What is Corporate Governance?
Corporate governance is the combination of rules, procedures and laws by which businesses are conducted, regulated and controlled. The term includes internal and external factors that affect the interests of a company’s stakeholders, including shareholders, customers, suppliers, government regulators, and management.
The Board of Directors or Corporate Executive Board is responsible for creating a framework for corporate governance that best aligns business conduct with corporate objectives. Good corporate governance involves establishing the principles of security, transparency, equity, compliance, dependability and accountability.
Importance of Corporate Governance
Corporate governance is important for the proper functioning of an organization. Demonstration of good corporate governance is critical to maintaining the reputation of the company.
Corporate governance is based on a set of rules, by-laws, policies and procedures to ensure the accountability of the company. When done correctly, it establishes a framework for achieving company objectives in all areas of management. It also recognizes the importance of shareholders. Shareholders elect the company’s board members, fund the company’s operations and have direct say in the conduct of the business.
Good governance ensures a company’s integrity, overall direction, risk management and success planning. This, in turn, helps companies remain financially viable and build strong community, shareholder and investor relationships and trust. Demonstrating good corporate governance is often considered as important to businesses as profitability.
Bad corporate governance can have many negative consequences, such as:
- failure to reach company goals;
- loss of support from stakeholders and the community;
- financial losses; And
- Company’s downfall.
principles of corporate governance
While the corporate governance structure can vary, most organizations incorporate the following key elements:
- Fair and equitable treatment. All shareholders, customers, employees and other stakeholders should be treated equally and fairly. Part of this is making sure shareholders are aware of their rights and how to exercise them.
- Accountability. Legal, contractual and social obligations to both shareholders and non-shareholders must be upheld. Organizations must define a code of conduct for board members; Board committees, such as the Audit Committee and the Compensation Committee; and senior officers. Newcomers joining those ranks must meet those established standards.
- Diversity. The board of directors must maintain a commitment to ensuring diversity within corporate governance and the company as a whole.
- Monitoring and Management. Board members must also have sufficient skills needed to review management practices.
- Transparency. All corporate governance policies and procedures should be disclosed to the relevant stakeholders. This includes regularly and consistently providing relevant information to employees, customers, investors, vendors and community members.
Conflict Management in Corporate Governance
One of the objectives of corporate governance is to implement a check-and-balance system that minimizes conflicts of interest between various stakeholders and any individual party.
Conflict arises when there is a conflict of opinion or goal on the way business is conducted between two parties. Conflicts of interest may also arise when individual stakeholders may personally benefit from a corporate action or decision in which they have a say. The board of directors should provide a fair way to handle such conflicts.
Conflict can occur when executives disagree with shareholders. For example, shareholders may want to pursue goals that generate greater profits, while CEOs may want to invest in better employee engagement efforts. Another type of conflict can arise if several shareholders disagree with each other.
Personal conflicts of interest or conflicts between directors, audit plan administrators and company executives are usually disclosed in proxy statements. A proxy statement is a document that shareholders use to evaluate the qualifications and compensation of board of directors and key senior management employees.
Public companies are required to issue proxy statements by the Securities and Exchange Commission. They are shared during annual meetings when a company is seeking shareholder votes on a given matter, such as nominating a new member to a corporate board.
examples of corporate governance
Typical processes outlined in corporate governance may include the following:
- action plans;
- performance measurement;
- environmental, social and governance principles;
- disclosure practices;
- executive compensation decisions;
- dividend policies;
- decision making practices;
- procedures for resolving conflicts of interest; And
- An express or implied contract between the company and the stakeholders.
An example of good corporate governance practices is a well-defined and enforced structure that works for the benefit of all concerned by ensuring that the enterprise adheres to accepted ethical standards, best practices and formal laws.
Alternatively, poor corporate governance is a poorly structured, vague and non-compliant approach to running a business. All of these approaches can damage the image or financial health of a business.
The Enron scandal is an example of poor corporate governance. Enron Corp. declared bankruptcy in 2001 – months before it became one of the largest companies in the U.S. Enron falsely reported its revenue by a wide margin and hid debt and toxic assets from investors and regulators to evade accountability. For fraudulent methods used. The scandal had a lasting impact on Wall Street and prompted the government to pass new rules on corporate accountability and governance.
Good corporate governance in the public sector often goes unnoticed. An example of a company with a reputation for good corporate governance is PepsiCo. In its 2020 proxy statement, the company outlined changes to its leadership structure and compensation program, as well as input from investors in the following areas:
regulation of corporate governance
Corporate governance has received more attention due to high-profile scandals involving abuse of corporate power or alleged criminal activity by corporate executives. To counter those activities, various laws and regulations have been passed to address the components of corporate governance guidelines, including the following:
- Basel II. This business standard minimizes the financial impact of risky operational decisions. Basel II includes the rights of shareholders, thus affecting corporate governance.
- Village-Leach-Bliley Act. This act, also known as the GLB Act, regulates the way personal information is handled by financial institutions. This requires that companies incorporate how to oversee financial organizations and stakeholders in their corporate governance strategy.
- Sarbanes-Oxley Act. Also known as SOX, the act was passed after it was found that high-profile companies and their executives were committing fraud – in particular, Enron and WorldCom. As a result, there was an emphasis on corporate governance as a way of restoring trust in public companies.
Good corporate governance depends on compliance with a variety of regulations, both general and industry-specific. Learn Top Cloud Compliance Standards And how cloud companies can use them.