Governance and Directorships

The Concept of Governance

Corporate governance as a collection of issues that one has to be fully aware of when
running a business.

 Systems – these may include various manifestations of systemic approaches in

organisation management such as software, hardware, structures and networks
 Processes – these may include any activities, tasks and specific responsibilities that
are part of various roles within the organisation
 Principles – these may include policies, statements, values and beliefs dictating how
the organisation attempts to meet the needs of its stakeholders

The above give us an indication how an organisation is governed towards meeting

stakeholder needs and establishing that its mission is achieved. Good corporate
governance is usually perceived as the achievement of:

 Fairness – ensure that all issues are addressed in a way that all involved parties
receive appropriate and equal treatment
 Transparency – provide a framework of practice that offers a clear view of internal
organisation operations such as problem solving and decision-making
 Accountability – assign responsibilities to individuals and put in place those
mechanisms for monitoring progress and control performance based on the
identification of cause and effect relationships

Good corporate governance is an essential element for a successful business. When good
corporate governance is achieved, it leads to a number of benefits such as:

 Effective decision making for a number of business issues

 Disclosure of information processed for making decisions
 Transparency of business transactions
 Compliance with legal, statutory and government policies
 Protection of stakeholder interests
 Commitment to business ethics
 Operations in line with organisation values

The role of the board is to take actions based on decisions that are in line with business
values and a corporate credo that aims to meet stakeholder needs. The board must ensure
that a number of objectives are met, such as:

 Ensuring that decisions are not affected by any internal or external factors and
remain independent
 Maintaining a balance between executive and non-executive members responsible
for addressing stakeholder needs
 Reaching decisions after following transparent processes and practices based on
adequate information
 Having in place the necessary resources to perform the board’s operations
  Informing shareholders of any developments that are likely to affect the company’s
value and well-being
 Monitoring the way the management team operates and functions
 Being in control of the company affairs at all times

Corporate governance is a term used to describe the way a business is governed.

Governance can be described in terms of:

 Techniques used for directing and managing the company

 Running the business according to stakeholder requirements
 Having in place a board of governors and associated committees for making
decisions
 Ensuring that business objectives are balanced with individual goals of stakeholder
groups
 Identifying any environmental influences that may affect business performance
 Shaping business performance and making adjustments when needed

Some of the most common benefits associated with corporate governance are as follows:

 Corporate success and increased performance due to solid governance

 Economic growth and financial stability based on a clear strategic plan
 The existence of a strong governing body is likely to lead to increased confidence in
the organisation’s standing and subsequently facilitate any attempt to raise capital
and attract investment
 The capital cost is likely to be reduced based on specific decisions following
reflection on company operations
 Share prices are likely to be increased following the appointment of a highly
respected board of governors
 Both owners and managers are likely to be given clear directions of how to achieve
specific objectives, aligned to stakeholder needs
 Several negative aspects associated with running a business may be addressed
including wasted resources, lack of transparency, corruption, unnecessary risk
taking, poor risk assessment, inefficient management practices, etc
 Strong corporate governance usually results in a strong brand

The company is based on corporate governance where:

 Values the participation of employees and empowers them in certain aspects of the
business decision-making process
 Employee participation is achieved through various systematic approaches that
ensure all views are recorded and reviewed
 Suppliers are also involved in several areas of decision-making that affect the end
products
 Stakeholder interests, and in particular customer needs, are identified and every
attempt is made for their full satisfaction
 Individual creativity and mutual trust are two very important values for the company’s
mission
Another example of successful boards of governors is the appointment of such committees
to oversee the running of schools and Higher Education Institutions such as Universities.
The role of such boards is to:

 Ensure that the curriculum is designed according to the sector’s benchmarks

 Identify whether adequate quality assurance procedures are in place
 Check that the institution’s operations are in line with its mission
 Provide guidance and direction towards future plans of the institution
 Reflect on performance and revise existing practices and operations

Corporate governance issues

It is expected that corporate governance is a complex concept that is likely to affect several
areas of the organisation, if not all. One of the key areas is allocating and utilising existing
corporate resources to support organisation operations. Those who are likely to be affected
by such decisions are:

 Shareholders
 Investors
 Customers
 Employees
 Suppliers
 Managers
 Wider community
 Industry sectors
 Local community
 The environment
 Competitors
 Governments

Legal issues
Depending on the industry within which an organisation operates, there may exist several
laws, regulations and directives constraining the way it conducts its business. Each
company is perceived as a legal entity with certain rights and responsibilities. An important
concept is that of jurisdiction as the country of incorporation for each company affects legal
issues.
Code of practice
Each company must adhere to certain rules, and a code of practice is likely to be in place in
order to provide a framework for the organisation’s operations and procedures. The code of
practice may affect several aspects of the organisation, from operations and finances, to
policies and procedures.
Corporate governance principles
It is crucial to have in place specific principles dictating how corporate governance is
achieved. Such principles ensure that organisations can be assessed in terms of how their
governance achieves the goals of its stakeholders. Some of the most prominent principles
are identified as follows:
  Shareholder treatment – all shareholder rights should be respected and each
stakeholder groups should be considered equal. Shareholders should be helped to
exercise their rights towards their objectives. For example, shareholders should be
supported towards communicating their views and explain their own objectives at
regular intervals through general meetings
 Stakeholder interests – several groups may have an interest in the way the
organisation operates and performs. The concerns of each identified groups should
be respected and every effort should be made to address any associated issues. For
example, the members of a local community may be affected by the environmental
impact a company’s operations may have
 Board roles and responsibilities – as the company is run by a group of individuals
who have a clear agenda in corporate governance, it is essential to (i) identify those
individuals who have what it takes to be a board member, (ii) decide the optimum
size of the board of governance, (iii) specify the necessary skills required for running
the business, (iv) have a clear view of what skills are required to address all needs
relating to corporate governance and (v) the roles that should be determined within
the board in order to cover all governance aspects. For example each board member
should have specific skills according to the tasks falling under his/her remit
 Corporate ethical credo – each company must have in place a doctrine specifying
organisation values that govern the way it conducts its business. The organisation is
likely to be proactive in identifying those values that determine how it operates in its
mission statement. For example, an organisation could determine what constitutes
and ethical behaviour towards its customers, the wider community and the
environment
 Disclosure and transparency – the company must have in place certain mechanisms
that ensure any roles, responsibilities, decisions and actions are communicated to
the company stakeholders. For example, the publication of any meeting minutes of
the board to the company shareholders ensures that the business operates in an
open and extroverted way 

International benchmark for corporate governance and consists of 50 disclosures, classified

under the following categories:

 Auditing
 Board and management structure and process
 Corporate responsibility and compliance
 Financial transparency and information disclosure
 Ownership structure and exercise of control rights

Transparency and openness are two important aspects of corporate governance as they
allow organisations to offer access to information relating to internal processes and
procedures.

