Since 1992, with the succession of corporate scandals in the United Kingdom, governance ceased to be an internal matter and came to the attention of investors, business partners and of the society in general. Since then, countries and key organizations in the global economy have made considerable efforts to create standards and parameters of probity for managers and transparency for decision-making processes.
The goal was to draw the outlines of what would be considered good corporate governance.
Adopting these new perspectives has proved extremely beneficial for companies around the world. In fact, 62.3% of global studies on the topic concluded that there is a positive correlation between good governance and increased corporate profitability. Another survey, conducted by S&P Global, also identified that the shares of enterprises that were well evaluated in this regard performed better when compared to the others.
In this third part of the ESG series, you will understand more about this criterion that has taken over the corporate world, and will comprehend how a good Contract Lifecycle Management software can be a powerful instrument to perform one of the main functions of the Board: risk management.
See also the previous parts in this ESG series:
- The E in ESG: how can CLM make your company more climate resilient
- THE S IN ESG: promoting social impact with CLM
The outlines of a good corporate governance
Although there are several different concepts of governance, the Organization for Economic Co-operation and Development - OECD works with a definition that can be summarized in the following terms:
the set of practices that provide a framework from which goals are drawn, the means to achieve them are determined, and metrics to track them are selected. They should be always transparent and in compliance with applicable regulations
One of the key agents of this structure is the Board of Executive Officers, responsible for developing strategies based on a coherent risk analysis, as well as for mobilizing people, processes and technologies to achieve these objectives. All decisions taken by this body must be based on consistent data, especially for the purpose of rendering accounts to shareholders and other interested parties.
In this quest to apply best governance practices, four points of consideration are important:
1. Adjustment between the interests of shareholders and the performance of managers
This is one of the most traditional concerns when it comes to governance.
The central point is to ensure that managers keep the best interests of the business in mind when running the company, not their personal goals. As the conflict between these positions is extremely harmful to the organization, it is essential that all strategic reasons for decision making are based on consistent data analysis, always valuing transparency.
2. Consideration of other interested groups
There is a consensus around the need for managers to consider the interests of groups other than shareholders, such as workers, suppliers, consumers and the community in general.
This is the corollary of the so-called Stakeholder Model, which advocates greater corporate social responsibility and forms the basis of the ESG criteria.
3. Coordination of the company towards a common goal
The selection of a common goal has a central position in the very definition of what makes for a good Corporate Governance. It is a general guideline that should orient workflows from beginning to end in all areas of the company.
To achieve this objective, the Board is responsible for the full coordination of people, processes and technologies as articulated and complementary parts, together in an efficient whole.
4. Internalization of compliance as a part of the company's culture
It is certain among market agents that a good compliance program is part of the best corporate governance practices. True success in this task is achieved when the company internalizes the logic of probity that guides the various rules to which they are subjected.
Only then, when these considerations become part of the work culture of the Board and of all other areas of the corporation, will it be possible to effectively prevent violations, valuing collaboration with public authorities and with other agents of the civil society.
The role of risk management for a good governance
One of the central components of good corporate governance, and indeed of business activity itself, is risk management.
That's because no course of action chosen by the company is immune to risks. All decisions, from the most conservative to the most daring, assume, to some degree, the possibility of failure.
In an institutional dimension, it is the Executive Board who performs this task within the company. When setting the business’ general objectives, the means to achieve them and the corresponding metrics, that is, when performing corporate governance, this body must have visibility of the different types of risks to which the operations are subjected. But not only that, it is also necessary to organize them in a clear matrix, and mobilize mechanisms to intervene efficiently on these possible adverse effects.
Some of these risks are, for example:
There are so many possible adverse effects and so many intensities and ways in which they can manifest themselves that it is very common for Boards to be affected by the so-called "analysis paralysis", understood as the inability to make important decisions due to excess data or possible courses of action.
Moreover, it is also up to the Board to assess the extent to which it is possible to intervene in each of these categories in order to generate some level of safety for the company.
This is because there are risks that are far from any influence of the enterprises, as is the case of variations in the financial market. With regards to these situations, it is important to structure preventive measures, but beyond that, there is not much else to be done.
On the other hand, there are risks on which the company can act directly, such as contractual and operational risks.
Whether to structure preventive measures, or to intervene directly on those risks, it is essential that the Board has the appropriate tools for the job. In this context, the great secret of solid corporate governance is a CLM software, such as netLex.
CLM Software: More visibility and control over contractual and operational risks
The idea of CLM, or Contract Lifecycle Management, is that the most efficient management of contracts is the one that considers these documents in a complete way, from elaboration to fulfillment, extracting data to generate intelligence in all these stages.
Contracts are, therefore, much more than instruments establishing obligations to the parties. They are living devices of business management, crossing operations from end to end and serving as a connector between the company and other market agents.
This vision gains even more consistency when it is combined with the full power of technology, as in specialized CLM software, such as netLex.
