Lexicon

What are the five principles of corporate governance?

by Dan Byrne on Sep 20, 2022

The principles of corporate governance are a cheat sheet – something bite-sized that you can keep in mind while you navigate your role in the boardroom. 

The five principles of corporate governance

The five principles of corporate governance are responsibility, accountability, awareness, impartiality and transparency.

1. Responsibility

It’s a two-way street between shareholders and directors: if directors are in the job on the say-so of shareholders, they are answerable to those shareholders. Remember this. 

A board is responsible for fulfilling shareholders’ wishes. That involves shepherding a company away from risk, around challenges, and towards success while staying true to its mission, respecting the law of the land, and the sensitivities of the politics around them. It’s a difficult job, but this is what responsibility truly means. 

One of the board’s most important functions is to select a CEO who will enable the company and its workers to achieve their full potential.

2. Accountability

No matter what decision a board takes, they should be able to back it up. 

Important corporate decisions will inevitably lead to questions, and this isn’t a bad thing – merely a sign of engagement and diligence.

“Why did you appoint this CEO over other candidates? Why did you select this as a top priority? Why are we focusing corporate resources on ESG?” 

As a board member, expect a constant flow of questions like this. When you get them, your job is to be clear in your answers.

3. Awareness

The key to a company’s survival and prosperity is to know the landscape of risk around it. 

Boards are always at the forefront of this effort, not just because they are in a position of responsibility, but because they are usually in their roles thanks to years, if not decades, of significant, relevant experience. 

With this experience comes the ability to pinpoint as many risks as possible, whether large or small, short or long term. 

Of course, no company can eliminate risk and should never approach risk management this way. The real trick is deciding which risks to take and which to avoid. You can read more about it in our guide to risk here.

4. Impartiality

Boards must strike a careful balance between their various responsibilities, the people who answer to them, and the people they answer to. 

They should approach every decision with an independent mindset, ensuring no personal interests or those of close colleagues come between them and the correct business decision. 

While impartiality is easy to agree to in principle, it’s easy to slip out of practice. Personal beliefs and friendships can cloud a board member’s objectivity. A board must know how this can happen – and how subtle it can be. They should take care to ensure it doesn’t influence their responsibility.

5. Transparency

This is the most practical principle, and it’s simply about the paperwork. Boards are responsible for documenting and reporting on everything that’s expected of them as clearly and thoroughly as is necessary. 

Don’t be fooled into thinking this is just about the financial statements. They are essential, but they’re not the whole picture. Boards must also report any conflicts of interest, severe conflicts over strategy and risks to the company.

In summary

Take the above five points as a foundation or starting point. You can build on them with information from your role. Every board in every industry is different, but these will set you on the right path.

Diploma in Corporate Governance

Enhance your career as a director. Develop the practical knowledge, insight and global mindset to be a great board director.

Learn more

Diploma in Corporate Governance

Enhance your career as a director. Develop the practical knowledge, insight and global mindset to be a great board director.

Learn more
Tags
Corporate Governance
Director's duties
Principles

Related Posts