According to the United Nations Economic and Social Commission for Asia and the Pacific, “governance” means the process of decision-making and the process by which decisions are implemented (or not implemented). In recent times, many governments, NGOs and other organizations have come under fire for poor governance. And more than a handful of regulators have called out “bad governance” as the root of all organizational evil (recall the 2008 financial institution crisis). In SMEs and not-for-profits, good governance includes placing focus on making decisions effectively that are sound, honest, defensible and, to some extent, transparent. A good basis for sound decision-making is having good policies and procedures in place so that everyone knows what is expected of them, and what processes to follow to ensure that decisions are sound, honest, defensible and transparent.
Good governance practices begin at the Board level in any organization. If the Board is not making sound decisions based on good, high quality and honest information, then it’s ability to take successful actions is compromised. It is common for Boards today to have a governance policy that covers the following areas in detail:
- the roles and responsibilities of the Board, its officers and committees;
- the manner in which the board exercises its authority;
- the responsibilities and authority of its managing person (Executive Director, President, etc.);
- the relationship between the Board and its senior management team; and
- the general principles that will guide its governance practices.
One of the most important areas where governance is key is financial management. While it is important for Board members to stay up-to-date on the activities going on in the organization, it is especially important that they are fully conversant in financial terminology, be able to read and understand complex financial reports and statements and be aware of their potential personal liability if everything is not in order. While it is not acceptable for a Board to micromanage the daily accounting processes, individual Board members must stay on top of the organization’s financial health and activities. This is often accomplished through the use of a financial management governance policy that states clearly what the organization will do in the areas of budgeting, regular reporting, auditing practices and authority for requisitioning, spending and financial reporting. It will also clearly set out the expectations for signing authorities for the organization.