you can operate optimally. You want some debate and some tension, so long as everybody’s objective is to get to the right place for the company, the shareholders, and the other stakeholders. Sometimes conflict and personality mismatch help get there. Getting the right mix really impacts the outcome to a large degree.

You need diversity of thought with any kind of group decision-making. It lets the conversation end up in different places, and probably with better outcomes. As humans we all have our own areas of expertise and our blind spots. So, how do you get diversity of thought? Through gender diversity, racial diversity, socioeconomic diversity, geographic diversity, and diversity of experience.

Q: Are there governance issues that are specific to family businesses?

O’Dowd: One that pops up quite often is the chair who owns and runs the company automatically putting their child who just finished business school on the board. The chair says, “They’re going to take over the business one day; this will be a great learning experience.”

From what I’ve seen, it actually undermines the child. A successful approach some families have as part of their succession structure is the next generation has a mandatory 7 to 10 years working in another industry to establish themselves, ideally to a C-level position.

At that point, they can join the board and immediately add value. Usually when they come in under those circumstances, the rest of the board is much more accepting and willing to listen to them. It makes succession, when it eventually happens, so much easier if they’ve earned their seat at the table.

Q: What’s the model for governance in startups?

McLarty: When a startup shows promise, or even simply has an investor with a brand, that is a signal for top-notch executives to come in and play a role either on a board or as informal advisors. It happens quite frequently.

But the vast majority of early-stage companies are led by people who haven’t yet had the opportunity to learn about governance. That’s just the reality.

Plus, let’s be honest, if you’re a first-time entrepreneur setting out to conquer the world, it’s way more interesting to be talking about your product or getting your first customer than corporate governance. It’s kind of a dry subject. It’s super important, because of the law, ethics, and fiduciary responsibility. But when you’re struggling to survive, governance is not going to be your number-one priority.

Usually with early-stage companies it’s part of the role of the first corporate lawyer to suss out whether the leaders may need help and guidance on governance. It is appropriate to learn on the job when you’re a new entrepreneur or even a first-time executive, but to start with, most don’t really know the first thing.

In my view, the moment you bring on outside money, even if it’s friends and family, you’re in a different realm of business from when it’s just you and your dog in the garage. When people give you money, creating a fiduciary duty, it’s time to move quickly up the learning curve.

Q: How do you know if a board is independent and effective?

O’Dowd: I find that the minutes of board meetings make clear whether it’s a real board or a rubberstamp. I also think the relationship between the CFO and CEO, how they interact with each other, is very telling. If the CFO is able to have an independent view of things, if there are strong financial controls in place, it gives me a lot more comfort.

McLarty: Financials, even if they’re not audited, offer an outside lender or equity investor a really strong indicator on governance. If they’re sloppy or have incorrect numbers, that tells you a lot. If answers aren’t readily available as to why revenue is recognized this way for this percentage of revenues and that way for that percentage of revenues, that’s an indicator of concerns that might extend to the board and its governance.

One of the most telling conversations can be to invite the board of directors to constructively criticize management. If they’re able to be objective and data oriented. If they talk about strong points and weak points, what’s working and what needs to be worked on, those are really good signs.

If you’re getting a feeling that it’s a clubby atmosphere where the CEO and the management have their buddies on the board, that’s usually going to be apparent.

O’Dowd: If you ask board members about key financial metrics, even if they don’t have a finance background, they should all have a good understanding of where the company is. With good corporate governance, you’ll find the board members are clearly engaged in all aspects of the company, financially, operationally, strategically, and can speak to any of the questions you may have. It’s a very positive sign.

Q: Beyond meeting legal requirements, does good governance lead to better business outcomes?

O’Dowd: It’s crucial for the long-term sustainable success of the business. You’re not going to be as nimble in certain situations as you might be. But just in terms of pros and cons, the pros just far outweigh the small cons.

McLarty: Speaking as the CIO of a public company, we have quarterly board meetings; preparing for the meeting, having the meeting, and doing the follow-ups consumes several days of my time. It takes probably 5 days of our CEO’s time, and even more of our CFO’s time. It’s a significant time commitment. But it’s also an investment that repays us many times over given the value of the insights that we draw from our board. Good governance leads to better business outcomes.

Interview conducted and edited by Ted O’Callahan.

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A corporate governance plan is not one of the types of documents that a company is required to file by the SEC or by state corporation regulators. Most governance plans are more in the nature of policies or guidelines, indicating how the company's management intends to run the company.

Sometimes a company adopts a corporate governance plan in response to pressure from institutional shareholders or to settle an investor class action lawsuit. Some companies adopt a plan because good ethics and transparency are a part of their image. Such plans can be found in the Investor Relations sections of the company's web site and would be discussed in the Management Discussion section of the company's Annual Report (SEC Form 10-K). 

