Corporate Governance and Business Verification: Building Trust Through Transparency

A strong corporate governance structure has historically been the foundation for a sustainable business. Corporate governance provides integrity in how companies operate, protect their stakeholders, and are part of the market’s confidence. However, in the age of global business, governance is not just about internal policies and processes; businesses are also responsible for the conduct of their suppliers, vendors, and third parties as well. Third-party due diligence, or business verification, bridges the gaps between governance policies and real-world practices.

What is Corporate Governance?

Corporate governance is defined as the combination of rules, regulations, and processes that guide and control a company. It includes the system of governance that aims to balance and manage the interests of stakeholders, such as shareholders, management, customers, regulators, and the community.

Importance of Corporate Governance

Good governance brings with it credibility and well-earned benefits over the long haul, while poor governance leads to reputational sullying, regulatory penalties, and in certain cases, the complete collapse of business. The Enron scandal of 2001, leading to the introduction of the Sarbanes–Oxley Act (SOX) as an instrument for stricter accountability in corporate affairs, and the global financial crisis of 2008, exemplify how failures in governance can undermine entire economies rather than just companies.

In the present landscape, governance is not just an internally considered matter for companies. Businesses are now being judged not only on how they govern themselves, but also on the conduct of third parties they associate with.

Scope of Corporate Governance: Monitoring Supply Chains

Regulators all over the world have been very clear: governance has moved beyond a boardroom focus. Companies are expected to just as rigorously scrutinize supply chains, vendors, and partners as their own internal processes.

To give an example:

• UK Corporate Governance Code (for listed companies) promotes accountability and transparency while recognizing that risk has to be managed.
• The OECD Principles of Corporate Governance provide global standards for the rights of shareholders, disclosures, and standards of behavior.
• The EU Corporate Sustainability Due Diligence Directive (CSDDD), to be enacted soon, will require companies to consider and mitigate human rights and environmental risk across their supply chains.

These regulations are evidence that good governance is not just about compliance with rules and regulations – it is about demonstrating to regulators, investors, and the public how you can be held accountable for your entire business ecosystem.

Third Party Risk: Governance Blindspot

One of the more neglected facets of governance is that of third-party risk. In a recent PwC survey, it was found that the disruption of more than 40% of organizations in 2022 has been largely due to third-party issues, many of which were attributed to gaps in governance. These findings indicate that good corporate governance doesn’t merely entail effective internal controls; it also requires oversight and verification of partners for risk management and accountability.

A business could have internally solid controls, but if its suppliers, vendors, or partners engage in fraud, corruption, or money laundering, the effects can be catastrophic.

To businesses, third-party failures can bring:

• Financial loss from fraud or non-performance against unfulfilled obligations.
• Regulatory penalties (in particular, if there are money laundering or sanctions violations related to the third-party actions).
• Reputational harm, as customers or investors may associate the wrongdoing on behalf of a third party with your brand.

Business Verification as a Governance Tool

So, how do businesses regulate corporate governance with third-party supervision?  The answer is verification of business and enhanced due diligence checks.

Business verification helps ensure that businesses listed on paper are real entities with documented ownership, follow the law, and have franchise or financial obligations.  By applying verification within governance structures and frameworks, businesses can identify risks well before they escalate.

Verification typically includes:

• Reviewing third-party official registrations and official licenses to ensure the third party is legitimate.
• Confirming Ultimate Beneficial Ownership (UBO), to identify potential underlying stakeholders and hidden investors.
• Screening of third parties against sanction screenings, and screening for Anti-Money Laundering (AML) and regulatory enforcement.
• Examine third-party legal and financial histories for any red flags associated with them.

Each of these verification checks provides a complete picture of whether a given third party meets governance and compliance standards.

Good Governance Starts with Knowing Your Partners

Good governance often includes having strong internal policies, accountability mechanisms, and a transparent decision-making system. But governance does not end when one leaves the boundaries of an organization. For governance to be meaningful, it must also be considered in relation to those with whom the organization does business.

Enhanced third-party due diligence helps reinforce organizational governance values externally. A company could have a strong internal anti-bribery/anti-corruption approach, but it would be meaningless if its suppliers, partners, or vendors are involved in illegal or unethical activities. By checking and monitoring these third parties, an organization protects its own compliance and reputation.

The alignment of organizational internal governance with third-party external assurance represents the thinking of current compliance stakeholders.

The KYB Helps Ensure Good Corporate Governance

Good Corporate governance extends beyond guidelines for the board and oversight of shareholders into maintaining some level of accountability and transparency for third-party relationships. This is where due diligence, or know your business (KYB), becomes important.

The KYB helps companies strengthen their compliance systems and protect their reputation, but they must also demonstrate governance in practice as much as in theory. The platform will enable third-party due diligence measures such as warning and regulatory enforcement screening, adverse media screening, and watchlist screening.

These checks allow early signs of financial crime, regulatory concerns, and reputational risks associated with external partners to surface. By putting such insights together, organizations can comfortably reduce their exposure to enforcement action and reputational harm while respecting governance standards.