by Dar Vanden Boogart

Corporate governance is a term that is heard more frequently in boardroom discussions for public and nonpublic companies, but what exactly does the term mean? An Internet search for the definition of corporate governance returns more than 5,000 results. For the purpose of this article, we will define corporate governance as the culture within an organization that promotes integrity, ethical standards, and corresponding controls that emphasize and demonstrate a commitment to a strong control environment.

This article focuses on strategies nonpublic companies can use to strengthen their corporate governance, starting at the top. Many of these concepts evolved from Sarbanes-Oxley Act (the “Act”) requirements and have been adopted by organizations exempt from the Act because they are considered to be good business or best practices.

Audit Committee
Many organizations have formed audit committees in response to the increased emphasis on risk management. A committee structure allows more time to devote resources to this area. Audit Committee charters are used to document the role and responsibilities of the committee.

Code of Conduct or Ethics Policies
All organizations can benefit from a strictly enforced code of conduct. While a code of conduct policy cannot cover every issue that may arise, it can define basic principles to guide employees and officers of the organization. Employees are often required to sign an annual acknowledgement of their understanding and adherence to the code of conduct.

Employee Hotlines
One way organizations can demonstrate commitment to integrity and ethical standards is to establish a mechanism or process for reporting improper activity. There are several ways to accomplish this. One method is to contract for this service through an independent service provider. There are several companies to choose from. Another method is to designate a person or persons that will receive the communication. A number of organizations have designated this as an Audit Committee chairperson role. Employees should be informed of what the process is and provided assurance that all reports will be held in strict confidence. It should also be clear that employees will not be retaliated against for submitting reports in good faith.

Some organizations have resisted instituting hotlines because of concerns the process would be used inappropriately for personnel or customer issues. Although this issue could occur, a well-defined program and employee education can typically limit the number of occurrences of these types of reports. Some programs do not provide for anonymous reporting. Ideally, anonymous reporting would be an option to reduce the employee’s fear associated with making a report.

Incentive Compensation Plans
Organizations should avoid policies and practices that may inadvertently provide incentives or temptations for inappropriate activities. Examples are a sales incentive plan focused solely on growth and volume without regard to quality or a sales incentive plan focused solely on quality. Neither of these plans is likely to be consistent with the intention of the incentive plan, which might be to improve performance and reward employees for efforts. In the first situation, quality may be sacrificed to achieve volume. In the second situation, legitimate business or growth opportunities may not be realized in an attempt to only generate sales of the utmost quality.

Walk the Talk
Nothing demonstrates management’s commitment to integrity and ethical standards and the culture of the organization more than actions. If management is consistently “overriding” procedures and controls, this demonstrates to employees that management has not committed to these standards and employees may place less emphasis on the importance of them.

Respond Fairly and Consistently
Another way management demonstrates commitment to integrity and ethical standards is dealing with improper behavior or inappropriate activity in a fair and consistent manner, not applying insignificant or overly onerous penalties for improper behavior based on position or standing within the organization. It is sometimes easier to handle issues that involve shorter-term entry level employees than it is to handle issues that involve key management or business development positions, but employees are counting on management to be fair and consistent in their approach.

Board of Director Surveys and Self-Assessments
Surveys and assessments are being used more frequently by Board members to gather information on corporate governance activities and ways to improve Board and individual effectiveness and performance. These types of surveys can serve as a great conduit for enhancing communication between management and the Board of Directors.

There is no "one size fits all" strategy. The strategies you choose to implement should be appropriate for your organization.