Principles of good governance:

 Adopting an ethical approach – focusing on organisational impact on society, culture,

country, and the wider community
  Balancing objectives – focusing on alignment of corporate goals with those of
different stakeholder groups
 Assigning clear responsibilities – focusing on how each identified role can be fulfilled
 Supporting decision making – focusing on the process to be followed and the criteria
to be taken under consideration
 Equal treatment – focusing on addressing the needs of all stakeholders based on fair
weighting of each one
 Accountability and transparency – focusing on providing the necessary justification
and clarification for all decisions and subsequent actions

There are several factors that may affect an organisation’s corporate governance. These
factors can be described as a range of pressures that impact on how corporate decisions
are made and the way business operations are performed.
We can classify such pressures in the following three categories:

 The business environment – this can be described as the surrounding structures and
external factors affecting corporate governance
 The stakeholders – this can be described as the collection of various individual or
group requirements affecting corporate governance
 The organisation’s management – this can be described as the inner ring of a model
identifying internal aspects of the organisation that affect the way it is governed

Corporate governance controls

Any corporate governance activities are likely to have a significant impact on the way an
organisation performs and its well being in general. It is critical for an organisation to have in
place regular monitoring systems and clear processes for assessing and reflecting on its
governance.
A typical classification is to group mechanisms, techniques and tools to internal and
external controls depending on who initiates such mechanisms. We could provide the
following working definitions:

 Internal corporate governance controls are based on mechanisms deployed by the

organisation with emphasis on identifying any issues associated with the way the
organisation is governed, aiming at taking corrective action to sort out any problems
 External corporate governance controls are imposed by various stakeholder groups,
who wish to assess whether the organisation’s efforts to meet their identified needs
are adequate

The most common internal corporate governance controls include:

 Monitoring board of directors – this mechanism involves regular meetings, which

reflect on decisions and actions as well as publication of meeting minutes and
justification for any organisation actions
 Introducing internal control procedures – this mechanism is based on assuring that
operations comply with laws, rules and regulations and that the necessary reporting
is produced according to requirements
  Deploying internal auditors – this mechanism involves personnel who assess
whether the internal procedures designed and implemented for controlling its
finances and reporting results are in line with acceptable standards
 Balancing power – this mechanism leads to the identification of clearly defined roles
with distinct responsibilities, ensuring that there is no over-concentration of decision
making and acting control within a single role
 Designing performance based remuneration – this mechanism associates rewards to
individual performance and productivity, allowing more objective criteria to be used
when assessing individuals and groups

External corporate controls are usually imposed by stakeholders and may involve the
following:

 Competitive practices – focusing on assessment of organisation efforts in line with

what typical competitors have in place
 Debt covenants – focusing on any agreements or contracts that affect the
organisation’s financial standing and its liabilities
 Publication of financial statements – focusing on accessibility to financial data and
the process that must be in place for stakeholders to receive unobstructed access to
a number of representations of financial information
 Dissemination of performance data – focusing on establishing a standardised
practice in publishing information on the organisation’s performance in a number of
key areas
 Government regulations – focusing on the organisation’s formal response on
imposed rules and frequently associated reports stating how the organisation
ensures that certain policies are in place to maintain compliance
 Media pressure – focusing on the role of public opinion and perceived value of an
organisation based on the interpretation of its performance by the wider public

Mergers and acquisition – focusing on the impact of major shifts in the market, leading to
new structures, increased competitions and significant change in market share 
The role of financial statements is essential for assessing the organisation’s health. This is
understandable as such information supports any decisions made by investors and
creditors. More specifically, such stakeholders base their decisions on:

 Balance sheets – providing information on company’s assets, outstanding debt, and

equity. This can be described as a snapshot of the company’s assets, liabilities and
equity
 Income statement reports – providing operating results for a certain period based on
sales, expenses as well as profit and losses. This can be described as an evaluation
of company performance and future expectations regarding cash flow
 Cash flow statement – providing an indication of how cash exchanges take place
between the organisation and its supplier. This can be described as a reflection of
the organisation’s ability to purchase further assets
 Shareholder equity statement – providing an understanding of how equity has
changed. This can be described as the difference between the company’s total
assets minus its total liabilities, resulting to the company’s net worth
  Shareholder’s equity – also known as net profit that can be paid as dividends to
shareholders or added to their equity
 Profit and loss account – including incomes and expenses as well as accruals that
can be realised after the profit and loss account statements are prepared
 Cash flow statement – showing predicted movement of money for future activities
 Income statements – measuring sales and expenses over a specific period of time

A company’s net worth is estimated by assessing its assets and liabilities. These are
classified as follows:

 Assets – including anything that the company owns such as cash, land, buildings,
equipment, machinery, patents, and money owed
o Current assets – including cash, government securities, accounts receivable,
inventories, and prepaid expenses
o Fixed assets – including land, plant equipment, machinery, furniture, fixture
and leasehold improvements
o Other assets – including patents, copyrights and intellectual property
 Liabilities – including loans, sales of property or services to the company on credits
o Current liabilities – including notes, taxes, accrued expenses, current
payment of long term debts, and obligation to creditors
o Long term liabilities – including mortgages, intermediate and long-term
mortgages, equipment loans, and payment obligation to company creditors

Employment Law and Legal Aspects of Governance

Businesses are built on their workforce achieving results and establishing an internal
environment that fosters great performance. As we have discussed, there are clear rules,
regulations, and directives restricting how every business is governed. When it comes to
workforce issues, there are clear laws that regulate business governance. This area is
called employment law and covers several aspects.
More specifically, employment law includes:

 Employment contracts – including (i) clauses that must be used in an agreement, (ii)
creation of collective agreements and (iii) employer’s right to manage
 Temporary employment – including (i) definition of different types of employment, (ii)
aspects constituting such type of employment and (iii) criteria for assessing whether
such employment is legal or illegal
 Wages – including (i) definition of reward mechanisms, (ii) determining the minimum
acceptable pay, (iii) issues relating to overtime and (iv) how to deal with deduction
 Holidays – including the number of days each employee is entitled to, (ii) identifying
issues affecting entitlement such as role and years of service, (iii) timing of absence,
(iv) periods that such absence is not permitted and (v) associated pay and issues
relating to illness
 Illness – including issues such as (i) self certification, (ii) associated benefits and (iii)
maximum period for associated benefits
 Termination of employment – including (i) written notices, (ii) employment
negotiations, (iii) deadlines, (iv) definition of grounds to be used for ending a
 contract, (v) probationary periods, (vi) illness related issues, (vii) pregnancy related
issues, (viii) unfair dismissal, (ix) dismissal procedures and (x) termination periods
 References – including (i) content and (ii) procedure followed

The Employment Rights Act 1996 provides the framework for defining concepts associated
with employment. In particular the key concepts that can be defined are as follows:

 Employee – “an individual who has entered or who works under a contract of
employment”
 Contract of employment – “a contract of service, whether express or implied whether
oral or in writing”
 Mutuality of obligation – where both parties (employer and employee) are under legal
obligation to each other
 Personal obligation – meaning that an employee cannot be replaced by a substitute
for certain employment relationships 

