Companies Need Sound Governance

By Jay B. Stephens
Sound corporate governance is the heartbeat of a great company and is more than meeting regulatory responsibilities. It is also more than deploying processes to mitigate operational, financial and compliance risks or defining responsibilities as to how we make decisions, operate our business, or relate to customers, partners and employees.

At its core, sound corporate governance is grounded in shared values that define a company’s culture, give employees tools to make ethical business decisions and builds trust that engenders teamwork to pursue and achieve stretch goals.

Sound governance depends on a culture of ethical decision making and a commitment to do things right.

First, it requires the right tone at the top to set expectations and lead by example. Second, employees must have and understand good decision tools and processes, including avenues to raise issues and get advice. The third key ingredient is an interactive, closed-loop education program built on best practices so that employees know what is required and how issues should be resolved. Finally, the fourth pillar is a culture of accountability where people take responsibility for their decisions and are imbued with integrity.

The defense industry is a highly competitive environment where evolving needs of global customers require speed and agility. The rapid advance of technology, a globally networked supply chain, budget pressure and individual customer dynamics complicate day-to-day compliance operations. Global business presents an even higher risk profile made even more complex by less transparency and specific customer relationships and requirements. Amid these challenging variables, the industry must rely on bedrock principles of sound ethical values and good governance processes.

Good governance defines checks and balances that shape roles and responsibilities, as well as the balance of power among competing interests, which sometimes impact the ability to reach good decisions with input from stakeholders.

In publicly-traded aerospace and defense companies, strong internal controls in an organization — especially in business units far from the mother ship — are essential to transparency and process fidelity. Linking the organization together with common processes and systems provides a good antidote to one-off actions and opaque transactions. This is especially important in the national security arena, where customer relationships can provide particular challenges and different cultures may pose unfamiliar behaviors.

It is at times of stress and change, whether in meeting business goals, complying with new regulatory requirements or consolidating business structure, that an organization’s mettle can be seriously tested. That is when deeply ingrained governance practices and processes can provide discipline in the system to keep otherwise well-intentioned employees within the lines.

Thus successful governance means a consistent message from the top. The board of directors and senior management must demonstrate full commitment to standards of conduct by elevating ethical behavior as a core competency and the very essence of leadership and success.

Rewarding financial interests at the expense of ethical conduct inevitably undermines the clarion call for honest dealing. From the top down, building trust requires unswerving behavior and messaging. The entire organization watches its leaders, and a single breach of the norm can rend the trust fabric so vital in weaving a culture of transparency and sound governance. Likewise, a reinforced message of ethical decision-making by senior leaders makes an organization sit up and take note that leadership really cares.

Corporate directors can also set the tone by actively engaging in issues vital to a company’s governance, risk profile and culture. Audit committee oversight of financial controls and corporate responsibility committee oversight of regulatory compliance programs are especially critical. The past decade has shown real progress by the boards of many large public companies in monitoring risk, enhancing governance and supporting a culture of transparency with management. Natural tensions between management and boards as they press for corrective action and greater transparency to protect long-term shareholder interests are to be expected but are well worth it.

Sound governance requires disciplined processes so that employees know and adhere to standards designed to prevent rogue actors from hijacking company interests and substituting their own agendas. Processes such as gate reviews of new programs or potential bids, earned value accounting, estimates at completion financial planning, and clear rules on bookings and revenue recognition are essential.

During gate reviews, having stakeholders in the room is key to assessing issues and working together on successful outcomes. Using matrixed functional organizations, instead of end-running them, signals sound management practices, and can enhance analysis and create a competitive edge. Clear and well-understood governance rules must train all eyes on long-range success so as to ensure that integrity and brand reputation are not sacrificed for the expedient.

Periodic evaluations and audits are key to maintaining the health of sound governance, including revisiting premises and carefully tailoring processes to balance risks and opportunities. The goal is to drive favorable business results, within a structured control and oversight environment.

Raytheon’s Anti-corruption Sustainment Program is a good example of enhanced internal controls, matrix engagement and sound governance. This effort is particularly important to the growing global market, different legal and regulatory regimes and cultural and customer expectations we are experiencing.

Global business activities pose enhanced risks, requiring us to identify new controls and processes tailored to mitigate them. This 12-step assessment and action process helps us comply with a myriad of global requirements, including the Foreign Corrupt Practice Act, the UK Bribery Act and other local laws and regulations.

A cross-functional team engages the business units, reaches into more remote locations with assessments and controls and facilitates closed-loop learning through audits and targeted ethics and compliance education programs. The Anti-corruption Program uses a layered approach to identify issues, provide solutions, enhance controls, and monitor practices.

Sound governance requires education to reinforce a company’s cultural standards. Effective training ensures that all employees know how to identify and resolve concerns, with attention given to high risk areas for full understanding of clear expectations, and where to get advice when difficult business dilemmas arise.

Jay Stephens is the senior vice president, general counsel and  corporate secretary of The Raytheon Co. The views expressed are solely the author’s.

Topics: Defense Contracting, Defense Contracting

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