The rules actually binding on a company with respect to the nomination of officers and directors and their duties are in the company's articles of incorporation and bylaws. (SEC Exhibit 3.) The salary and compensation of executives is found in the company's Annual Reports (SEC Form 10K), quarterly reports (SEC Form 10-Q), and in proxy statements.

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Human Capital Strategy Linked to Kao’s Management Strategy

Value creation cycle for enhancing corporate value

Kao’s greatest asset is its employees, and continuing to maximize their vitality is a key issue in its human capital strategy. Through its human capital and organizations with global perspectives, high-level expertise, and the power to drive transformation, Kao will evolve its Yoki-Monozukuri and build robust businesses through investment. The impacts from this investment will then be reinvested in human capital with the aim of driving further company development. Kao’s Guidelines for Human Capital Development contain the three policies of “from equality to equity,” “from the relative to the absolute” and “from the uniform and formal to the diverse and having initiative.” Under these guidelines, Kao is promoting Global Sharp Top human capital/organizational management, which expands decisive investment in highly motivated employees and enables prompt decision-making and implementation. After implementing “Create equitable opportunities for all employees,” in order to “Sharpen the skills and unlock the potential of highly motivated employees,” Kao optimally assigns employees based on their career plans and the company’s plans. The company also expands opportunities for reskilling and skills improvement, including education on digital transformation (DX), making efforts to “Withdraw from matrix management in organizations” by reinforcing a scrum-type approach, in which employees capable of prompt decision-making are brought together for key tasks. Key employees will be identified at the preliminary stages of their careers to undergo systematic and proactive training and assignment. At the same time, Kao will strive to “Create an environment that focuses on challenges and results,” by providing greater transparency in performance evaluations and rewarding employees who tackle difficult challenges and produce results. As stated by Hideki Mamiya, Senior Executive Officer and Senior Vice President, Human Capital Strategy, “Kao has always recognized the strengths of employees as its greatest asset and has worked to maximize their vitality. Now, to achieve K27 and evolve our Yoki-Monozukuri , there is a need for our human capital/organization to become Global Sharp Top . We have begun swiftly implementing decisive human capital measures and activities around the pillar of transitioning ‘from equality to equity.’”

Revitalizing Employees and Organizations Through Dialogue

Human capital strategy toward achieving K27

The basis for all activities is ongoing dialogue from all directions. Kao is further implementing initiatives and approaches to expand this dialogue as diverse work styles tailored to roles become more prevalent. Kao conducts regular employee engagement surveys, including with group companies in Asia, Americas and EMEA, to verify the state of employees and organizations while verifying the effectiveness of the respective measures at the time. Based on these activities, Kao strives to implement efficient measures to further expand its pool of highly motivated employees. As an indicator for this, Kao has set the FY2027 target of a total score of 75 (out of a perfect score of 100) in the employee engagement survey (FY2023 score was 63 *2 ).

• * 2 In 2023, 27,460 Kao employees responded to the survey

Create equitable opportunities for all employees: well-being, DE&I and OKR

To maximize the power and potential of employees, Kao is working together with health insurance associations to conduct Health and Productivity Management *3 that promotes well-being. At the same time, the company is promoting the empowerment of all employees, including those who identify as female, members of the LGBTQ+ community, have disabilities, are from different cultures, and/or are raising children or providing care to family members.

• * 3 Health and Productivity Management is a registered trademark of Non-Profit Organization Kenkokeiei.
• News Releases from March 2024 Kao Selected as a Health & Productivity Stock Selection Brand for the Ninth Time

Introduced in 2021, Objectives and Key Results (OKR) is an initiative in which employees set challenging goals and work toward them from the three focus areas of business contributions, ESG and “One Team & My Dream.” Currently, 72% of global employees and 90% of employees in Japan have set goals and activities based on OKR. All employees are able to view each other’s OKRs in the system. Employees engage in dialogue and collaboration transcending countries, regions and positions, which drives innovation and increases business velocity. Kao also provides opportunities for employees to learn about psychological safety and unconscious bias to help build an organizational culture with a dialogue focus.

Create an environment that focuses on challenges and results: More transparency in evaluation

Kao is expanding 360-degree feedback, which has been introduced in some organizations, to all Kao Group companies in Japan from FY2024 to support the growth of the management team and improve the transparency of organizational management. This tool provides feedback from various directions, not just senior positions, thereby enabling management-level employees to objectively assess their own capabilities and the degree of leadership they demonstrate. This leads to capacity building and enhances the transparency and reliability of performance evaluations for managers.