Contracts of employment

A contract of employment is not necessarily one that is written. An oral agreement can
suffice for dictating how employment is fulfilled. However, the provision of a written
agreement offers a better reference point through the use of a number of clauses describing
any expectations from both parties during the employment. The contract terms can be (i)
express, meaning that both parties have agreed to the exact terms or (ii) implied, meaning
that they form part of the contract of employment even though both parties have not agreed
them. There are specific reasons why implied terms are used, such as: (i) the need for such
terms in order to make a contract workable, (ii) custom of employment contracts, (iii) typical
practice of employment contracts, (iv) specific piece of legislation, and (v) policies.
Each contract of employment consists of clauses that clarify the terms and conditions for
the specific employment. The contract’s express terms are included in several types of
documentation that can be provided to employees at the beginning of the contract. This
ensures that they have a clear understanding of their rights and obligations as well as any
expectations required of them. Typically, the documentation including express terms may
be:

 Offer letter – used to extend the proposal for employment commencement

 Statement of terms and conditions – defining the restrictions, rules and guidelines for
employees
 Contract of employment – the formal document used to specify any employment
terms
 Employee handbooks – well structured documentation that provides answers to
frequent questions and most expected areas of concern for new employees
 Policy documentation – written statements describing the organisation’s specific
strategies, plans and procedures
 Collective agreements – documentation, and specifying agreements reached with
trade unions, that govern all their members and agreements that cover all employees
according to their role
 Memos – more informal documentation that is used for disseminating recent
developments, amendments and changes to employment terms and conditions
The Employment Rights Act 1996 under section 1 mentions that by law, employees are
entitled to a written statement of terms and conditions of employment. This means that
within two months of commencement of employment each employee must receive such a
statement. The statement must include certain clauses that are listed below:
http://www.legislation.gov.uk/ukpga/1996/18/contents

 The names of the employer and employee

 The date when the employment began
 The date on which the employee’s period of continuous employment began
 The scale or rate of remuneration or the method of calculating remuneration
 The intervals at which remuneration is paid
 Any terms and conditions relating to hours of work
 Any terms and conditions relating to any of the following—
o Entitlement to holidays, including public holidays, and holiday pay,

incapacity for work due to sickness or injury, including any provision for sick pay

o Pensions and pension schemes

 The length of notice which the employee is obliged to give and entitled to receive to
terminate his contract of employment
 The title of the job which the employee is employed to do or a brief description of the
work for which he is employed
 Where the employment is not intended to be permanent, the period for which it is
expected to continue or, if it is for a fixed term, the date when it is to end
 Either the place of work or, where the employee is required or permitted to work at
various places, an indication of that and of the address of the employer
 Any collective agreements which directly affect the terms and conditions of the
employment including, where the employer is not a party, the persons by whom they
were made
 Where the employee is required to work outside the United Kingdom for a period of
more than one month—
o The period for which he is to work outside the United Kingdom
o The currency in which remuneration is to be paid while he is working outside
the United Kingdom
o Any additional remuneration payable to him, and any benefits to be provided
to or in respect of him, by reason of his being required to work outside the
United Kingdom
o Any terms and conditions relating to his return to the United Kingdom

Employment Law and Legal Aspects of Governance

As we mentioned before, there are specific terms that must be agreed upon by both parties
signing the employment contract. These express terms are common in most employment
contracts and may include the following:

 Length of contract – typically a permanent contract means that it continues

indefinitely until one of the two parties gives notice for its termination. However, a
fixed term contract may be agreed with a specific date of termination
  Notice – usually a specific period of a few weeks or even months is identified as the
period that must lapse before employment is terminated after the wish for contract
termination is expressed in writing, by one of the parties
 Job title – the identification of the role that is covered by the employment contract
means that the role holder can be assessed in terms of specific responsibilities,
skills, performance expectations, experience and tasks undertaken
 Place of work – with each role it is possible to define where the tasks associated with
the job are supposed to take place. This means that any work that is carried out
remotely, or requires travel, must be also determined
 Hours of work – the workload associated with each job must be specified, meaning
that the employee is aware of any expectations such as number of hours per week,
daily work and continuous work
 Holidays – every job has an entitlement of paid leave, which must be defined in the
employment contract
 Pay – each employee agrees to a salary that may be paid on a daily, weekly or
monthly basis. Other arrangements may be possible as long as the full amount of the
reward is identified for the given tasks
 Benefits – the employee may also receive additional perks as part of the job,
including rewards associated for increased performance but also gifts or rewards in
kind. These are on top of the main salary and pay assigned to the job done
 Restrictions – there are several requirements that may affect the freedom of
employees. Some examples include:
o Confidentiality agreements – restricting individuals with respect to sharing
company secrets or disseminating information that they have gained access
to as part of their job
o Exclusivity – restricting individuals working for another company or
specifically for competitors while being employed by the organisation
o Work prohibition – restricting employees from soliciting business for their own
benefit with the organisation’s clients
o Individuals’ acts represent the organisation – restricting employees from
behaviours that may have a negative impact to the organisation
o Future employment – restricting employees from working for direct
competitors immediately after contract termination, even after a period of
several years

Some of the most common implied terms include:

 Demotion – it is implied that certain actions may have a penalty leading to the
reduction of pay and most likely shifting of the employee’s role to a lower
classification
 Language used – it is implied that employees should be addressed appropriately and
no offensive behaviour or communication should be used
 Privacy – it is implied that an individual’s personal information and matters should be
respected at all times
 Bullying and harassment – it is implied that the working environment should be such
that an individual does not feel intimidated, threatened or uncomfortable
  Grievances – it is implied that when an employee makes a complaint either verbally
or in writing, the organisation must ensure that a policy is in place where certain
procedures are followed and the issue is addressed in a satisfactory manner
 Disciplinary action – it is implied that a formal procedure that adheres to a well-
documented policy is followed when dealing with employees whose behaviour or
actions have triggered an investigation

Every employer must ensure that there are certain conditions in place to ensure that
employees do not suffer as a consequence of their work. More specifically, the employer
must ensure:

 Safe work conditions – meaning that the employee is involved in work that does not
pose a threat to his/her well being
 Adequate support mechanisms – meaning that the employee has access to all
necessary resources required for the successful fulfilment of his/her role
responsibility
 Suitable working environment – meaning that the employee works in an environment
that does not affect his/her performance in a negative way
 Respecting confidentiality agreement – meaning that the employee is aware of any
restrictions to the information that he/she is allowed to disseminate freely

Employment contract issues

There are several issues that employers and employees must address before employment
commencement. In this section we consider a number of employment contract areas and
how these are likely to affect the working relationship between employers and their
employees.
Wages
One of the key issues associated with employment is the salaries and wages of individual
employees. It is important to have a clear understanding of:

