Corporate Governance Best Practices

Corporate governance emerged in the 1980s as a movement of shareholders and investors in the United States who wanted to protect themselves from abuses by company boards and from the indolence of ineffective boards of directorsopens in a new tab (in Portuguese).

Governance is therefore not just a fancy phrase reserved for the conference rooms of large corporations. It is fundamental to how organizations are directed, supervised and controlled.

In this way, the practice defines the relationship among stakeholdersopens in a new tab such as shareholders, directors and management, making sure each group’s interests are aligned with the larger goal of the company’s long-term sustainability and success.

But what exactly is corporate governance? What is the concept behind it?

In this post, you will learn the main corporate governance best practices, what governance is for and what its objectives are. You will also learn about the 8 Ps of corporate governance.

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• [E-BOOK] Corporate governance: a practical guide to digital optimization of corporate governanceopens in a new tab (in Portuguese)

What is corporate governance?

Corporate governance refers to the system by which companies are directed, managed and controlled. It involves the set of practices and processes that determine how a company is governed and supervised, aiming to balance the interests of the company’s different stakeholders, including shareholders, directors, managers, employees, customers and the community at large.

Governance in companies thus serves to enable harmonious coexistence among capital, management, the family (in the case of family businesses) and the society in which the company operates.

The objectives of corporate governance therefore include ensuring that the company’s actions are carried out in a way that is clear and understandable to all interested parties, guaranteeing access to essential information about the company’s management and operations.

They also include clearly defining the responsibilities and duties of board members and managers, so they can be held effectively accountable for their actions and treat all shareholders and stakeholders fairly and equitably, including minorities and other groups.

And finally, they include running the company efficiently, making decisions that are fast but well thought out, aligning the interests of management with those of shareholders and other stakeholders.

That is why the best corporate governance strategies follow 4 principles and 8 best practices, which I present to you below.

See how Siteware was key in helping Sompo Seguros reach corporate governance best practicesopens in a new tab (in Portuguese)

The 5 principles of corporate governance best practices

The 6th edition of the IBGC Code of Best Practices of Corporate Governanceopens in a new tab (in Portuguese) updated the fundamental principles that guide organizations. There are now five principles that should permeate governance practices:

1. Equity;
2. Integrity;
3. Transparency;
4. Corporate responsibility;
5. Sustainability.

These are 5 corporate governance values that must always be preserved. I explain each of them in more depth below:

1. Equity

Equity is crucial in corporate governance and refers to the fair and equal treatment of all stakeholders, including minorities and other vulnerable groups. Equitable governance involves respecting the rights and interests of all shareholders, regardless of the size of their stake in the company.

This includes ensuring that everyone has the opportunity to express their opinions, access relevant information and take part in important decisions, such as shareholder meetings. The practice of equity strengthens ethics in the company and helps maintain a fair and democratic business environment.

2. Efficiency and effectiveness

Integrity represents consistency between words and practice. It means making sure the organization’s decisions, relationships and strategies are guided by non-negotiable ethical values. It means doing the right thing even when no one is watching, and building a culture where doing right is not an option but the path.

In practice, this principle translates into managing risks related to unethical conduct, strengthening complianceopens in a new tab policies and fostering environments that do not tolerate fraud, corruption, discrimination or any other misconduct.

It goes further still: it is about making sure governance guides the whole organization to make choices aligned with its values, its purpose and its responsibility to society.

3. Transparency

Transparency in corporate governance means ensuring that all relevant information about the company is made available clearly and accessibly to all stakeholders.

This includes financial data, strategic decisions, internal policies and any issues that may affect the interests of investors and other interested parties.

The goal is to create an environment where stakeholders can trust the direction and management of the company, based on open and honest information. Transparency helps minimize misunderstandings and conflicts, and makes external and internal oversight of management easier.

4. Corporate responsibility

The principle of responsibility in corporate governance ensures that individuals and groups within the company, especially senior management and the board of directors, are held accountable for their actions. This implies a clear definition of responsibilities and the implementation of accountability mechanisms.

For example, the board must answer to shareholders for the company’s performance and strategic direction, while managers must answer to the board for putting those strategies into operation. Holding managers and directors accountable strengthens the integrity and effectiveness of management, and promotes the trust of investors and other stakeholders.

5. Sustainability

Adopting sustainability as a principle means the organization must manage its business in a way that ensures its longevity. This involves not only generating profit but also promoting positive impacts, or at least mitigating negative ones, across the environmental, social and economic dimensions.

Companies that adopt this principle start to consider aspects such as the following in their decision-making:

• responsible use of natural resources;
• development of the communities where they operate;
• diversity and inclusion;
• ethical practices in relationships with suppliers;
• employees and customers;
• alignment with social and environmental compliance best practices.

Main components of corporate governance

It is quite common for certain fundamental elements to be needed for corporate governance to be effective. They are usually:

1. Board of directors

The Board of Directors is a crucial body in corporate governance, acting as the intermediary between shareholders and company management. It is responsible for overseeing operations and management, making sure the company is run ethically and efficiently.

The board also sets strategic policies and makes decisions that influence the company’s course. Its effectiveness depends on its composition, which ideally includes a mix of internal directors (members of company management) and external directors (independent, with no day-to-day involvement in company management), to ensure a balanced view and minimize conflicts of interest.

2. Audit and compliance

These are vital components for making sure the company not only complies with all applicable laws and regulations, but also follows market best practices and ethical standards.

• Audit: includes internal and external audits. Internal audits are conducted by an internal department to review compliance, internal controls and operating processes. External audits are performed by independent audit firms to validate the company’s financial statements, offering an objective opinion on the company’s financial reporting.
• Compliance: involves monitoring and ensuring that the company adheres to external and internal rules, including government regulations, internal policies and commitments to stakeholders.

