Lexicon
The meaning of corporate governance
In the simplest terms, corporate governance is a set of rules, best practices and processes that determines how an organisation is managed.
Corporate governance also means implementing the best practices and processes by which an organisation is directed and operated.
Good governance ensures that the interests of the stakeholders of an organisation are met. The stakeholders may include:
- Shareholders
- Customers
- Management
- Employees
- Board members
- Suppliers
- Partners
- Investors
- Governments
- Community interests
Governance involves the relationships between various stakeholders, such as shareholders, executive managers, employees, customers, suppliers, and the wider community.
The main objective of corporate governance is to ensure that companies are managed and operated responsibly, ethically, and transparently, aiming to increase long-term shareholder value while considering other stakeholders’ interests.
The meaning of corporate governance
Maintaining good corporate governance is primarily the responsibility of an organisation’s board of directors.
The responsibilities of the board include setting the strategic goals for the company as well as providing the leadership to effect these strategies.
The CEO, who usually – but not always – sits on the board is then responsible for the hands-on management of the of the business, taking direction from the board.
The meaning of corporate governance, therefore, defines what the board does, setting its values, culture, and direction. Typically, the board, apart from the CEO, does not take an active part in the day-to-day operations of the business.
In the past few years, boards have been coming under increasing scrutiny. There is also increased responsibility for both the board and the individual directors on the board.
Therefore, good governance is having a wider impact on all types of companies, including charities, PLCs and private organisations.
All businesses should ensure that they are fully accountable to their shareholders.
As a result of the increased awareness of how businesses operate – within society as a whole as well as within a specific locality – is that some of the most recent research suggests that well-governed companies perform better.
One example of this research was conducted by Grant Thornton in the UK (full report called “Corporate Governance and Company Performance“), and their summary is that:
- Companies with strong governance operationally outperform those with weak governance
- Companies with strong governance generate more value for the company, shareholders and lenders
You can learn more about corporate governance qualifications and jobs by downloading the course brochure below.
In summary, key elements of corporate governance include:
The board of directors
The board of directors is responsible for overseeing the company’s management (the executive leadership team) and making decisions on behalf of shareholders. They provide strategic guidance, appoint executives, and monitor their performance.
Shareholder rights
Corporate governance protects the rights of shareholders by ensuring honest treatment, access to information, and opportunities to participate in decision-making processes. It also aims to safeguard against abuse of power by the executive management.
Transparency and disclosure
Companies must disclose relevant and accurate information about their financial performance, ownership structure, corporate policies, and potential risks. Transparency enhances accountability and helps stakeholders make informed decisions.
Ethical conduct and corporate responsibility
Corporate governance promotes ethical behaviour, integrity, and responsible business practices – otherwise known as ESG. This includes compliance with laws and regulations, environmental sustainability, social responsibility, and respect for human rights.
Risk management
“Effective governance involves identifying, assessing, and managing risks to the company. This includes financial risks, operational risks, reputational risks, and legal and regulatory compliance,” says David W Duffy, CEO of the Corporate Governance Institute.
Internal controls
Companies need robust internal control systems to safeguard assets, prevent fraud, and ensure accurate financial reporting. Internal audits and checks and balances help maintain integrity and minimise conflicts of interest.
Stakeholder engagement
Corporate governance recognises the importance of engaging with various stakeholders and considering their perspectives. This includes regular communication, seeking feedback, and addressing concerns.
Building trust
By implementing sound corporate governance practices, organisations can build trust, enhance their reputation, attract investment, and achieve sustainable long-term growth.
Governance is also essential in ensuring accountability, minimising conflicts of interest, and reducing the risk of corporate misconduct.