The complete digitization of the contract lifecycle makes it possible to standardize documents and workflows, enabling the efficient management of two major types of risks to which companies are subjected: contractual and operational.
1. Contractual risk management
As we have seen in the previous topic, contracts are fundamental parts for the company's performance. But their relevance does not stop there: they are also, per excellence, risk allocation devices. Efficient contract management is therefore a prerequisite for sound risk management.
Contracts as risk allocation instruments
The parties may have greater or lesser freedom to structure the allocation of risk depending on the type of legal relationship they establish.
In B2B contracts, parties can foresee situations, from the most commonplace to the most unusual, and distribute among themselves the risks associated with each of them. In B2C or labor contracts, the legislation sets stricter parameters, assigning companies a greater share of responsibility and also indicating the limits within which it is possible to discuss the attribution of this burden.
Therefore, a notion of the legal regimes applicable to the contracts signed by the company must be part of the business’ risk management strategy. More specifically, the Board should be aware of the particular burden allocation decided in each negotiation.
However, as companies sign hundreds, if not thousands of contracts, it is impossible for the Board to inform itself about each one of them. At this point, the standardization of risk allocation clauses becomes an essential practice to achieve good corporate governance.
Automating contract elaboration and controlling revision
It is part of good corporate governance to define risk matrices and, based on them, to establish guidelines for managing risks in each of the individually considered contracts. These guidelines can come in the form of standard clauses, which, as a rule, cannot be deleted or altered.
This is because any withdrawal or modification of these provisions has the potential to alter the allocation of burdens originally based on the matrix. Without visibility of these occurrences, the company can be surprised by the materialization of an adversity for which it had not provisioned.
To automate contract elaboration is the best way to manage this specific risk, and it is within the reach of a company that adopts a CLM software such as netLex.
Thus, the document is prepared through the filling of a simple questionnaire, and the final product will invariably be generated with all the company's standard clauses.
In the review stage, it is possible to control the powers granted to the negotiating parties, to:
- Deny the possibility of altering the document’s text, allowing the reviewee only the visualization of the information filled in the questionnaire;
- Authorize the modification of the text, but highlighting the changed passages, with the inclusion of a new stage of internal review for the approval of the interventions.
With both of these control mechanisms, all risks allocated in the company's contracts are visible to managers and duly considered in the corporation's market strategy.
2. Operational Risk Management
Contracts are not the only source of risk whose management is important. The very workflows that lead to its formation, review, signature, and, in the end, fulfillment, are also potential sources of adversity. Specifically with regard to these processes, some strategies are fundamental:
Standardization and automation of procedures
An inexhaustible source of risks for operations is the lack of standard procedures.
While part of this phenomenon naturally follows from the adoption of customary practices within departments, not all deviations are potentially neutral. If there is no standard, it becomes possible for workflows to be captured for the interests of specific individuals or groups, misaligning them with the company's overall objective and undermining governance.
So, it is important to ensure that all business procedures follow the standards outlined by the Board. And the best way to do so is by automating these flows within a CLM platform like netLex.
That way, when the company's internal procedures are conducted on a system in which the standards are observed by default, the manager drastically reduces the chances of deviations from the expected practice. As a consequence, they can make sure that the company's activities are conducted closely to the objectives traced by the Board.
Compliance steps by default
To ensure the correct behavior of employees and suppliers, compliance forms have multiplied within businesses. An increasingly frequent example are the measures to prevent private corruption, adopted under national and often international standards.
The inclusion of these compliance steps is a good practice strongly encouraged by the market, and the failure to comply can be assessed as a neglect in the execution of due diligence by the members of the Board.
If the Board of Directors needs to base its decisions on solid data analysis, the most reliable information will certainly be that extracted directly from the company's operations.
Depending on how this data is acquired, however, this approach could end up being counterproductive. That is because if information about operations is manually compiled by employees in each sector, the risk of human error, or worse, of deliberate adulteration of results, will invariably hang over every decision.
Therefore, just as automation is an important aspect of standardizing procedures, so too is data extraction. When information about the company's workflows is gathered automatically, dispensing with human action, reliability is added to the panorama presented.
A platform like netLex allows the instant extraction of data referring not only to the documents created, but also to the workflows in which they are inserted. These inputs can be evaluated within the software itself, or exported through integration with Power BI systems.
Placing technology at the service of good corporate governance
An efficient management of contractual and operational risks is one of the most important attributions of the Board of Directors.
In doing so, it is necessary to follow the guidelines that define good corporate governance, ensuring that the selected course of action is the one that best achieves the company's goals, having considered all the interests involved, from investors to the society as a whole.
Since this task is not simple, it is essential that the corporation has adequate tools to perform it. NetLex puts the best of technology at the service of optimizing the management of your company's contractual and operational risks.
To learn more about how to bring these advantages to your organization, talk to our experts!