Governance: Explained

What is it, how to calculate it, formula, why it's important

As the CFO of a company, I have witnessed firsthand the importance of governance. Governance can be defined as the set of processes, rules, and regulations that guide and control an organization. It includes everything from how decisions are made to how finances are managed.

Governance is not just important for large corporations or government entities. Even small businesses need to have proper governance in place to ensure smooth operations and minimize legal and financial risks. In this article, I’ll explain what governance is, why it’s important, and how to implement it in your organization.

What is Governance?

Governance can be broken down into two main components: internal and external. Internal governance deals with the processes and systems that an organization puts in place to ensure effective decision-making and management. External governance, on the other hand, refers to the rules and regulations that an organization must comply with, such as environmental regulations or labor laws.

One of the key elements of internal governance is the structure of the organization. This includes things like the roles and responsibilities of key personnel, the decision-making processes, and the chain of command. A proper organizational structure helps ensure that everyone is clear on their responsibilities and that decisions are made efficiently.

Another important aspect of internal governance is financial management. This includes things like budgeting, accounting, and financial reporting. Having proper financial management in place helps organizations stay financially stable and reduces the risk of fraud or mismanagement.

External governance includes compliance with regulations and laws, such as environmental regulations or labor laws. It also includes adherence to ethical standards and best practices, such as following the guidelines set forth by the International Standards Organization (ISO).

Why is Governance Important?

Governance is important for several reasons. First and foremost, it helps ensure that an organization’s operations are legal and ethical. This can help prevent legal and financial issues down the line.

Governance also helps ensure that an organization is managed effectively and efficiently. By having clear processes and structures in place, everyone knows what their responsibilities are and decisions can be made quickly and confidently.

Finally, governance can help improve an organization’s reputation and brand image. Adhering to ethical standards and best practices can help build trust with customers and stakeholders.

Implementing Governance in Your Organization

Implementing governance in your organization can seem overwhelming, but it doesn’t have to be. Here are some steps you can take:

Assess Your Current Governance Practices

The first step is to assess your current governance practices. Take a look at your organizational structure, decision-making processes, and financial management practices. Identify any gaps or areas for improvement.

Identify Relevant Regulations and Best Practices

Next, identify any regulations or ethical standards that are relevant to your organization. For example, if you’re a manufacturer, you may need to comply with environmental regulations.

Research best practices in your industry and consider implementing them in your organization. This could include things like adopting ISO standards or adhering to ethical guidelines set forth by industry associations.

Develop and Implement Policies and Procedures

Once you’ve identified areas for improvement and best practices to adopt, develop and implement policies and procedures to ensure compliance and adherence. This could include things like developing a code of conduct or establishing financial reporting processes.

Train Employees and Monitor Compliance

Finally, train your employees on the importance of governance and how to adhere to your policies and procedures. Monitor compliance regularly to ensure that everyone is following the established guidelines.


Governance is a critical component of any organization, regardless of size or industry. By implementing proper governance practices, you can help ensure legal and ethical compliance, effective operations, and a positive reputation. Take the necessary steps to assess your current practices, identify relevant regulations and best practices, and develop and implement policies and procedures. Your organization will be stronger for it.

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