 Minimum wage – these are regulated for hourly paid contracts and may be subject to
collective agreements that are binding for employers
 Overtime – the threshold is nine hours per day or 40 hours per week and the
supplement must be at least 40% of the wage. Sometimes an agreement is made for
a reward to be given as time in lieu
 Wage deductions – this can be done only with the employee’s consent, unless it is
stated in the contract of employment. Sometimes collective agreements may also
identify specific instances where employers are allowed to exercises this right

Holidays
The time off permitted to each individual is subject to a number of criteria such as:

 Holiday length – five weeks or 25 days are allowed for everyone who has worked
from January to December. A portion of the entitlement is allocated to individuals
who start in the middle of the year
  Holiday timing – both parties when scheduling leave must give notice. Employers
must provide two months notice for any holiday period that is enforced to employees.
Everyone is entitled a summer holiday
 Holiday pay – each employee is entitled to at least 10.2% of gross wages during
holiday leave
 Holiday illness – if an employee is ill for more than a week after his/her holiday has
started, he/she is entitled to a new sick leave after the production of a medical note
or doctor’s certificate

Illness
Employees are also covered for periods during which they are ill. A number of important
issues are as follows:

 Self-certification – each employee can provide a note for his/her illness as long as
the period of absence is no more than three days. This practice can be used a
maximum of four times during a 12 month period and the three days include all days
and not just business/working days
 Sickness benefits – as long as the employee is employed for more than four weeks
they qualify for sickness entitlement, and the income basis for such a benefit is at
least 50% of the national insurance basic amount. Employees must show evidence
that they have tried to engage in work related activities and after eight weeks they
must produce an extended doctor’s note
 Sickness benefits from employers – the employer pays sickness benefit for the first
16 days of absence and on the seventeenth day, the National Insurance Scheme
pays the sickness benefit
 Sickness benefit amount – usually the amount paid for sickness benefit is calculated
on the basis of the average weekly wage of the employee, and quite commonly it is
based on the wages of the last four weeks before sickness was reported
 Duration of sickness benefit – the sickness benefit expires after the first year of
sickness

Dismissal – fair reasons

The Employment Rights Act 1996: http://www.legislation.gov.uk/ukpga/1996/18/contents,
provides the following reasons for fair dismissal:

 Misconduct
 Incapability
 Redundancy
 Legal requirement
 Retirement at 65 or above (providing a particular procedure is followed)
 Some other substantial reason that justifies the dismissal

Dismissal – automatically unfair

If the dismissal of an employee does not fall under any of the six categories identified by the
Employment Right Act 1996: http://www.legislation.gov.uk/ukpga/1996/18/contents, it is
deemed to be an automatically unfair dismissal. The most common automatic reasons are
as follows: https://www.gov.uk/dismiss-staff/unfair-dismissals:
  “Pregnancy, including all reasons relating to maternity”
 “Family, including parental leave, paternity leave (birth and adoption), adoption leave
or time off for dependants”
 “Acting as an employee representative”
 “Acting as a trade union representative”
 “Acting as an occupational pension scheme trustee”
 “Joining or not joining a trade union”
 “Being a part-time or fixed-term employee”
 “Discrimination, including protection against discrimination on the grounds of age,
disability, gender reassignment, marriage and civil partnership, pregnancy and
maternity, race, religion or belief, sex and sexual orientation (in Northern Ireland, this
also includes political beliefs)”
 “Pay and working hours, including the Working Time Regulations, annual leave and
the National Minimum Wage”
 “Whistleblowing”

The Employment Act 2002 introduced the Dismissal and Disciplinary Procedure (DDP) that
is applied to certain types of unfair dismissal. It is based on the following steps:

 Step 1 – the employer must communicate in writing the reasons leading to the
consideration of dismissal for the employee and invite the employee to attend a
meeting
 Step 2 – the employer must meet with the employee and following the meeting a
dismissal confirmation must be provided in writing
 Step 3 – the employee should be given an opportunity to appeal against the
dismissal

The notice entitlement depends on the employee’s length of service. More specifically:

 No notice is required for less than a month of service

 One week is required for more than one month but less than two years
 One week is required for each complete year of service for individuals who have
completed two full years of service
 A maximum of 12 weeks is required for 12 or more complete years 

You should have identified some of the following:

 Employment Rights Act 1996 – the act gives several rights to employees such as (i)
the right to claim unfair dismissal, (ii) the right to be given a written statement of
terms and conditions, (iii) the right to receive an itemised pay statement, (iv) the right
to time off for various reasons (e.g. participate in trade union activities, being a
member of a committee and perform public duties), (v) the entitlement to a minimum
notice period, and (vi) the right to receive statutory redundancy payment after
serving more than two years
 Public Interest Disclosure Act 1998 – commonly known as Whistleblowing - protects
employees who wish to notify authorities of fraudulent, criminal or dangerous
activities carried out by their employers. Protection is provided if evidence shows (i)
 criminal activity, (ii) failure to comply with the law, (iii) miscarriage of justice, (iv)
health and safety dangers and (v) environmental damage
 Employment Relations Act 1999 – providing support to employees in the form of a
statutory right to be accompanied to disciplinary or grievance meetings
 Employment Act 2002 – ensuring that employers must comply with statutory
procedures applied to dismissals, grievances and disciplinary matters

There is specific legislation that ensures that no discrimination is allowed in the workplace.
More specifically the following is in place:

 Disability Discrimination Act 1995

 Employment Equality (Age) Regulations 2006
 Employment Equality (Religion Or Belief) Regulations 2003
 Employment Equality (Sexual Orientation) Regulations 2003
 Equal Pay Act 1970
 Race Relations Act 1976
 Sex Discrimination Act 1975

Roles and Responsibilities of Directors

The Companies Act 2006 provided a detailed guide of the duties and responsibilities of
company directors. The guide is known as the Statement of General Duties of Directors and
provides a number of key principles, as follows:

 The general duties mean a director must act in the interests of the company and not
in the interests of any other parties – including shareholders (i.e. when several
interested parties are involved, the director must ensure that he/she is impartial –
interestingly enough the same applies when a sole shareholder exists where the
director must not put his/her own interests above the company’s)
 Duty to act within the company’s powers (i.e. the company’s rules included in its
constitution must be followed by the director who must use the powers delegated by
shareholders for the benefit of the company)
 Duty to promote the success of the company (i.e. the director’s judgment should be
exercised in order to identify which is the most likely approach and associated
actions to ensure sustainable growth, profitability or any other concept used to
represent success)
 Duty to exercise independent judgement (i.e. the director’s judgment should be in
line with the company’s constitution)
 Duty of skill, care and diligence (i.e. the director should demonstrate appropriate
knowledge and skills as expected for the role and act according to his/her possessed
knowledge and skills)
 Duty to avoid conflicts of interest (i.e. the director should avoid situations where
personal or external interests may come into conflict with the company’s interests)
 Duty not to accept benefits from third parties (i.e. directors should not accept benefits
arising from their own actions)

