CORPORATE GOVERNANCE

What is Corporate Governance?

Corporate governance is something altogether different from the daily operational management
activities enacted by a company’s executives. It is a system of direction and control that dictates how
a board of directors governs and oversees a company.

DEFINITION- CONCEPTS

Corporate governance is the combination of rules, processes or laws by which businesses are
operated, regulated or controlled. The term encompasses the 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 is responsible for creating the
framework for corporate governance that best aligns business conduct with objectives.

Specific processes that can be outlined in corporate governance include action plans, performance
measurement, disclosure practices, executive compensation decisions, dividend policies, procedures
for reconciling conflicts of interest and explicit or implicit contracts between the company and
stakeholders.

An example of good corporate governance is a well-defined and enforced structure that works for
the benefit of everyone concerned by ensuring that the enterprise adheres to accepted ethical
standards, best practices and formal laws. Alternatively, bad corporate governance is seen as poorly-
structured, ambiguous and noncompliant, which could damage the image or financial health of a
business.

Principles of corporate governance:

While corporate governance structure may vary, most organizations incorporate the following key
elements:

 All shareholders should be treated equally and fairly. Part of this is making sure shareholders are
aware of their rights and how to exercise them.
 Legal, contractual and social obligations to non-shareholder stakeholders must be upheld. This
includes always communicating pertinent information to employees, investors,
vendors and members of the community.

 The board of directors must maintain a commitment to ensure accountability, fairness,

diversity and transparency within corporate governance. Board members must also possess the
adequate skills necessary to review management practices.

 Organizations should define a code of conduct for board members and executives, only
appointing new individuals if they meet that standard.

 All corporate governance policies and procedures should be transparent or disclosed to relevant
stakeholders.

Conflict management in corporate governance:

One purpose of corporate governance is to implement a check and balances system that minimizes
conflicts of interest. Conflicts typically arise when two involved parties have opposing opinions on
the way the business should be conducted. Since a board of directors is typically a mix of internally
and externally involved members, corporate governance is a non-biased way to approach conflict.

Conflicts could occur when executives disagree with shareholders. For example, the shareholders
will typically want to solely pursue interests that generate profit while the chief executive officer
might want to invest in better employee engagement efforts. Another type of conflict could arise if
multiple shareholders disagree with each other. It would be the role of corporate governance to
define how these matters are settled.
Strategy of Corporate Governance:

 Corporate governance is a system of rules, policies, and practices that dictate how a
company’s board of directors manages and oversees the operations of a company;
 Corporate governance includes principles of transparency, accountability, and security.
 Poor corporate governance, at best, leads to a company failing to achieve its stated goals,
and, at worst, can lead to the collapse of the company and significant financial losses for
shareholders.

Key Principles of Corporate Governance – Major Principles

1. Shareholder Primacy

Perhaps one of the most important principles of corporate governance is the recognition
of shareholders. The recognition is two-fold. First, there is the basic recognition of the importance of
shareholders to any company – people who buy the company’s stock fund its operations. Equity is
one of the major sources of funding for businesses. Second, from the basic recognition of
shareholder importance follows the principle of responsibility to shareholders.

The policy of allowing shareholders to elect a board of directors is critical. The board’s “prime
directive” is to be always seeking the best interests of shareholders. The board of directors hires and
oversees the executives who comprise the team that manages the day-to-day operations of a
company. This means that shareholders, effectively, have a direct say in how a company is run.

2. Transparency

Shareholder interest is a major part of corporate governance. Shareholders may reach out to the
members of the community who don’t necessarily hold an interest in the company but who can
nonetheless benefit from its goods or services.

Reaching out to the members of the community encourages lines of communication that promote
company transparency. It means that all members of the community – those who are directly or
indirectly affected by the company – and members of the press get a clear sense of the company’s
goals, tactics, and how it is doing in general. Transparency means that anyone, whether inside or
outside the company, can choose to review and verify the company’s actions. This fosters trust and
is likely to encourage more individuals to patronize the company and possibly become shareholders
as well.
3. Security

An increasingly important aspect of corporate governance is security. Shareholders and

customers/clients need to feel confident that their personal information is not being leaked or
accessed by unauthorized users. It’s equally important to ensure that the company’s proprietary
processes and trade secrets are secure. A data breach is not just very expensive. It also weakens
public trust in the company, which can have a drastically negative effect on its stock price. Losing
investor trust means losing access to capital that is necessary for corporate growth.

Everyone in a company, from entry-level staffers to members of the board, needs to be well-versed
in corporate security procedures such as passwords and authentication methods.

Consequences of Poor Corporate Governance:

One of the biggest purposes of corporate governance is to set up a system of rules, policies, and
practices for a company – in other words, to account for accountability. Each major piece of the
“government” – the shareholders, the board of directors, the executive management team, and the
company’s employees – is responsible to the others, therefore keeping them all accountable. Part of
this accountability is the fact that the board regularly reports financial information to the
shareholders, which reflects the corporate governance principle of transparency.

Many of the executives used shady tactics and covert accounting methods to cover up the fact that
they were essentially stealing from the company. Erroneous figures were passed along to the board
of directors, who failed to report the information to shareholders.

With responsible accounting methods gone out the window, shareholders were unaware that the
company’s debts and liabilities total much more than the company could ever repay. The executives
were eventually charged with a number of felonies, and the company went bankrupt. It
killed employee pensions and hurt shareholders immeasurably.

When good corporate governance is abandoned, a company runs the risk of collapse, and
shareholders stand to suffer substantially.