What is corporate governance? Corporate governance means the system which directs and controls a firm. It involves balancing the interests of company stakeholders, senior management executives, customers, suppliers, financiers, the government, and the community. Corporate governance provides the framework for fulfilling a company’s objectives. It encompasses every area of management, from internal controls and action and plans to performance management, measurement, and corporate disclosure.
What Is Corporate Governance?
Corporate governance is the system that directs and controls businesses. The governance of their companies is the responsibility of their boards of directors. The shareholders’ role in governance is to appoint directors and auditors, as well as to ensure that an appropriate governance structure is in place.
The board’s responsibilities include setting the company’s strategic goals, providing leadership to put them into action, supervising business management, and reporting to shareholders on their stewardship.
Corporate governance is thus concerned with what the board of directors of a company does and how it establishes the company’s values, and it is to be distinguished from the day-to-day operational management of the company by full-time executives.
Understanding Corporate Governance
Governance refers to the set of rules, controls, policies, and resolutions put in place to dictate corporate behavior. Proxy advisors and shareholders are important stakeholders who affect governance. The board of directors is pivotal in governance, and it can have major ramifications for equity valuation.
A company’s corporate governance is important to investors since it shows what direction the company is in and its business integrity. Good corporate governance helps companies build trust with investors and the community. Conclusively, corporate governance helps promote financial viability by creating a long-term investment opportunity for market participants.
Communicating a firm’s corporate governance is a key component of community and investor relations. Most companies strive to have a high level of corporate governance. For many shareholders, it is not enough for a company to only be profitable; instead, it also needs to demonstrate good corporate citizenship through sound corporate governance practices. Good corporate governance creates a set of rules and controls in which shareholders, directors, and officers have aligned incentives.
Corporate Governance And The Board of Directors
The board of directors is the primary direct stakeholder influencing corporate governance. Directors are elected by shareholders or appointed by other board members, and they represent the company’s shareholders.
The board is tasked with making important decisions, such as corporate officer appointments and dividend policy. In some instances, board obligations stretch beyond financial optimization, like when the shareholder resolutions call for certain social or environmental concerns to be prioritized.
A board of directors should consist of a diverse group of individuals, those who have skills and knowledge of the business and those who can bring a fresh perspective from outside of the company and industry.
Boards are often made up of inside and independent members. Insiders are major shareholders, founders, and executives. Independent directors do not share the ties of the insiders. Still, they are chosen because of their experience managing or directing other large companies. Independents are considered helpful for governance because they dilute the concentration of power and help align shareholder interests with those of the insiders.
The board of directors must make sure that the company’s corporate governance policies incorporate the corporate strategy, risk management, accountability, transparency, and ethical business practices.
Final Thoughts
Corporate governance refers to the guiding principles that a company establishes to guide all of its operations, from compensation to risk management to employee treatment to reporting unfair practices to its impact on the environment, and so on.
A company with strong, transparent corporate governance makes ethical decisions that benefit all of its stakeholders, allowing the company to position itself as an appealing option to investors if its financials are also healthy. Bad corporate governance causes a company to fail, often resulting in scandals and bankruptcy.
