Good governance is absolutely necessary to convert an average business to a successful and dominant force in its respective industry. No business or organization can dream of succeeding in highly competitive market without implementing good governance in its true letter and spirit. Not having good governance in place is definitely a proven recipe for failure especially for large organizations having multiple of hierarchal and management levels. Francoise E. Aubert, an internationally recognized Swiss Consultant in his webinar, “ How to Secure a Business Failure” explains how ineffective and poor governance leads most of business to failure and how they can prevent this situation in both short and long run.
Aligning the Interests of Stakeholders:
For any business to succeed, the stakeholders have to align their interest and think in the same direction. In fact, disharmony and conflicts among the stakeholders prevents business executives to govern the organization effectively that will ultimately result in the business failure. It is quite obvious that if all the stakeholders are going in different direction or have their own axe to grind, the organization cannot work properly and prosper over the course of time.
How to Have Good Governance in Place?
Now the question rises that how business leaders can ensure to have good governance in place in their organizations. Here, it is important to note that the good governance is not a new idea but Islam had introduced the concept some 14 centuries ago in the shape of Mudarabah and similar concepts. Although, this particular concept is quite comprehensive and covers everything you need in terms of good governance in modern world yet some experts opine that is not comprehensive enough to run large organizations.
The larger the company, more complex will be the governance. Therefore, the business or governance plane for such companies should written all levels from mission statement to job descriptions much be properly aligned.
- The Mission:
Before formal launch, an organization should have a clear and concise vision about its goals and targets. The three main aspects of any organization’s mission are why, how and what. The business leaders should be clear in their mind about what is the purpose of the organization they are going to launch and what are its goals. Secondly, they should devise a solid strategy about how they are going to attain those goals. Final, they must be able to analyze their efforts and what are they leading to. For instance, will their strategies lead to a business success or to an absolute failure. In short, a good mission statement must exist and it must be engaging effectively answering the important question “how.”
- Implications of Poor or No Governance:
The implications of poor or nonexistent governance are too many and far reaching. The lack of governance in any organization will eventually result in problems like inefficiency, poor performance, conflicts between employers and employees and within employees, unmotivated staff, increasing frauds and higher authorities losing control of the situation. All these factors lead to the downfall of the organization and eventually a total failure.
Main Governance Elements:
There are many governance elements but most important of them are discussed in the following lines one by one.
- Conflict of Interests:
As mentioned above, there is always a conflict of interest between various stakeholders responsible to run any business. However, it is the duty of business leader to eliminate that conflict or at least try to resolve or manage those issues. It is also the responsibility of the stakeholders to avoid potential conflicts as much as possible.
- The Board:
An organization needs to have an independent and powerful board to look after its various matters. In order to place good governance, the board needs to have at least 75% independent members. Furthermore, this board should be constituted according to the needed capabilities not to the network or a bunch of friends.
- Family Business:
In case of family business when there is no external stakeholder involved, the decisions of the patriarch should be the final as it will help the board members to govern the organization in a better way. However if there are external shareholders in your family business as well, it is imperative for you to put the governance in black and white and try to avoid conflict of interests as it can adversely affect the performance of your business.
- Shareholders’ Interests:
It is paramount for any business leader to address the interests of all the shareholders involved whether it is your sponsor or anyone else. This is important because it is the shareholders who possess the ultimate power and can nullify your decisions if you fail to keep them happy preventing your from having good governance in place.
- Incentive Scheme:
Formulating a good incentive scheme for everyone involved can also assist you to implement good governance in the organization. This is because when everyone is happy, he will not create problems for you. There are three types of incentive you can offer to your employees and other stakeholders and they are given below.
- Fixed incentive or salary.
- Mathematical or discretionary bonuses.
- Share plan or incentive.
Key Performance Indicators:
The key Performance Indicators do not only help you to analyze and judge your performance but will also enable you to govern the organization in much better way. However, you need to devise such KPIs that help you to do so rather than creating problems for you in the long run. You should consider your mission statement while making KPIs for future reference and they should also be in line with job descriptions so that they do not confuse employees. Finally, the KPIs should align the interests of managers, shareholders, colleagues, clients and subordinates to have good governance in place.
While it seems very easy to implement all the above mentioned points but the reality is very different. However, it is paramount for the organizations to consider having good governance in place sooner than later because it is the ultimate profit generator. For that matter, business leaders should try to make all stakeholders think in the same direction, eliminate uncertainty, have an inspiring mission statement, apply good governance rules and finally, the KPIs should be coherent.