The Companies Act 2006

In 2006, several amendments led to the Companies Act 2006, providing a more
comprehensive guidance on director duties and responsibilities. The Act states the following
on the principles identified above:
Section 171 Duty to act within powers

 A director of a company must —

(a)  act in accordance with the company’s constitution, and

(b)  only exercise powers for the purposes for which they are conferred.
Section 172 Duty to promote the success of the company
(1)  A director of a company must act in the way he considers, in good faith, would be most
likely to promote the success of the company for the benefit of its members as a whole, and
in doing so have regard (amongst other matters) to —
(a)  the likely consequences of any decision in the long term,
(b)  the interests of the company’s employees,
(c)  the need to foster the company’s business relationships with suppliers, customers and
others,
(d)  the impact of the company’s operations on the community and the environment,
(e)  the desirability of the company maintaining a reputation for high standards of business
conduct, and
(f)    the need to act fairly as between members
(g)  the company.
(2)  Where or to the extent that the purposes of the company consist of or include purposes
other than the benefit of its members, subsection (1) has effect as if the reference to
promoting the success of the company for the benefit of its members were to achieving
those purposes.
(3)  The duty imposed by this section has effect subject to any enactment or rule of law
requiring directors, in certain circumstances, to consider or act in the interests of creditors of
the company.
Section 173 Duty to exercise independent judgment
(1)  A director of a company must exercise independent judgment.
(2)  This duty is not infringed by his acting —
(a)  in accordance with an agreement duly entered into by the company that restricts the
future exercise of discretion by its directors, or
(b)  in a way authorised by the company’s constitution.
Section 174 Duty to exercise reasonable care, skill and diligence
(1)  A director of a company must exercise reasonable care, skill and diligence.
(2)  This means the care, skill and diligence that would be exercised by a reasonably
diligent person with —
(a)  the general knowledge, skill and experience that may reasonably be expected of a
person carrying out the functions carried out by the director in relation to the company, and
(b)  the general knowledge, skill and experience that the director has.
Section 175 Duty to avoid conflicts of interest
(1)  A director of a company must avoid a situation in which he has, or can have, a direct or
indirect interest that conflicts, or possibly may conflict, with the interests of the company.
(2)  This applies in particular to the exploitation of any property, information or opportunity
(and it is immaterial whether the company could take advantage of the property, information
or opportunity).
(3)  This duty does not apply to a conflict of interest arising in relation to a transaction or
arrangement with the company.
(4)  This duty is not infringed —
(a)  if the situation cannot reasonably be regarded as likely to give rise to a conflict of
interest; or
(b)  if the matter has been authorised by the directors.
(5)  Authorisation may be given by the directors —
(a)  where the company is a private company and nothing in the company’s constitution
invalidates such authorisation, by the matter being proposed to and authorised by the
directors; or
(b)  where the company is a public company and its constitution includes provision enabling
the directors to authorise the matter, by the matter being proposed to and authorised by
them in accordance with the constitution.
(6)  The authorisation is effective only if —
(a)  any requirement as to the quorum at the meeting at which the matter is considered is
met without counting the director in question or any other interested director, and
(b)  the matter was agreed to without their voting or would have been agreed to if their votes
had not been counted.
(7)  Any reference in this section to a conflict of interest includes a conflict of interest and
duty and a conflict of duties.
Section 176 Duty not to accept benefits from third parties
(1)  A director of a company must not accept a benefit from a third party conferred by
reason of—
(a)  his being a director, or
(b)  his doing (or not doing) anything as director.
(2)  A “third party” means a person other than the company, an associated body corporate
or a person acting on behalf of a company or an associated body corporate.
(3)  Benefits received by a director from a person by whom his services (as a director or
otherwise) are provided to the company are not regarded as conferred by a third party.
(4)  This duty is not infringed if the acceptance of the benefit cannot reasonably be regarded
as likely to give rise to a conflict of interest.
(5)  Any reference in this section to a conflict of interest includes a conflict of interest and
duty and a conflict of duties.
Some of the most common actions that directors must take can be classified according to
their duties. More specifically we can identify the following categories:

 Improving the business environment and social performance – actions could include:
o Monitoring the business impact in the wider community
o Introducing a corporate social responsibility programme
o Identifying corporate social responsibility obligations
o Informing decision making processes with corporate social responsibility
issues
 Reporting on social, environmental, employee, community and contractual
responsibilities with suppliers – actions could include:
o Assessing company performance against identified obligations
o Identifying measurable criteria for assessing performance
o Implementing appropriate reporting systems and mechanisms
o Recording the interests of each stakeholder group with respect to reporting
needs
 Reacting on creditor interests – actions could include:
o Minimising risks to creditors
o Informing creditors of any major changes
o Identifying threats to the business well being
o Reporting early signs leading to company insolvency
 Adopting appropriate decision making procedures – actions could include:
o Introducing procedures supporting directors to comply with the Act
o Understanding company constitution
o Aligning director duties to company rules
o Being aware of director obligations to the company
o Submitting decision-making procedures to the board for review
o Reporting whether decision making procedures have been altered or if any
deviation from the original plan is observed
 Ensuring proper communication and flow of information – actions could include:
o Holding regular meetings
o Identifying agenda items after consultation with board members
o Providing relevant materials in advance with plenty of time for review
o Ensuring that executive directors are aware of performance-related matters
 Reducing the likelihood of conflict of interests – actions could include:
o Ensuring directors are aware of any obligations
o Reflecting on individual objectives and possible interests that may trigger
conflict
o Disclosing relevant interests to the board
o Avoiding taking part in decision making in areas where personal interests
may exist 
One of the most important responsibilities of each director is producing the necessary
information to report on business performance. Consider those aspects of business
performance that are essential to assess its well-being and identify what data is needed
when reporting on performance.

Feedback
A director’s report should include the following:

 A generic business review discussing all major events since the last reporting period
 An identification of the principal risks for the business
 An assessment of future developments and possible uncertainties that may affect
the organisation’s performance
 Data for evaluating how the business performed during the financial year
 The position of the business at the end of the reporting period with emphasis on the
business size, complexity and market sector
 Analysis of any trends and factors that may affect the sector at large and
subsequently have an impact on the business performance
 Information on issues such as social, environmental and political matters
 Issues relating to the company’s workforce and employees
 Analysis based on financial key performance indicators
 References and resources to explain financial reports and justify performance
indicators and any financial data generated

The appointment of certain individuals to specific director roles should be an exercise that is
based on a clear understanding of the responsibilities of each of the director roles.
A summary of generic director responsibilities can include the following:

 Identifying how exercising director powers appropriately and for the identified
purpose will restrict directors dealing with various areas of the business
 Ensuring that directors act in good faith, focusing solely on the business objectives
and not affected by individual interests
 Assessing possible areas where conflict of interest may occur and steer clear from
such decisions, making sure that company’s interests always come first
 Performing own duties with the necessary professionalism and the skills, knowledge
and experience expected for the seniority of the role
 Keeping in mind the interests of company shareholders, stakeholders and employee
groups