Watch the video (in Portuguese):

3. Shareholder rights

Protecting and facilitating shareholder rights is fundamental to good corporate governance. This involves ensuring that shareholders receive adequate information about the company, can participate effectively in general meetings, vote on important decisions and are protected against unfair practices.

Respect for shareholder rights encourages more active and conscious investment, contributing to more transparent and accountable management.

4. Ethics and integrity

A strong culture of ethics and integrity is essential to maintaining stakeholder trust and to the long-term success of any company. This includes establishing and maintaining clear codes of conduct, anti-corruption policies and mechanisms for managing conflicts of interest.

Promoting an ethical organizational culture helps prevent fraud and protect the company’s reputation, and makes sure decisions are made with regard for moral and legal principles.

5. Risk and crisis management

Proactively identifying, assessing and managing risks are essential components of corporate governance. This involves developing strategic plans to mitigate financial, operational, legal, environmental and reputational risks.

The company must also be prepared to manage crises, with response and communication plans ready to be activated, ensuring business continuity and minimizing damage in adverse situations.

The 8 Ps of corporate governance are:

Professors José Paschoal Rossetti and Adriana Solé developed the 8 Ps methodology to support the effective application of governance best practices in companies.

1. Ownership (Propriedade);
2. Principles (Princípios);
3. Purposes (Propósitos);
4. Roles (Papéis);
5. Power (Poder);
6. Practices (Práticas);
7. People (Pessoas);
8. Perpetuity (Perenidade).

1. Ownership

Refers to clarity about who the owners (shareholders) are and how they exercise their rights and influence over the organization. Effective governance requires that ownership be well defined and that owners be engaged and informed about the company’s management and performance.

Ownership types include: mixed-capital, public or private, family-owned, consortium, state-owned, publicly traded and so on.

What does the corporate governance methodology measure at this stage?

• Cohesion among shareholders;
• Succession;
• Shareholder shielding.

2. Principles

Refers to the ethical standards and guidelines that shape the conduct of the company and its members. Sound governance principles ensure that the company operates fairly, transparently and responsibly, promoting stakeholder trust.

It is the owners who determine the hierarchy of principles that will apply within their company. However, we presented the 4 fundamental principles of corporate governance above, which can serve as inspiration.

Ideally, principles are shared internally and accepted externally by everyone.

3. Purposes

Defines the company’s mission, vision and values. A clear purpose helps align all actions and decisions with the company’s strategic objectives. Effective governance starts with a shared understanding of what the organization seeks to achieve and how it intends to do so.

4. Roles

This “P” involves the clear definition of the roles and responsibilities of each entity within the organization, including the board, management, employees and other stakeholders. Clarity in roles is crucial to avoid overlaps and conflicts of function and to ensure operational efficiency.

A practical example:

If in your company the grapevine (“rádio peão”) is more efficient than formal communication between levels, something is wrong.

When the distribution of roles is not clear within a company, it means the power structure is corrupted.

5. Power

Relates to the distribution and balance of power within the company, especially among the board of directors, senior management and shareholders. Effective governance ensures that no individual or group has excessive power, promoting a balance that protects the interests of all stakeholders.

6. Practices

Refers to the procedures and policies that govern the company’s daily operations. Practices must be consistent with the company’s principles and designed to maximize efficiency, ensure compliance and maintain operational and financial integrity.

Corporate governance best practices are tied to 2 main factors:

• Data Driven: everything a company does and decides is grounded in data.
• GRC (Governance, Risk and Compliance): aims to ensure the integration of processes within an organization, so that the business strategy is carried out in a unified and transparent way, in line with corporate policies, laws and regulations, minimizing risks.

7. People

Includes all individuals who have a role in the company’s governance, including the board of directors, senior management, employees and external advisors. Making sure the right people, with the right skills and integrity, are in positions of influence is crucial for effective governance.

The goal is to measure the quality of HR and of Human Resources processesopens in a new tab (in Portuguese). Whether it is strategic or not, how the organizational climate is mapped and acted on, and succession at every hierarchical level.

8. Perpetuity

Focuses on the company’s long-term sustainability and continuity. This involves succession planning, risk management and the creation of strategies that ensure the company can thrive and adapt in a constantly changing business environment.

One of the pillars of ESG, which is currently on the rise, is governance. Learn more (video in Portuguese):

The importance of corporate governance

Corporate governance is a fundamental part of any successful organization. This practice establishes a system of processes, procedures and mechanisms that help companies reach their objectives and goals more efficiently.

The role corporate governance plays in delivering sustainable long-term results for shareholders, employees and other stakeholders is increasingly recognized.

When organizations adhere to the principles of corporate governance, they can effectively reduce the risk of losses to shareholders and make sure the defined business objectives are met.

The principles of corporate governance also help improve transparency, accountability, integrity and ethical behavior within the company. In conclusion, corporate governance offers major benefits to everyone involved in the company, because it gives the company the momentum it needs to achieve long-term results.

Examples of corporate governance in Brazil

After a serious crisis of confidence that sent the company’s value plummeting, Petrobras adopted strong corporate governance measures. As a result, the company recovered its credibility, and at the same time its assets and profitability.

And that is just one example of corporate governance in Brazil. We can also mention Nestlé, winner of the Compliance Brasil Award in Food Safetyopens in a new tab (in Portuguese) in 2017, and Grupo Fleury, which has been awarded twice by the IBGC for its corporate governance practices.

Read also: Books on risk management: 9 tips to help you handle this topic better in your company

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