Sharpen the skills and unlock the potential of highly motivated employees: Kao Techno School, DX Adventure Program and the Kao Group Internal Job Posting system

Kao Techno School, which trains employees to be the next Genba leaders in Supply Chain Management Division, is a program that enhances employees’ management capabilities both in terms of demonstrating excellent character and insight (spirit) and having a wide range of subject-matter expertise and competencies (skills). Young employees globally are selected to participate in this program, with 1,047 having completed the program so far. Eighty percent of employees in leader roles at worksites that handle high-pressure gasses, where safety management is a critical need, have completed this program. In the last three years, 45% of participants were selected from group companies in Asia, Americas and EMEA, making this a global learning program. Graduates who have developed new knowledge, skills and the spirit of challenge have become standout employees who are contributing to revitalizing their workplaces.

In addition to proactive efforts to foster “citizen developers *4 ,” Kao introduced the DX Adventure Program in November 2023 to promote the enhancement of digital skills among all employees. Kao is bolstering its activities to discover and foster “DX employees” and accelerate the creation of new value and business process transformation in all Kao companies and divisions. Kao is bringing visibility to employees’ skills by adopting Open Badges (digital certificates) to boost employee motivation. This program has started in Japan and will expand worldwide from 2024.

• * 4 Activities with a Genba -oriented perspective to promote operational improvements by regular employees without IT expertise through the use of low-code or no-code tools

The Kao Group Internal Job Posting system was launched in January 2024 as a means of providing highly motivated employees with opportunities to shape their careers themselves. Based on their interests and motivation to take on challenges, employees can apply for open positions that are directly linked to the management strategy.

Withdrawal from matrix management in organizations: Business Steering Board

Kao is evolving its matrix-type organizational management that leverages the freedom of business and functional divisions and promoting “scrum-type management,” which aims to achieve targets for priority tasks at maximum speed. In 2023, Kao launched the Business Steering Board in its key businesses, which include the Fabric Care, Sanitary and Hair Care categories, comprising key employees from each business and function. The Business Steering Board holds spirited discussions on priority issues based on group-wide strategy and quickly makes decisions, leading to accelerated velocity of initiatives targeting business expansion. The brand melt , which was launched in April 2024, is a new hair care brand created by the Business Steering Board.

• News Releases from February 2024 Kao Launches Business Transformation to Build Hair Care Business into a Growth Driver: [1st Launch] New Brand melt

The Kao Group has been promoting the Kao Group Mid-term Plan, with its vision of “protecting future lives” and “sustainability as the only path,” since 2021. It contains 19 key leadership actions and the human capital strategy relates to many of them, such as respecting human rights, inclusive and diverse workplaces, employee well-being and safety and human capital development. The Kao Group will continue to integrate its ESG strategy into its management practices, develop its business, provide better products and services for consumers and society, and work toward its purpose, “to realize a Kirei world in which all life lives in harmony.”

About the Kirei Lifestyle Plan

Over the past 130 years, Kao has worked to improve people’s lives and help them realize more sustainable lifestyles—a Kirei Lifestyle. The Japanese word ‘kirei’ describes something that is clean, well-ordered and beautiful, all at the same time. The Kao Group established its ESG strategy, the Kirei Lifestyle Plan in April 2019, which is designed to deliver the vision of a gentler and more sustainable way of living. By 2030, Kao aims to empower at least 1 billion people, to enjoy more beautiful lives and have 100% of its products leave a full lifecycle environmental footprint that science says our natural world can safely absorb. Please visit the Kao sustainability website for more information.

Kao creates high-value-added products and services that provide care and enrichment for the life of all people and the planet. Through its portfolio of over 20 leading brands such as Attack , Bioré , Goldwell , Jergens , John Frieda , Kanebo , Laurier , Merries, and Molton Brown , Kao is part of the everyday lives of people in Asia, Oceania, North America, and Europe. Combined with its chemical business, which contributes to a wide range of industries, Kao generates about 1,530 billion yen in annual sales. Kao employs about 34,300 people worldwide and has 137 years of history in innovation. Please visit the Kao Group website for updated information.

Media inquiries should be directed to:

Public Relations Kao Corporation

• [email protected]

Related Information

Kao Releases the Kao Integrated Report 2024

Kao Releases Progress Reports on its ESG Strategy—the Kirei Lifestyle Plan

Kao launches new ESG Strategy “Kirei Lifestyle Plan” to support consumer lifestyle changes

Kao’s New Challenges for the Future: Accelerating Purposeful Business Commitment with ESG

Kao sustainability website

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102 Employees Fired After WPP Scangroup Announced Changes

At least 102 employees were laid off by WPP Scangroup company a marketing service firm in the year ended December. Scangroup said it implemented most of the job cuts in May 2023.

The move is expected to facilitate effective operational excellence and corporate governance, allowing the group to focus on its core business areas.

“In 2023, we continued to progress towards our goal of building a future fit organization by streamlining the workforce and investing in the new talent and skills,” the company’s annual report read.

“We exited 15 percent of the workforce via redundancy in May as a result of the exercise,” the report further read.