Directors also have clear roles, which carry specific actions, tasks and procedures. We can
identify the following key role pillars:

 Vision, mission and value – meaning the director’s role to establish a clear
organisational vision, participate in formulating a strong statement and define norms,
beliefs and values that form the basis of the organisation’s existence. Example
actions may include:
o Determining company vision
o Documenting company mission
o Setting the pace for current operations
 o Setting objectives for future goals
 Strategy and structure – meaning the director’s role to participate in strategic
planning of the organisation’s structures, resources and operations. Example actions
may include:
o Reviewing present opportunities
o Evaluating future opportunities and developments
o Forecasting potential threats and risks
o Analysing business strengths and weaknesses
o Identifying environmental opportunities and threats
o Determining strategic directions for business plans
o Aligning organisational structures and resources to fit strategic plans
o Matching organisational strategy to business plans and operations
 Management – meaning the director’s role to delegate any operational activities to
management level. Example actions may include:
o Delegating authority to managers
o Monitoring the implementation of company policies
o Evaluating the impact of business strategies and plans
o Assessing management performance against corporate plans
o Introducing measurable criteria for business performance
o Deploying internal control mechanisms
o Communicating results and decisions to senior management
 Accountability – meaning the director’s role to have a clear picture of the company’s
performance and being aware of any causes for the observed effects, being able to
attribute company performance to individual actions and specific matters. Example
actions may include:
o Engaging in effective communication with shareholders
o Keeping stakeholders informed of any developments
o Ensuring that shareholder interests are taken into account during decision
making
o Gathering information from shareholders and stakeholder groups
o Monitoring how business performance affects relationships with shareholders
and stakeholder groups

Issues relating to director’s responsibilities

It is necessary to consider that companies come in many in different forms, the most
common being limited companies and public limited companies. In all cases the company is
a separate entity with the owners of a limited company having no liability for its debts apart
from an obligation to pay any amount they owe for the shares they hold. A public limited
company has a minimum share capital of £50,000 of which £12,500 must be fully paid and
the remaining £37,500 must be paid only if requested by the directors or in the case of
insolvency.
The relationship between the company and its directors can be described as the
relationship between a principal and an agent. The directors are trustees of the company’s
assets and they have the responsibility to manage it in the best interest of its members.
Some rules include the following:
  Private companies need to have one director
 Public companies need at least two directors
 A company director cannot act as a company secretary if there is no other director
 All companies must have at least one director
 Private companies are not required to have a company secretary
 A director is a company officer but not necessarily an employee

There are certain criteria that are used to assess whether an individual can be appointed as
a director. The following are not eligible for such an appointment:

 An un-discharged bankrupt unless permitted by the court

 Anyone disqualified under the Company Directors' Disqualification Act 1986
 The company auditor
 Anyone under the age of 16 years

Directors are removed when:

 They die
 They resign
 They are disqualified
 The company dissolves
 They are removed by the members of the board by what is known as ordinary
resolution
 They retire

There are several types of director based on the size and consistency of the board of
directors. More specifically:

 Executive directors – full time employees of the company that have a clear
management role
 Non-executive directors – serving on a part time basis due to their expertise with a
key role to provide input for policy making
 Chairman – responsible for board meetings as well as meetings with company
shareholders
 Managing director – being primarily responsible for the business operations while
trying to implement the company strategy
 Alternate or acting director – replacing the managing director during brief periods of
absence
 Nominee director – representing the interest of certain shareholders
 Shadow director – although not a member of the board, he/she provides direction to
the other members. It can be an individual or another company
 Connected persons – these are a director’s spouse or children, associated
companies, trustees of any trust the director or his/her connected persons are
beneficiary of, partners of the director, spouse, children or associated company 

Directors are responsible for generating reports such as accounting records. The
information provided by accounting records include the following:
  The financial position of a company
 Financial transactions of the company
 Records of company assets and liabilities
 Entries of all receipts and payments
 Details of all sales and purchases of goods and services
 Identification of buyers and sellers
 Stock held at the end of each period

Directors may be accused of criminal offences if they:

 Conceal property and records

 Destroy property and records
 Falsify company records
 Are privy to the above

Distinguishing Business Ownership from Business Control

There are various classifications of business types and it is necessary to identify those
criteria that may help us to decide whether a new business belongs to a certain
classification. The two main factors we should take under consideration are (i) legal
structure of business and (ii) intellectual property.
The main business types identified include the following (the following types are quite
common in the US, while different names are used in the UK to describe similar business
types):

 Sole proprietorship – can be described as a business entity that is the same as its
owner. There are minimum costs to set such a business up and usually it is the
simplest form of business trading
 General partnership – this business form is an association between a number of
individuals trading together in an attempt to share resources, skills and expertise,
leading to generation of further profits. The main concern with such businesses is
that the members have full liability for their debts
 Limited partnership – this business form still has associated members exposed to
their individual liabilities but only the invested capital is at risk
 Limited liability partnership – in this type of business, all partners have limited
liability. This business form combines the benefit of pass through taxation and
liability protection
 Corporation – this type of business regards the company as a separate entity from
its owners. It has limited liability, transferrable shares, and perpetual existence
 Limited Liability Company – they have flow through taxation and limited liability

In order to distinguish between the different business types we must consider their
characteristics in terms of specific criteria. There are some key factors that can help us to
distinguish between different company types. For example:

 Taxation – how are the different business types assessed in terms of their profits and
revenue?
  Liability – what are the limitations in terms of responsibilities of business owners
when it comes to debts and legal action?
 Risk – what are the known threats and vulnerabilities associated with each business
type?
 Control – who is in charge of the business and how are decisions made, from
strategic planning down to daily operations?
 Continuity of existence – what happens to the business once the owner decides to
step down, retire or sell?
 Transferability – how easy and feasible it is for the business ownership to change?
 Expense – what is the associated cost with setting up and running a business of
each type?
 Formality – is there a need for a detailed and structured approach in setting up each
business type?

