The Role/Benefits/impact of a Corporate Governance Framework

Having a common governance framework can play an important role in helping boards gain a better
understanding of their oversight role. The framework should have attributes that contribute to effective
governance and tools for addressing governance risk. A framework also provides a more cogent
construct for evaluating how management’s responsibilities fit with the board’s oversight
responsibilities.

The Board’s Unique Role

The Deloitte Governance Framework proposes that there are at least five critical elements of the
organization’s governance program —those related to talent, performance, strategy, governance and
integrity— that the board cannot simply delegate to management. In each of these respective elements,
stakeholders expect that the board is not solely serving as a monitor of management programs. The
board has a specific role to play, such as in the selection of the CEO. Risk and culture sit at the core of
the governance framework, as everything the board and management do to create and maintain
effective governance programs is predicated on the existence of strong risk management and a culture
that supports “doing the right thing.”

The board has a set of key objectives and activities for each of these governance elements, which could
be described as:

Governance: The board establishes structures and processes to fulfill board responsibilities that consider
the perspectives of investors, regulators and management, among others. The board selects its
members and leader(s) via an inclusive and thoughtful process, aligned with company strategy.

Strategy: The board advises management in the development of strategic priorities and plans that align
with the mission of the organization and the best interests of stakeholders, and that have an
appropriate short-, mid- and long-range focus. The board also actively monitors management’s
execution of approved strategic plans as well as the transparency and adequacy of internal and external
communication of strategic plans.

Performance: The board reviews and approves company strategy, annual operating plans and financial
plans. It also monitors management execution against established budgets as well as alignment with
strategic objectives of the organization.
Integrity: The board sets the ethical tenor for the company, while management adopts and implements
policies and procedures designed to promote both legal compliance and appropriate standards of
honesty, integrity and ethics throughout the organization.

Talent: The board selects, evaluates and compensates the CEO and oversees the talent programs of the
company, particularly those related to executive leadership and potential successors to the CEO. The
board communicates executive compensation and succession decisions in a clear manner.

Risk governance: The board understands and appropriately monitors the company’s strategic,
operational, financial and compliance risk exposures, and it collaborates with management in setting
risk appetite, tolerances and alignment with strategic priorities.

For some elements, the board’s role could be thought of as one of active monitor, with the board
understanding the operating models that are in place, determining such models are adequately
developed and resourced, monitoring the output and any issues identified in the process, and so forth.

Attributes that Contribute to Governance Effectiveness

There are four attributes that help assess the board’s performance level and put the framework into
action. A board can use these attributes to help identify its strengths and opportunities for improvement
within each of the governance elements:

Skills and knowledge: What are the skills that are needed for the board to effectively execute its
responsibilities?

Process: What processes are necessary for the board to both understand and properly oversee the
activities of the organization?

Information: Is the information received by the board adequate to support effective oversight and
decision-making?

Behavior: Does the board’s behavior support and reinforce strong oversight?

These very broad questions can help to start the process of identifying gaps and opportunities for
improvement within the overall framework. Once the broad questions have been addressed, the board
can get more tactical and drill down to more analysis of development opportunities within the various
elements. For example, a board may find the quality and timeliness of information provided by
management with respect to performance to be quite adequate, while determining that the information
available related to the strategic planning process needs work. This high-level prioritization helps to take
the broad concepts of board effectiveness and create manageable activities.