Article updated March 2024
1. The origins of good governance
Good governance traditionally refers to the way the State manages national affairs. The original idea was to monitor what elected officials and senior civil servants could spend with taxpayers' money.
The concept was theorised in 2008 around 12 major principles defined by the Council of Europe. They cover issues such as:
- citizen participation in decisions,
- holding elections in accordance with the law,
- responsiveness to citizens' expectations, effectiveness and efficiency,
- transparency,
- respect for the law and court rulings,
- ethical conduct,
- continuous improvement of skills,
- openness to change and innovation,
- sustainable development,
- sound financial management,
- respect for human rights and cultural diversity,
- responsibility and accountability...
Watch the Council of Europe video on good governance
2. Why do we talk about good governance in business?
CSR traditionally had 3 pillars: social, environmental and economic. Yet the term ESG, for environmental, social and governance, is trying to gain ground. This second term, which comes from the world of finance, agrees on the economic importance of good management, but less so on the idea of redistributing wealth. It is because of this different political outlook, and the push from investment funds in CSR regulation, that the term has taken root in our vocabulary.
Today, the notion of good governance has reached private companies. First, because the principles are virtuous and the idea of responsible companies is appealing (see our article on marketing and CSR). Second, because PPPs, public-private partnerships, have grown. This arrangement allows the State to call on private companies to deliver major infrastructure projects. The State also places many orders with private companies, and it has to be sure that public money is well spent and serves the common interest as much as possible. By extension, the State also holds stakes in almost a hundred companies (through the APE, the French government shareholding agency). Finally, changing attitudes are gradually demanding that the State stop funding companies with dubious and opaque methods.
On top of the omnipresence of investment funds in our economies, public and private are closely intertwined, so the notion of good governance has gradually gained ground. As we shall see, good governance can and must have positive consequences for our economy.
3. What is good governance, and why is the concept so vague?
The main problem is that every country, region or company has its own interpretation, depending on its culture or its interests. And so, like anything vague, it is poorly or rarely applied. To make it easier to grasp, we have summed the idea up in a few points:
- Clarity and transparency about the company's activities in the medium and long term
- Multiplying decision-making and oversight bodies, and diversifying profiles
- Employees' competence and their ability to carry out the task they are responsible for
- Honesty and transparency in the company's accounts
- The integrity of leaders and the trust they inspire around them
Being clear and transparent about activities, especially in the medium and long term
As an employee, or by opening the newspapers, it is easy to learn a company's short-term ambitions. But what about its medium-term ambitions and its long-term mission? The clearer, more transparent and more explicitly stated the vision and values are in advance, the earlier and more appropriately citizens, employees and other stakeholders can react in a changing context. Clear communication, especially internally, is essential so that employees can make fully informed decisions.
Transparent communication about activities would no doubt have saved many organisations from closing after mismanagement. Mismanagement and lies by decision-makers can lead a company to bankruptcy. That was the case for ENRON (2001), ANDERSEN (2002), WORLDCOM and PARMALAT (2003), LEHMAN BROTHERS (2008) and the MADOFF affair, where customers, employees, shareholders and suppliers sometimes watched helplessly as the company closed overnight with no recourse. Lies, lack of transparency and lack of planning can also lead to public health or safety problems.
Multiplying decision-making and oversight bodies, and diversifying profiles
The examples above mainly reflect one reality: alone at the helm, a leader can dig in on bad choices and run out of time to communicate. To ensure sound management, it is therefore essential to multiply the means of oversight, information and reflection. The right solution for a company, even an SME, may be to set up an executive committee or a management committee. You will find more information on the role of each in this article.
As well as acting as a safeguard, this decision-making body brings more perspectives to identify the best opportunities. According to consulting firms, and notably a McKinsey study, cultural, ethnic and gender diversity allows a company to perform up to 36% better thanks to its ability to innovate and to interpret situations differently. A gender-balanced leadership team will be all the more effective if their teams also reflect that richness.
Being competent for the position you hold
Good governance also includes the idea of hiring the right people for the right jobs. Even if a friend or family member is in need and will certainly be loyal to you, someone who is not competent will not make the best decisions for the company. They may also fail to take the necessary risks: the person must be able to challenge their line manager's view with full knowledge of the facts. For a boss, hiring docile people who will not have the freedom to judge a situation for themselves and to present the full range of options can cost them their competitive advantage.
In the same way, the company must show that it is doing everything it can to recruit qualified people regardless of gender, age or origin, which can sometimes prove difficult for recruiters subject to cognitive biases.
Being accountable for spending
This means being transparent and consistent in spending and being able to justify the amounts. For public procurement, it starts with publishing calls for tender to make sure that as many companies as possible can offer their services and that the one that best meets the requirements and the budget wins the contract. This transparency is supposed to prevent public decision-makers from signing big cheques to their friends, who would pass part of it back under the table. This question of spending is partly what the Carlos Ghosn affair is about, with his contracts in Oman and Lebanon. It is also what the French employment agency ANPE was criticised for when, in 2004, it spent 2.4 million on its rebranding.
- It is also said to be how roundabouts sprang up all over France: with prices impossible to estimate, France has 5 times as many roundabouts as Germany or England.
To prevent abuses, the executive's decisions must therefore be checked by supervisory and regulatory committees. The role of watchdogs, NGOs, associations and the media is also fundamental: the more numerous and independent the oversight bodies, the better the risk of corruption is controlled.
However, this external oversight assumes that information is available, understandable, shared and honest. And there, some companies have become masters in the art of camouflage.
The leader's integrity and the trust they inspire
Decisions must be taken for the good of stakeholders, and this is where the growing role of CSR takes on its full importance. A lack of trust and poor redistribution of wealth contribute to an unstable economy and to feelings of injustice (social crises). According to the NGO Transparency International, nothing has changed on corruption for several years. France has barely moved up to 21st place, behind Germany, England, Switzerland and the Nordic countries.
With the growth of globalisation and increasingly complex tax and administrative measures, the principle of good governance is becoming more opaque.
Labels and certifications are multiplying to try to stem the problem, and our label also covers governance among its many assessment criteria. The best remedy for good governance problems remains multiplying decision-making bodies, transparency, sharing information and involving stakeholders.
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