What is Corporate Governance?
Corporate governance refers to the system of rules, practices, and processes by which a company is directed and controlled. It involves balancing the interests of a company’s many stakeholders, such as shareholders, management, customers, suppliers, financiers, government, and the community. Corporate governance provides a framework for attaining a company’s objectives, and encompasses practically every sphere of management, from action plans and internal controls to performance measurement and corporate disclosure.
Why Corporate Governance Matters
Corporate governance is crucial because it is fundamentally about enhancing value and accountability. It is a key element in improving economic efficiency and growth as well as enhancing investor confidence. Corporate governance influences how the objectives of the company are set and achieved, how risk is monitored and assessed, and how performance is optimized.
The Role of Corporate Governance in a Company
Corporate governance is used to provide a direction to the company. It involves regulatory and market mechanisms, and the roles and relationships between a company’s management, its board, its shareholders and other stakeholders, and the goals for which the corporation is governed. In contemporary business corporations, the main external stakeholder groups are shareholders, debt holders, trade creditors, suppliers, customers and communities affected by the corporation’s activities.
How Corporate Governance Works
Corporate governance works through a set of mechanisms that influence the decisions made by managers when they have discretion. These mechanisms can be both internal and external to the firm.
Internal Mechanisms
Internal mechanisms of corporate governance may include a board of directors, balanced ownership structure, and effective policy and process management. The board of directors is pivotal in governance, and it can have significant effects on firm performance.
External Mechanisms
External mechanisms can include the market for corporate control, regulatory requirements, and market expectations. These mechanisms are designed to ensure that managers take the stakeholders’ interests into account.
Key Principles of Corporate Governance
There are several key principles of corporate governance that can help a company achieve its goals. These include:
- Transparency: Ensuring that information is readily available to those who need to make informed decisions.
- Accountability: Individuals or groups in a company who make decisions and take actions on specific issues must be accountable for their decisions and actions.
- Responsibility: A basic principle of corporate governance is that the board of directors are responsible to the shareholders.
- Independence: The company has a degree of independence from its stakeholders, and the board is free from any business or other relationship that could interfere with the exercise of independent judgement.
In essence, corporate governance is about ensuring that companies are run in a responsible manner for the benefit of all stakeholders. It is a system that is designed to reduce risk and prevent mishaps, and when done effectively, it can contribute to companies’ long-term success.