Good corporate governance – what does it mean in practice? And how can franchisors get it right?

Good corporate governance is something that is often spoken about – following the Banking Royal Commission more than ever. In late 2019, ASIC’s Corporate Governance Taskforce released its first report on board oversight of non-financial risk.  In the sphere of large, listed entities, where it may have been assumed that there would be sophisticated and established processes for all aspects of governance, ASIC found that some areas were severely lacking in strong and effective corporate governance practices. 

This finding leads to the observation that good corporate governance does not naturally grow with an organisation. Rather, achieving and maintaining an appropriate level of corporate governance takes ongoing attention and dedication by a company’s board.    

There are three fundamental and practical questions in relation to corporate governance – we’ve outlined them below and provided some practical guidance in relation to each.

1. What is corporate governance?

The term ‘corporate governance’ covers a broad range of behaviours and disciplines within an organisation.  Importantly it covers the assessment of, and action in relation to, both financial risk (where and how will the business make money and grow, what market threats does it face?) and non-financial risk (what is the business’ values and culture and how do we measure compliance with them?), which are obviously related.  In practical terms it covers:

• Setting and approving the strategy of the business, and its risk appetite. 
• Understanding the regulatory framework in which the business operates (eg education and training for employees on key legal issues).
• Making informed and responsible decisions (eg acting in accordance with the law and the ‘moral and cultural’ standards expected of or set by the organisation).
• Managing stakeholders.

2. What does corporate governance look like?

What exactly corporate governance looks like will be different for each business, depending on its size, structure and nature.  However, what doesn’t vary is that corporate governance is typically led from the top down – the board and executives need to create a culture of compliance.  

Following are some questions to ask that will provide an indication as to whether or not a business has fundamental tasks and processes in place that can lead to good corporate governance:

• Does the board have a ‘corporate governance policy’ that articulates things such as: its commitment to regulatory compliance; the values of the company; and the importance of training and education?
• Does the board consider both financial and non-financial risks that the business encounters?  Has it articulated these and its risk appetite in relation to them?
• How does the board measure how the business is tracking with respect to these risks?
• How does the business seek to minimise these risks, for example:

• Are there training programs for employees with respect to key risks (legal or otherwise) and the culture and expectations of the organisation?
• Is there clear reporting from employee level right through to the board?
• Are employees comfortable escalating issues and are they taken seriously when they do so (this may entail anonymous reporting for sensitive issues)?
• Have specific strategies been enacted for material risks, such as additional levels of management oversight, auditing and dedicated board committees?   

• How does the business identify when it may have exceeded its risk appetite on any one issue?
• Is there a ‘crisis team’ of trained personnel and PR policies that can be enacted in relevant circumstances?
• Does the business constantly reassess the above and have a ‘living and breathing’ approach to compliance?
• Is there genuine debate at board level, where all directors speak their mind?  Is there adequate minute taking and company secretarial compliance?

How franchisors can get corporate governance right

Corporate governance for a franchisor can be more difficult – it is responsible for brand management, but cannot control all behaviours of its franchisees, who dictate much of the value of that brand.  That is not to say that good corporate governance is not achievable for a franchise network, but it needs to be more carefully thought through. In a franchised network, good corporate governance could entail:

• Meaningful and positive engagement with a franchisee representative committee, which itself has responsibilities and a voice in key decisions and management of other franchisees.  
• Detailed policies and guidance for franchisees on how to manage and deal with relevant issues and risks.
• Quality induction for franchisees and their employees in relation to the ‘culture of the brand’.  
• Direct lines of communication for employees and customers of franchisees, so they feel able and comfortable reporting concerns to the franchisor. 
• Clear public relations plans that both franchisees and the franchisor can enact in certain circumstances and the provision of media training to franchisees.     

3. What steps should you take now?

Good corporate governance is essential to the long term viability of a business, and provides an opportunity to build value and achieve growth. Some key take away points are that:

• Risks to guard against are not just financial – they are operational, compliance based, and risks flowing from unacceptable conduct.  
• Good corporate governance requires buy-in from the whole organisation.
• It can be achieved by stepping back and identifying the relevant risks within an organisation, and then crafting processes to minimise, plan for or otherwise address them.  

Organisations can start small, and build up with the assistance of lawyers, accountants and PR professionals to build bespoke processes around key and evolving risk areas.   

Authors: Jessica Reid and Shaun Temby.

Jessica has a wealth of experience and is passionate about acting for emerging and established franchisors, and assisting them with their commercial law needs including network establishment, franchisee engagement, exit and growth, consumer law issues and strategic planning, and is a partner in Maddocks’ consumer markets and franchising team. 

 Shaun is a commercial disputes partner at Maddocks with over 20 years’ experience focusing on helping clients avoid and resolve disputes in the areas of consumer markets, franchising and fast-moving consumer goods. Shaun regularly acts for clients at all levels of the franchising and consumer markets sector across Australia. He is highly regarded for his legal knowledge, strategic advice and negotiating skills.