Distinguishing Business Ownership from Business Control

Tell Me

Business ownership

We have briefly viewed how US law views the different business types. In the UK a similar
classification exists that identifies the following business types:

 Sole trader – these are usually based on individuals who wish to trade as companies
and are quite common with manual work trades
 Partnerships – these forms are usually popular in industries where expertise and
skills are shared in order to generate a more valuable intellectual capital
 Private companies – these businesses are based on capital collection from
shareholders but the number of shares remains small in order to maintain control
within the core of the shareholders
 Public companies – such businesses are able to attract more investors but control is
shared between a large number of shareholders
 Franchises – these forms of business are based on a main company allowing setting
up of smaller businesses in order to sell a service or a range of products owned by
the original firm

We can describe, as well as compare, each of the business types based on a number of
criteria as follows:

 Sole trader
o Ownership – usually one trader
o Control – the owner controls the business
o Sources of finance – owner’s savings, bank loans and overdrafts as well as
business profits
o Size – very small
o Liability – unlimited
o Profits – to the owner
o Access to capital – limited sources available
 o Weaknesses – requires a lot of work and initial effort
 Partnerships
o Ownership – usually two or a few individuals
o Control – the partners have joint and equal control of the business
o Sources of finance – partners’ loans, overdrafts and business profits
o Size – fairly small
o Liability – mostly unlimited
o Profits – to the partners
o Access to capital – usually fairly limited
o Weaknesses – requires trust between partners and difficult sometimes to
reach consensus
 Private companies
o Ownership – usually a small number of directors
o Control – the directors are responsible for strategic plans as well as day to
day decisions
o Sources of finance – shares, bank overdrafts, venture capital and profits
o Size – mostly small but can become large
o Liability – limited
o Profits – to the shareholders
o Access to capital – various sources but with significant obstacles
o Weaknesses limited financial sources and limited capital
 Public companies
o Ownership – shareholders
o Control – the board of governors provides direction followed by directors and
managers
o Sources of finance – shares, bank overdrafts, venture capital and profits
o Size – large
o Liability – limited
o Profits – to the shareholders
o Access to capital – extensive
o Weaknesses – vulnerable to acquisitions and take-over attempts
 Franchises
o Ownership – the franchisee obtains the license from the franchiser
o Control – the franchisee makes day to day decisions within a tight framework
guided by the franchiser
o Sources of finance – franchisee’s savings and borrowing
o Size – small individual ventures that are part of a very large network
o Liability – limited
o Profits – divided between franchisor and franchisee based on an agreed
percentage
o Access to capital – limited by franchisee’s capital
o Weaknesses – profits must be shared and decisions are regulated by
franchisor

Distinguishing Business Ownership from Business Control

Sole proprietorship
Advantages

 They are very easy to set up

 They have a straight forward structure and operations
 Offers full decision making control to owners
 Business revenue can be used according to the owner’s wishes
 Company profits flow directly to the owner’s personal tax returns

Disadvantages

 Legal liability is unlimited

 Personal assets are vulnerable if legal action is take against the business
 Difficult to attract investors
 Employees are likely to request a share of the business in the future

Business partnership
Advantages

 Allowing sharing resources between individuals

 Strategic alliances can be formed between partners
 Raising funds has increased chances
 Business profits directly to the owners

Disadvantages

 There is a significant liability risk

 Joint decisions may become problematic
 Control battles may erupt
 Sharing profits may cause friction

Limited Liability Company

Advantages

 Personal liability is limited for any debts

 Profits flow directly through the individual shareholders
 Flexible management of the company
 Ability to control strategy and operations

Disadvantages

 Complex structure and organisation

 Limited liability is a reason for lack of investment
 Clients may be concerned due to the limited liability status
 Resources may be an issue while company expands

Corporation
Advantages

 Ability to raise funds by selling stock

 Liability is relatively limited
 Tax benefits are possible

Disadvantages

 Requires a complex process to set up

 Control is shared with others
 Dividends are the main vehicle to draw funds but are also taxable

Consider what you are likely to need for starting your own business. Consider the different
business types and identify the main issues that you should address. Identify the main
areas you need to consider and decide on which aspects of the overall exercise you should
focus.

Feedback
You should first consider your main goal and specific objectives. For example:

 You wish to have a business through which you engage with your customers in your
line of profession as an individual
 You wish to join forces with a colleague to increase the chances of getting bigger
jobs
 You wish to engage in a more complex venture with a plan to expand and gain other
work
 You wish to attract investors and deploy a complex business structure with ambitious
expansion plans

You should also consider the main threats, including:

 Lack of management skills

 Poor practices and organisation
 Complex structures and operations
 Lack of necessary resources
 Underestimated costs and effort required

Business ownership is a concept that may seem risky for most people whilst it may seem
very attractive to others. There are clear benefits from owning a business, such as:

 There is potentially no limit in the amount of money one can gain as opposed to a
fixed salary
 One can take his/her own decisions
 One can be the boss of others
 Ideas can be put into practice
 Being your on boss means there is job security
 Every aspect of the business requires your view and authorisation
 A number of disciplines and business aspects become familiar
  Ability to directly communicate and engage with customers
 Helping local communities with sponsoring and even giving jobs to people
 Enjoy working in your own dream job

However, owning a business also comes with several drawbacks, such as:

 Taking financial risks

 Lack of free time till the company reaches certain growth
 Heavy schedules and continuous involvement is required
 There are time consuming aspects associated with the more mundane tasks of
running a business
 Income may be subject to fluctuations
 At times cash flow may be a problem
 Certain tasks are not enjoyable, for example, firing people and resolving conflicts
 There are so many disciplines that require expertise, experience and time to master

Business control

We have discussed so far that the ownership of a business is a concept that may generate
contrasting feelings. There are different business types, meaning that business ownership
may vary significantly. Sometimes it is possible for a business owner to have no control on
certain aspects of the business. It sounds strange but sometimes business control and
business ownership are not aligned and quite often the same people do not possess both
ownership and control.
Some of the most typical activities associated with the business control process are as
follows:

 Establishing standards for assessing business performance

 Monitoring business performance with certain key indicators
 Reporting business performance with the aid of measurable criteria
 Evaluating performance based on certain benchmarks and sector standards
 Identifying areas for further improvement and specific inefficiencies
 Taking corrective action against certain causes of poor performance

In order to control a business, managers and directors need to evolve their personal traits
and skills. There are clear stages that can be followed in order for individuals to become
capable of controlling a business. More specifically these include:

 Identifying areas for further improvement and specific inefficiencies

 Identifying individual areas for improvement
 Gaining the necessary skills through training programmes in business control
 Establishing business control processes tailored to the needs of the specific
business
 Assessing organisational controls that are deployed for their effectiveness
 Establishing a business control strategy that is part of the leadership ethos of the
organisation
We could distinguish between two types of control, namely strategic and operational control.
Strategic control involves the on-going reflection on the business strategy with emphasis on
any areas for improvement based on any evidence for the strategy’s success or failure. The
scope of this control process is to provide a strategy that is responsive to the business
needs and the environment’s influences. On the other hand, operational control is
concerned with the way the business strategy is executed. Operational controls are usually
in the form of specific goals, objectives and standards that help assess business
performance. Some of the most common operational controls include:

 Return on investment
 Net profit
 Cost
 Product quality
 Production rate

Control types may include (i) feed forward control that focuses on assessing what actions
we can take in the future in order to achieve our plans, (ii) concurrent control that focuses
on monitoring on-going activities and making the appropriate adjustments and (iii) feedback
control that focuses on collecting information about a completed activity with the aim to
improve similar activities in the future.
We can view any control activities as part of a loop containing the following stages:

 Planning – this stage involves the creation of the necessary strategy for the business
to follow
 Organising – this stage involves setting up the necessary structures and putting in
place the required resources for the business operations
 Leading – this stage involves any activities that are part of the business plan and the
actions that are taken to ensure the activities are performed as required
 Controlling – this stage involves the collection of information which is essential for
corrective actions before a new loop is entered 

There are several internal controls that a business can put in place to ensure that its
operations and processes are in line with its plans. At the same time the organisation can
assess its performance and take the necessary actions. Some of the most common internal
controls include:

 Aligning business objectives – ensuring that everyone has common goals and that
the business strategy is clear at all times
 Safeguarding assets – making sure that the organisation’s assets are protected from
external and internal malicious attacks including fraud, theft as well as accidents and
human errors
 Preventing fraud and errors – putting in place monitoring and control mechanisms
that detect and prevent both intended attacks and accidental errors
 Encouraging good management – providing guidelines and a framework of good
practice to share positive experiences and past success stories
 Taking action against poor performance – having a clear procedure that takes
corrective action when unacceptable performance is observed
  Reducing exposure to risks – engaging in a thorough risk assessment, leading to the
identification of threats and vulnerabilities and the suggestion of specific responses

Producing appropriate financial reports – disseminating performance results by using the

necessary financial statements.
The following criteria can be used to assess whether the internal control procedures are the
appropriate ones:

 Completeness – the extent to which control procedures provides all the necessary
information required for decision making
 Accuracy – the provision of correct information to be used for assessing business
operations and activities
 Authorisation – the ability of directors and managers to regulate control procedures
 Validity – the assurance that the control procedure produces the appropriate findings
 Existence – the correspondence of the findings generated by the control procedure
to the matching activities and operations
  Error handling – the ability to identify and process errors
 Duty separation – the assignment of distinct responsibilities to each role that is
associated with the control procedures
 Disclosure – the preparation of timely and accurate reports

Some of the most common areas where internal control procedures can be deployed
include:

 Safeguarding assets
 Producing accurate financial information
 Generating reliable financial statements
 Ensuring compliance with financial reporting standards
 Achieving business objectives

Assessing Governance and Directorship for Different Business

Structures
Some good examples of measuring governance are listed below:

 Preserving creativity – focusing on the mechanisms used to foster creation by

overcoming any bureaucratic processes and complex structures
 Results over presence – focusing on the output of each unit rather than the recorded
hours of presence or logged time of team members
 Opting for confrontation – focusing on establishing open communication and
discussion between members to reach decisions and explore all different options
 Action over attendance – focusing on measuring meeting success in terms of actions
and output rather than membership of committees and presence to meetings
 Macro over micro management – focusing on strategic planning and wider guidance
rather than resolution of mundane, daily matters and routine activities
  Encouraging regular feedback – focusing on establishing mechanisms that support
the provision of feedback between team members in an effort to achieve wide
dissemination of views, trust and openness within teams
 Restrained leadership – focusing on a leadership style that is less authoritarian and
becomes inclusive to team member views
 Preserving team energy – focusing on the prioritisation of decisions and actions to
ensure that team effort is balanced throughout project lifecycles 

Assessing governance

In order to assess governance we must consider the different areas of governance.

Governance activity may fall under one of the following areas:

 Social context – describing how members of the society become aware and raise
their views on specific issues
 Political context – explaining how specific rules are introduced in order for policies
and regulations to be shaped
 Governmental context – affecting the way government agencies introduce policies
 Bureaucratic context – determining how policies are implemented and administered
 Economic context – identifying the rules that govern the way the state interacts with
different markets
 Judiciary context – defining those rules that are used for conflict resolution

Governance can be assessed with the aid of the following principles:

 Participation – focusing on the extent to which stakeholder groups are involved in the
formation of policies
 Fairness – focusing on the application of rules equally to all members of the different
governance contexts
 Decency – focusing on how rules are introduced and their effect on individuals in
terms of humility
 Accountability – focusing on the identification of responsibility between individuals
who are perceived as enforcing agents of policies and rules
 Transparency – focusing on the ability to implement policies in a clear and open way
 Efficiency – focusing on the way resources are utilised for the implementation of
policies

he Governance Assessment Process (http://www.thegovernanceforum.com/gap/) is used to

assess the governance of third sector organisations that are validated by the Council of
Governance Forum. The process is followed by organisations that wish to assess where
they are and where they need to be in terms of good governance.
The process has clear benefits such as:

 Assessing governance compliance against certain standards

 Improving the governance profile of an organisation
 Enhancing decision making, monitoring and control processes
 Offering independent governance assessment mechanisms
 Providing clear improvement plans for organisational governance
  Participating in a national benchmarking exercise on governance assessment

The areas of governance being assessed by the process are as follows:

 Resources – the structures and processes and tools that are available for the board
to assess the way it governs the organisation
 Competency – the skills and experience required for assessing governance against
strategic direction and organisational values and goals
 Execution – the ability to plan how the board’s strategy can be implemented 

The process is based on the following levels:

 Level 1 – compliance (the organisation demonstrates legal and statutory compliance)

 Level 2 – standard (the organisation proves that is governed well and the
governance tools are part of the organisation’s planning processes)
 Level 3 – enhanced (the organisation actively seeks to maximise its performance
with efficient and effective use of processes and protocols)
 The first area of the governance assessment process is focused on resources and
more specifically on clarity of structures, processes and tools. The goal is to achieve
effective structure and documentation.
 The second area of the governance assessment process is focused
on competency and more specifically on acquiring the right range of skills and
experience. The goal is to achieve effective boards and effective chairpersons.
 The third area of the governance assessment process is focused on execution and
performance and more specifically on implementing the board’s strategy in a
coordinated way. The goal is to achieve effective control, probity and risk
management.
Summary
 We could define corporate governance as a collection of issues that one has to be
fully aware of when running a business. Good corporate governance is an essential
element for a successful business.

 Corporate governance is likely to bring several benefits to ay organisation. The

involvement of a formal governance approach is likely to affect the way the business
operates, performs and is perceived by its stakeholders and customers.

 It is crucial to have in place specific principles dictating how corporate governance is

achieved. Such principles ensure that organisations can be assessed in terms of
how their governance achieves the goals of its stakeholders.

 There are several factors that may affect an organisation’s corporate governance.
These factors can be described as a range of pressures that impact on how
corporate decisions are made and the way business operations are performed.
 Corporate governance may take several forms depending on the type of business
we are concerned with. In the UK a classification exists that identifies the following
business types:

o Sole trader – these are usually based on individuals who wish to trade as
companies and are quite common with manual work trades
o Partnerships – these forms are usually popular in industries where expertise
and skills are shared in order to generate a more valuable intellectual capital
o Private companies – these businesses are based on capital collection from
shareholders but the number of shares remains small in order to maintain
control within the core of the shareholders
o Public companies – such businesses are able to attract more investors but
control is shared between a large number of shareholders
o Franchises – these forms of business are based on a main company allowing
setting up of smaller businesses in order to sell a service or a range of
products owned by the original firm