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What is Corporate Governance?
Corporate governance is a set of rules, practices, and processes used to direct and control an organisation. Boards of directors are the primary force determining corporate governance.
Accounting, transparency, fairness, and responsibility are the four fundamental principles of corporate governance.
What is the definition of corporate governance?
The term corporate governance refers to how companies are run and for what purpose.
Corporate governance also defines an organisation’s power structure, accountability structure, and decision-making process.
It is essentially a set of tools that enables management and the board to run an organisation more efficiently and effectively.
Environmental awareness, ethical behaviour, corporate strategy, compensation, and risk management are all aspects of corporate governance.
A company’s operation and profitability can be negatively impacted by poor governance.
Further reading on corporate governance:
How corporate governance works
The purpose of good governance is to ensure that businesses have the appropriate decision-making processes and controls to ensure that all stakeholders’ interests (shareholders, employees, suppliers, customers and the community) are balanced.
At the corporate level, governance involves setting and achieving the company’s goals while considering the social, regulatory, and market contexts.
In other words, this concept refers to practices and procedures for ensuring that a company runs in a manner to meet its objectives while ensuring that its stakeholders can have confidence that they can trust the company.
The Corporate Governance Institute is the home of good governance and believes that good governance is critical to improving the quality of decisions made by management.
The ability to make ethical and high-quality decisions is essential to building a sustainable business.
Read more: The modern history of corporate governance.
What is a board of directors?
The board of directors is an organisation’s governing body. It consists of a group of individuals elected by shareholders.
Boards of directors set company policies and supervise the managers of the organisation. Good governance is about separating ownership and control.
Company shareholders own the company, but its managers control its operations.
In an ideal world, the directors would work to align shareholders, and managers’ interests and the company’s best interests should remain their top priority.
There must be a board of directors for all publicly owned companies. Private companies often have boards of directors as well. Boards typically meet a few times a year.
The structure of a typical board of directors
- Inside directors (executives and managers)
- Outside directors (non-executive directors)
- A chairperson
Directors on a board can either be insiders or outsiders. Good boards do include non-executive directors.
Executives, such as the chief executive officer (CEO), are considered inside directors. In addition to serving on the company’s governing body, these people handle managerial duties.
A non-executive director or NED is not part of the company’s executive team. They are independent professionals selected based on their industry experience and expertise. In addition, NEDs serve only one role, which is to serve as directors. This makes them more unbiased than company managers.
The chairperson can be either an inside or an outside director.
Key responsibilities of the board of directors
- Recruiting top executives
- Establishing executive compensation
- Monitoring executive performance
- Dismissing executives as needed
- Approving the issuance of stock
- Paying dividends
- Managing internal controls and corporate governance
- Establishing other company policies
Video – how to join a board of directors
Watch Julie Sinnamon, former CEO of Enterprise Ireland explain how to join a board of directors.
Why is corporate governance important?
Corporate governance involves the relationships between various stakeholders, including shareholders, a company’s management, its customers, suppliers, financiers, the government, and the community.
Corporate governance is important for several reasons:
- Protection of shareholder interests: Good corporate governance ensures that the interests of shareholders, who are the owners of the company, are protected. It promotes transparency, accountability, and fairness in decision-making, preventing the abuse of power by company executives.
- Risk management: Strong corporate governance helps identify and manage risks, including financial, operational, legal, and reputational risks. Effective oversight and risk management mechanisms can prevent costly mistakes and crises.
- Enhanced business performance: Good governance practices contribute to improved company performance and long-term sustainable growth. Transparent financial reporting, ethical behaviour, and effective management practices attract investors and boost the company’s reputation.
- Access to capital: Investors, especially institutional investors, are more likely to invest in companies with strong corporate governance practices. This provides companies with better access to capital and lowers their cost of capital.
- Stakeholder confidence: Transparent and ethical governance practices build trust and confidence among stakeholders, including employees, customers, suppliers, and the public. This can positively impact the company’s brand and reputation.
- Legal and regulatory compliance: Effective corporate governance helps companies adhere to legal and regulatory requirements. Compliance with laws and regulations reduces the risk of legal actions and financial penalties.
- Conflict resolution: Clear governance structures and mechanisms can help in resolving conflicts of interest among different stakeholders. This reduces the potential for disputes that could harm the company’s operations and reputation.
- Innovation and adaptability: Good governance practices encourage a culture of innovation and adaptability. When decision-making processes are transparent and flexible, companies can more effectively respond to changes in the business environment.
- Long-term perspective: Corporate governance encourages a focus on long-term goals rather than short-term gains. This can lead to more sustainable business practices and better alignment with the interests of various stakeholders.
- Social responsibility: Companies are increasingly expected to consider the broader social and environmental impacts of their actions. Effective governance ensures that these considerations are integrated into the company’s strategy and operations.
Corporate governance is important because it provides a framework for responsible and effective management of a company, safeguarding the interests of shareholders and stakeholders, promoting ethical behaviour, and contributing to an organisation’s overall success and sustainability.
Corporate governance is also a field of study
Corporate governance is a field of study that examines the structures, processes, policies, and principles that guide the behavior of companies, their management, and stakeholders.
There are various educational paths and resources available for people interested in studying corporate governance, including the professional, university-acredited Diploma in Corporate Governance from the Corporate Governance Institute.
Whether you’re interested in pursuing a formal education or simply expanding your knowledge through self-study, the Diploma will help you learn about corporate governance and its significance in modern business practices.
Download the free course brochure below to learn more.