The importance of systems and processes in corporate governance: what are systems and processes and how can they be used to meet corporate governance objectives?
This is a guest article by Matthew Harris, Fund Accountant at Foresight Group. Views expressed are his own.
Adequate systems and processes are of vital importance for a company that wishes to sustain a high level of Corporate Governance. There is an inappreciative amount of reliance on them in the modern day workplace.
While systems and processes may have been established in your business, as it grows and competes at a greater level, the complexity required will demand more control mechanisms, better communication and improved systems to drive efficiency. Stepping up to the next level may mean looking at alternative ways of doing things and employing new thinking to ensure that your business is as efficient and streamlined as possible, while still delivering a high level of satisfaction to the end user.
It would be easy to focus in depth on business systems and processes. However, the rest of this article will help link the two key aspects into more of a corporate governance perspective.
As a starting point, corporate governance can be enhanced from the use of systems and processes in the following ways:
Now let’s look at definitions found for corporate governance, systems and processes to help demonstrate how they all interlink:
In essence, the system by which companies are directed and controlled and the relationships among the management, board of directors, controlling shareholders and other stakeholders. [Here is ACG's definition of corporate governance]
System software refers to the files and programs that make up your computer's operating system. System files include libraries of functions, system services, drivers for printers and other hardware, system preferences, and other configuration files. The programs that are part of the system software include assemblers, compilers, file management tools, system utilities and debuggers.
A specific event in a chain of structured business activities. The event typically changes the state of data and/or a product and generates some type of output. Examples of business processes include receiving orders, invoicing, shipping products, updating employee information, or setting budgets and forecasts. Business processes occur at all levels of an organisation's activities and include events that the customer sees and events that they do not. The term also refers to the amalgam of separate steps towards the final business goals.
We can relate the three terms together by establishing that in order to direct, control and sustain relationships with stakeholders, businesses must use systems to collate, compile and manage files as well as using them as part of the service in reporting to stakeholders. And, in order to run the business proficiently, a chain of activities must be put in place which when combined, will achieve the final organisational goals.
Systems are used to store a constant in-flow of new information on aspects such as a company’s customers, shareholders, levels’ of inventory, investments made or financial performance. The aforementioned are examples.
A stand-out benefit of such systems is that they become part of an ever more stringent reporting process, helping business generate high quality documents by transforming data held within them into informative and transparent papers for stakeholders such as management, a board or non-executives or shareholders.
Able systems help companies produce timely and accurate reporting which assists in controlling relationships between varying stakeholders. Without these systems, reporting would be inefficient, making it difficult for stakeholders to accomplish their intentions of making sound business and investment decisions in the best interest of the company.
Aside from reporting, a system may be used to keep track of correspondence between a company and potential investors, allowing the sales representatives to appear highly professional by being seen to remember prior discussions between themselves and the targeted investors.
Systems can be used as a main database for information, as a backup/secondary source or as a central location for the whole organisation to access what they demand. An example would be a company which stores investment information in both management accounts and on a separate database. Everybody within the business could be allowed access to the database, whereas only select personnel should have authorised access to the management accounts, due to the sensitivity of other information contained within them.
In summary, systems allow vast amounts of information to be stored in one place, therefore making it easily accessible to all personnel within an organisation who are all likely to have differing information usage and reporting needs.
Processes and procedures should be at the forefront of any organisation. Some processes will involve many departments within an organisation whereas others will not. Processes must run smoothly in order to achieve the desired end user results.
From a reporting mindset, efficient processes allow companies to cut down the time spent on such activities and reduce the risk of errors occurring within the concluding information being presented. With sound processes, management, the board and other stakeholders will receive information in a timely manner enabling decisive business and investment decisions to be reached and finalised at the earliest opportunity.
Proper processes can allow a company to reduce the risk of fraudulent activities, from the standpoint of identifying unexplained variances and suspicious transactions at a much earlier point in time.
With suitable processes in place, it will allow an organisation to adapt instantaneously to changes taking place within the business itself or the industry in which it operates. Management and directors can then decide on the most appropriate strategies for the business.
Processes are of particular importance for companies with regulatory or legal obligations. An example would be a public listed company. They will have stock exchange deadlines and far greater shareholder responsibilities to abide with. By having efficient and timely processes in place, reporting requirements can be met in a more seamless fashion.
Reliable and suited processes offer more assurance to stakeholders involved in the business, allowing for more timely decisions to be made throughout and help reduce the risk of fraudulent activities or errors in reporting.
If businesses fail to recognise problems stemming from the systems and processes they have in place, the inability to recognise the need for change could become a costly mistake. The following quote which I sourced summarises this well:
“if you always do what you always did, you’ll always get what you always got”
As mentioned above, when a business grows and begins to compete at more demanding levels, complex requirements are likely to arise, leading to updates in systems and processes becoming crucial.
Systems and processes become “bad” if they are no longer serve the original desired purpose they were first introduced to support.
Bad systems and processes can lead to hours of time and resource being wasted. Further wastage will occur where there is a need to make manual amends in the absence of working systems and processes in order to accomplish a compulsory task. A system may be slow in updating, unable to hold the type of data required or may no longer be able to process the information successfully.
As mentioned in the previous section, improved systems and processes can reduce the risk of fraud and errors occurring in final reporting information presented. This can have the opposite effect in the form of bad systems and processes increasing these risks.
Poor organisation will be a direct result of having inefficient systems and processes within an organisation. This leads to deadlines being missed and will also mean that management and board members do not receive information in a timely manner restricting their ability to make effective and decisive decisions.
Finally, a lack of trust arises through the entire organisation and with stakeholders. The users of the systems and processes do not trust the information being produced. Management begin to doubt the abilities of the staff working below them if continuing late and incorrect information is presented and the board of directors begin to question the effectiveness of the senior executives running the company on a day to day basis. Trust is diminished at all levels.
I work for an investment management company in Kent, England. It has seen substantial growth over the last year or two, doubling in staff numbers and assets under management. With no signs of growth slowing, the decision has been made to commit vast amounts of resource and expenditure to improving the systems and processes within the business. It is very important that this is implemented now, to avoid a scenario whereby the company has doubled in size again, making changes and updates to systems and processes even harder to implement and notably more costly.
A colleague of mine with advanced systems experience has been selected to take control of this assignment and to determine and later implement an appropriate system for the business as a whole. He has held discussions with each department on the current systems and processes they use and what advantages and disadvantages arise. He has taken into account the costs involved with each piece of software and whether or not there is a feeling of sustained value for money. Once all of the necessary detail has been obtained, the intention is to find a system provider who can meet the whole company’s needs rather than having three or four different systems for varying departments.
All of the departments within the company have also been liaising with each other to determine how they can improve their own departmental processes to benefit the company as a whole and not just their own department. A large part of implementing these changes successfully is all to do with knowledge sharing and innovation within the company.
I think that my employers have realised the importance of improved systems and processes at just about the right time and have avoided a potential uphill struggle and any risks involved with having to incur significant further expenditure later on down the line.
Organisations holding frequent meetings should consider the following advantages which can be associated with this new trending form of information sharing.
As the above points explain, this new form of information sharing allows vast improvements to the corporate governance position within a business.
Consideration must be paid to business systems and processes on an ongoing basis and not simply when problems start to occur. Existing systems and processes should be adapted to meet ever changing business needs and requirements.
New businesses should think carefully about the quality of their systems and processes from day one to avoid the possibility of future problems and un-expected expenditure later on in the business’ life.
The creators of the Applied Corporate Governance have also developed a Board Management System, including iPad app for directors to access paperless board packs. For more information, please visit www.CommitteeWise.com