The internal and external control is to ensure adequate risk management and the observance of external and internal ground rules in company operations. However, rules and corporate governance provide no guarantee that a company will succeed. Companies require the strategic agility to identify changes in customer needs and respond with solutions that the customer understands and appreciates.
Corporate Governance
The aim of corporate governance is to ensure compliance with the laws, decrees and government regulations that apply to the industry in question. Corporate governance also applies to a company's internal guidelines and policies intended to protect its reputation and to create a framework for trustworthy management in all of its activities.
The purpose of internal and external control is to ensure adequate risk management and the observance of external and internal ground rules in company operations.
Primary internal control occurs at the operational level of a business, where control is a continuous process forming part of daily routines. Executives are generally assisted in this task by risk management, financial control and legal and HR functions working at corporation-level, independently of the company's business activities.
As business operations globalize, the requirements and responsibilities related to business activities increase, emphasizing the need to harmonize the related ground rules. This is particularly true in cases where a range of practices and operating models have formed due to acquisition-based growth. In the case of publicly held companies, these rules are described in the Finnish Corporate Governance Code. For privately owned companies, Boardman has recently updated its guide on the constitution of boards of directors and on the related CG manual.
In large and medium-sized publicly held companies, the board's Audit Committee is responsible for ensuring compliance with the rules. Control is based on the audit reports of various supervisory bodies, which confirm the effectiveness of and/or identify deficiencies in the target of the audit. In many cases, a 'traffic light' system is used to classify the criticality of shortcomings; based on this, bodies such as the Audit Committee can direct their attention to the most critical deficiencies. Audit reports include recommendations for operational improvements. The implementation of these recommendations should also be systematically monitored.
Monitoring of corporate governance should be based on an annual schedule divided into quarters.
At each of its meetings, the Audit Committee or equivalent body should consider standard follow-up reports on internal control, risks and regulation. The financial statements and the related, updated CG Statement or manual should be considered during the first quarter. The first quarter is also the natural time for evaluating the adequacy of controls and the effectiveness of risk management. In the final quarter, the accounting principles for the year about to end and, in the light of these, the quality and scope of the auditors' work should be assessed. This is also the time to discuss the action plans for control in the coming year. Natural, special themes for the second and third quarters could be formed around the updating of key corporate policies.
Strategic Agility
Clear ground rules and compliance with them form the core of almost all companies' values.
However, rules and corporate governance provide no guarantee that a company will succeed.
In today's constantly changing business environments, companies require the strategic agility to identify changes in customer needs and respond with solutions that the customer understands and appreciates. Many people predict that the world will change more in the next 20 years than it has in the previous 200. Numerous megatrends such as globalization, urbanization, digitalization and climate and demographic change are impacting on business environments – the combined effects of these are transforming traditional business models and the related revenue model. A board needs to be able to draw up a clear direction (vision) for a company, usually linked to certain key megatrends; it must also define measures (strategies) and – in particular – appoint key resources (actors) who will take the company in the desired direction.
Agile management requires seamless cooperation throughout the chain of command - originating from operative executives preparing issues to the board and, via the board, among active shareholders. The industry earnings rational model and changes affecting it must be understood throughout the chain of management – there can be no room for friction or major differences of opinion.
Success in general – and during the current revolutionary transition – calls for the rapid alignment of objectives and agendas throughout the chain of command and readiness to change strategic thinking within the chain at very short notice.
As an enabler of strategic agility, the CEO and his or her team are in pole position, so to speak, in sketching out the strategic options, presenting recommendations and putting decisions into practice.
The idea is to create an experimental corporate culture in which failures are viewed as steps towards new beginnings and, through a new level of customer focus, the company begins working alongside – rather than just listening to – the customer. We have to learn to look at companies through user and customer experiences, while forming an experimental corporate culture that can read weak signals from changing customer needs and revenue models – to understand what is essential and adapt to the new 'normal' better and faster than competitors. A key prerequisite for this is that all staff understand the need for change and its urgency. We must learn to communicate clearly and consistently on why change is needed and how it will benefit business, as well as the effect on each individual.
During major transitions, the board's ability to recruit the best actors – the CEO and his or her top team – to define key tasks and ensure their completion, becomes a critical issue. These key tasks are often called 'must-win battles'. The board should keep a close eye on these top-level projects in particular and, in doing so, demonstrate its own skills as an enabler ensuring the fulfillment of the vision and strategic objectives.
If the company has active owners, their role should consist of providing input into the appointment of an experienced Board of Directors with diverse knowledge of the industry.
To succeed in this, the active owners too must understand the exceptional nature of the challenges presented by the transition phase, so that they can use their influence to champion the adaptive measures being taken by the board and management.
In publicly held companies in particular, evaluating the board's performance has become an established, annual practice forming part of corporate governance. During the current revolutionary transition, perhaps a 'health test' of this kind should be extended to the entire change of management – active owners, the board and management.
Corporate governance is one of themes in Aalto EE's Board of Directors program.