However, out of the 102 employees who were laid off, 86 were contract workers while 16 were permanent staff. This adds up to 157 employees it laid off in 2020 when covid-19 pandemic disrupted businesses.

Scangroup Restructuring Plan

Scangroup announced a comprehensive restructuring plan that includes staff layoffs and strategic changes in its corporate structure.

In a statement, the company stated that the restructuring was aiming to facilitate operational excellence.

“The Proposed Restructuring is aimed at optimizing the Company group corporate structure into a leaner, simpler and more efficient structure that will facilitate effective operational excellence and corporate governance, while enabling the Group to focus on core business areas,” the company stated in a statement.

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The restructuring was also intended to minimize operational and compliance costs while maintaining service delivery in strategic markets.

Scangroup issued a profit warning back in November 2023, citing the “continued subdued economic environment in our markets of operations” as a key factor.

The firm also reported spending Ksh 178 million on a one-time staff retrenchment during that period. The company’s total staff cost a rose of 7.8 percent of Ksh 1.8 billion to 2.01 billion in the year under review.

The company has registered entities in operations in other countries including Ghana, Rwanda, Malawi, Uganda, Gabon, Mozambique, Mauritius and Gambia.

Former CEO Lawsuit

The announcement of the restructuring plan came amid the ongoing legal dispute involving Bharat Thakrar, WPP Plc, and WPP-Scangroup directors.

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Thakrar, who served as Scangroup’s CEO, initiated a Ksh 4.3 billion lawsuit against WPP, alleging “neo-colonialist practices and discriminatory tactics” leading to his removal in 2021.

In a statement, Scangroup is in the process of perusing the court pleadings to enter an appearance and prepare a defence.

“The directors are aware of a case filed by Bharat Thakrar, former CEO, former director, and a current shareholder of the company against the company. Service was effected on 23 April 2024,” the statement stated.

“The company is in the process of perusing the court pleadings to enter an appearance and prepare a suitable defence. The company cannot comment any further as the matter is the subject of an active litigation in court,” the statement further read.

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Judge Recommends Cutting Commercial Logging from Forest Plan

By Quinn Wilson

The US Bureau of Land Management should exclude commercial logging from its management plan of a southwestern Oregon forest, but its land use project otherwise complies with federal law, a federal magistrate judge said.

Judge Mark D. Clarke recommended granting summary judgment to five environmental nonprofits that the US violated the National Environmental Policy Act by failing to conduct an environmental impact statement when it approved the Integrated Vegetation Management for Resilient Lands Program. Clarke also recommended granting summary judgment to four of the nonprofits that the government violated the Federal Land Policy and Management Act when it granted commercial ...

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Pick n Pay's Bold Break-Even Strategy: A New Dawn for South Africa's Retail Giant

New ceo sean summers unveils a strategy to revive south africa's struggling pick n pay supermarkets. the plan includes closing 100 loss-making stores and converting them to franchises, aiming for a break-even by 2027. the ackerman family will reduce their voting rights, boosting investor confidence and corporate independence..

Break-even targets and a new strategy for South Africa's core Pick n Pay supermarkets seem "plausible", analysts said on Tuesday, a day after the new CEO of the struggling retailer outlined his plan.

New CEO Sean Summers is tasked with reviving a business that has been losing market share to bigger rivals Shoprite and others for more than a decade. Under his new plan, over 100 loss-making Pick n Pay supermarket stores will be closed or converted to Pick n Pay franchise or Boxer stores, resulting in about 850 million rand ($46.52 million) of savings.

He also expected the core loss-making Pick n Pay business to break-even in its 2027 financial year. "While always carrying execution risk and the risk of conditions changing or things not going exactly to plan, the corporate plan to turn around the business appears plausible," Sasfin Wealth senior equity analyst Alec Abraham said.

Stephan Erasmus, investment analyst at Anchor Capital concurred, said these actions, combined with the projected rights issue and listing its discounter Boxer, "will position Pick n Pay for a more stable and profitable future." The Ackerman family, which founded Pick n Pay and is its majority shareholder, also announced on Monday that it will relinquish control by decreasing its voting rights to slightly below 50% after the planned rights offer.

"This change is expected to establish a more equitable and transparent governance framework, increasing investor confidence," Erasmus said. Casparus Treurnicht, portfolio manager at Gryphon Asset Management, said with the Ackerman family's lowering influence, Pick n Pay could operate as a more independently owned business.

"I think it was inevitable for this to happen," Treurnicht said. "This also gives Sean (Summers) more flexibility in running the operation going forward. I think the Ackerman family was too influential in the past." Treurnicht added that he wondered if Summers and the financiers "pushed for this more balanced shift of power."

Chairman Gareth Ackerman, who will step down next year, told investors that he recognised the need for composition change in the board and that "we need new blood and ideas." ($1 = 18.2717 rand)

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