internal policies

Ashok K. K. Vasudevan, pursuing Diploma in Entrepreneurship Administrative and Business Laws from NUJS, Kolkata, assesses the topic of “What are the common issues on which businesses have internal policies”.

Why do businesses have internal policies? (1)

 

For the purpose of conveying to employees what is expected of them during their tenure of employment, organizations have organizational policies or internal policies as commonly referred to, which may be jointly drafted by the HR and Finance team as deemed fit.  Any well-written policy makes it very clear to the employees about the “do’s and don’ts” leaving the managers’ free to focus on management priorities.  In the absence of clear-cut internal policies, managers’ could end up spending endless hours in defining rules as and when a situation arises and then an equal amount of time for putting in corrective actions pertaining to that situation.

 

Common points necessitating internal policies in an organization? (1), (2) & (3)

Some of the contributing factors necessitating internal policies in an organization are:

(i) Internal Control Factor

An organizational policy can be seen as a control mechanism for the execution of different activities.  Typical examples for this aspect could be policies on delegation of authority and segregation of duties.  It is essential that such policies related to internal controls are enforced through an auditing mechanism in order to check its effectiveness at prescribed intervals.

While on the topic of internal controls, one major aspect would be to providing proper guidance to employees for appropriate behavior at work.  Policies from Human Resources cover these aspects and in general are meant to protect both the business interests of employers and its employees.  Some of the key points that are typically covered in a HR Policy are listed below:

(A) Hiring Forms

(B) Checklists for Hiring of Personnel

(C) Employee Handbook

(D) Health, Safety and Environment

(E) Employee Ethics Code

(F) Internet usage and guidelines on e-mail usage

(G) Absenteeism and Tardiness

(H) Public Holidays and Leave – Casual, Medical and Earned Leave

(I) Bereavement Leave

(J) Maternity and Paternity Leaves

(K) Employee Benefits

(K) Application for Internal Job Opportunities

(L) Policy on blogging and exposure of company to social media

(M) Employee Access to Personnel Records

(N) Job Candidate Evaluation Form

(O) Employee Internal Assessment Form

(P) Lunch Timings and Breaks

(Q) Dress Code: Office and Shop floor

(R) Confidentiality Agreements

(S) Usage of mobile phones

(T) Drug Testing / Screening Policy

(U) Employment Discrimination

(V) Employee Harassment

(W) Procedure for addressing employee disciplinary actions

(X) Training and Development

 

(ii) Risk Management

Organizational policies play an important role in addressing the risk management. An example to this effect would be to limiting the financial losses that could lead to the crippling of the business due to the negative impacts arising from frauds, errors and any other kinds of losses.  A well drafted financial management policy could cover all or many of the below-listed aspects that could have a financial impact to the effective running of the business:

(1) Purpose of the policy

(2) Financial Responsibilities and Accountabilities

(3) Conflict of Interest

(4) Budgeting Process

(5) Financial Statements

(6) Cash Management

(7) Auditing Process

(8) Accounts Receivable

(9) Accounts Payable

(10) Approval of Expenditures

(11) Signature Policy

(12) Compensation and Payroll

(13) Travel and Expenses Reimbursements

(14) Purchasing

(15) Leasing and other contractual agreements

(16) Banking Accounts and Investment Accounts

(17) Bank Accounts Reconciliations

(18) Cash and Cash Equivalents

(19) Management of Petty Cash

(20) Investment Reports and Investment Policy

(21) Insurances

(22) Property and Equipment

(23) Document Retention

(24) Confidentiality of Records

(25) Tax Reporting

 

(iii) Corporate Governance

Corporate governance provides a framework of rules and practices by which the management board ensures accountability, fairness and transparency in a company’s relationship with all its stakeholders, both internal and external, namely, customers, management, employees, statutory bodies and the community within which the company operates as a whole. The framework of corporate governance typically consists of explicit and implicit contracts between the company and stakeholders. This framework provides for the distribution of rights, responsibilities and rewards, procedures for reconciling conflicting interests of stakeholders in accordance to their roles, responsibilities and entitlements and also procedures for supervision, control and flow of information, which serve as an effective system of checks and balances. A high level of corporate governance in any organization helps in maintaining a high reputation of the company in the market and thereby increasing its brand equity. Therefore, organizational policies and procedures play a critical and important role in addressing the aspect of corporate governance.

Organizational policies support a company in maintaining a degree of accountability in the eyes of internal and external stakeholders. A simple example of compliance would be related to an HR case for maintaining a trail of newly hired employees, who have undergone a structured training with the company. This would serve as proof that the company is involved in ethical human resource practices.  

Another good example of Corporate Governance could be explained with the administration practices of “Corporate Social Responsibility” (CSR) in any organization. Wikipedia (4) defines Corporate Social Responsibility (also called corporate conscience, corporate citizenship or responsible business) as a form of corporate self-regulation, integrated into a business model. CSR policy functions as a self-regulatory mechanism, whereby a business monitors and ensures its active compliance with the spirit of the law, ethical standards and national or international norms. CSR strategies encourage the company to make a positive impact on the environment and stakeholders including consumers, employees, investors, communities and other. Organizations today, have well drafted CSR policies and in many cases are being administered by forming a CSR administrative committee as it also has relevance to statutory norms.  A case by point and which would serve as a validating example would be the allocation of two percent of the net profit before tax of the organization towards CSR initiatives.  If there is no policy to that effect being drafted which defines as to what constitutes to 2% of the net profit before tax and to the activities chosen for this spend, there is every possibility of this allocated money being spent in non-CSR related activities and thereby violating the statutory requirements defined for CSR initiatives. Therefore, a well drafted CSR policy and proper administration of CSR through relevant board approvals would aid in upholding one of the key requirements of corporate governance for any organization.

Conclusion

While discussing contributing factors necessitating internal policies in an organization, we discussed three important factors, namely, (i) Internal Controls, (ii) Risk Management and (iii) Corporate Governance. Even though these are seen as separate factors, in essence, they are all interdependent and complement each other. A case by point would be that corporate governance would also serve as risk mitigation. When Corporate Governance is executed effectively, it can help prevent corporate scandals, fraud and the civil and criminal liability of an organization. If corporate governance is compromised, then there are possibilities for corners being cut in important decisions leading to management complacency and corruption. When audited financial reports reflect any compromises in the administration of corporate governance, it can cause the shareholders to lose trust on the organization and exit out. Therefore, it is important to understand that internal controls, risk management and corporate governance are intertwined factors, held together by strong corporate policies and procedures.

We can conclude that policies and procedures provide the definition for the success of an organization. A well-documented policies manual gives a structure to the organization and also serves as a solid foundation on which management and employees could build the business upon with absolute clarity.  On a final note, properly documented policies and procedures can support management and employees in effectively aligning to the vision, mission and strategies set forth for the organization and also in strengthening its value system.

References

  1. “The Importance of Organizational Policies” by Audra Bianca (1)
  2. https://www.thebalance.com (2)
  3. http://www.businessdictionary.com (3)
  4. Wikipedia (4)

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