Corporate governance is different from the day-to-day operational management of a company, which is usually performed by its executives. Corporate governance refers to the system of rules, practices, and policies that outlines the individual rights and responsibilities of every member of the company—shareholders, board of directors, company management—and how they interact. It’s how the company is controlled and run.
What’s the Purpose of Corporate Governance?
Good corporate governance facilitates a company’s growth and long-term success. A company’s corporate governance structure guides how the company’s board of directors navigates the management of the company. It ensures that the decision-making process is transparent and always in the best interests of the stakeholders. Good corporate governance builds a foundation of trust and transparency that supports continued growth for the company.
What are the Principles of Corporate Governance?
Just like there’s no single approach to corporate governance that works for all companies, different companies adhere to different principles of corporate governance. A company’s corporate governance principles are decided by their boards, management, and shareholders, as a guide to developing the specific governance processes that are most appropriate for that company.
Some common corporate governance principles include:
Accountability: Good corporate governance ensures that stakeholders know that the company’s mission, goals, and values are. Everyone in the organization know the role they're required to play to help the company achieve their objectives and everyone is accountable for their actions. The management of the firm is accountable to the members of the board who, in turn, are held accountable to the shareholders. Everyone is obligated to provide rationale for why the company acted the way it did.
Transparency: Solid corporate governance practices require the timely and accurate disclosure of all relevant information—financial statements, annual reports, etc. Stakeholders want to be sure that the company is operating withing the law, so they should always be informed about the company’s strategy, objectives, activities, risks, and more. Access to accurate formation builds confidence in the company and helps everyone make the best decisions in support of the company’s objectives. Lack of transparency has led investors to be completely surprised by fraud violations.
Responsibility: The board acts on behalf of the company, in its best interests. They’re responsible for managing the business in an ethical, fair, and transparent way. Responsibility means recognizing mismanagement, taking corrective action to rectify it, and implementing processes that eliminate the possibility of it happening again.
Sustainability: The way a company does business influences its environment, so it’s important that a company’s governance practices positively impact environmental, social, and financial development. When developing strategy for the short-term success of the company, the board should ensure their actions won’t adversely affect the organization’s long-term success and ability to meet their objectives.
Social Responsibility: To be good corporate citizens, well-run boards will prioritize social issues. By ensuring they’re acting ethically regarding the environment and human rights, companies may experience correlated positive results, including improved company morale and market enthusiasm in support of the company’s stance.
Good corporate governance practices lead to better board performance and companies that are better positioned for sustained growth. It’s the catalyst for boosting investor confidence and shareholder value.
Benefits of Good Corporate Governance
- Increase the chances of financial success. A good governance framework is proven to produce better operational results, resulting in economic development and a more profitable company. It helps companies identify opportunities and risk and provides detailed roadmap of how to manage both scenarios.
- Encourage investment. A company that proves itself with consistent and reliable growth increases investor confidence, making it easier to raise capital and resulting in more favorable rates for business loans.
- Improves compliance. A key component of successful corporate governance is compliance. The board should identify and work to stay compliant with all local, state, and federal laws and regulations.
- Facilitate well-informed decisions. Making good decisions quickly is what keeps a board nimble and is tied to improved performance. Good governance ensures that all the information board members need is in one place and easily accessible, so they can make decisions that move the company forward.
- Promote transparency and accountability. A solid corporate governance system ensures transparency, and the board must be held accountable for not meeting objectives and overall poor performance.
- Build the company’s reputation. Companies that are clear about their commitment to good governance increase their chances of attracting valuable partners that can drive success. These stakeholders include investors, lenders, government agencies, prospective employees, and even vendors and suppliers.
Consequences of Poor Corporate Governance
Poor governance has many negative consequences. It casts a shadow on a company’s reliability and integrity, impacting its performance and value. It can lead to the company failing to meet its strategic goals, and even to the failure of the company and substantial financial losses. It can also make it easier for corruption, negligence, and fraud to take root, and make it harder for them to be identified and resolved.
Prioritizing good corporate governance practices should be part of the overall corporate culture, starting with the leadership team and circulating throughout the company. It helps drives success by helping the company define and meet their objectives.
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