Definition of corporate governance
Corporate governance refers to a system of governance. It aims to monitor and control strategic aspects of the board activities, decision making, setting policies, and overall direction of the business.
It’s considered one of the most important areas of business management. Let’s understand the importance of this governing system.
Corporate governance is important because of the following benefits.
- Business Integrity: When individual responsibilities are assigned, performances are monitored, and procedures are defined then business integrity grows resulting in quality output, satisfied customers, and overall performance efficiency.
- Shareholder welfare: Corporate governance is designed by aligning the interests of board members and shareholders to reduce the incidence of agency problems and attract shareholder investments. Therefore, share prices might surge creating a strong competitive advantage.
- Transparency: When a company is being transparent in its operations, it means anyone either inside or outside the organization has the choice to review its policies, procedures, or decisions. This shows that the company is confident that its operations conform with the law. Hence, the disclosure of company records, financial statements, minutes, etc. builds the firm’s good reputation because new investors are attracted and existing shareholders put their trust in the company and make big investments fearlessly. Further, Transparency reduces the risk of frauds and scams as well. Also, this creates a positive brand image resulting in boosted sales. Both of these factors are a means of developing financial viability for the business.
- Accountability: Transparency reveals good and bad performers making everyone take responsibility for their actions. With this, the management can set a reward and penalty system to streamline business functions and avoid future offences. Accountability is not only for low-level employees but also for senior management.
- Security: Corporate governance is responsible for ensuring that the personal data of its stakeholders is safe and protected. This security, transparency, and accountability implemented through corporate governance has an encouraging impact on business relationships.
- Corporate Social Responsibility (CSR): Corporate governance is the best way to promote ethical business conduct by implementing policies related to environmental sustainability, the welfare of the society, community, and government.
Corporate governance explained
Corporate governance has its meaning in its name. Simply put, it is how organizations are governed. So, corporate governance is the set of rules, regulations, policies, and procedures developed and implemented by the board of directors to achieve company goals in terms of shareholder wealth maximization, efficient operational business activities, risk and failure management, optimal performance, and the benefit of all key stakeholders.
The need of developing a defined framework of do’s and don’ts became necessary after increasing downfalls of great businesses in the 20th century. Therefore, corporate governance is the “one best of doing things” to minimize errors and inefficiencies in the corporate environment. It creates a link between all key business partners including management, the board, employees, customers, government, and society so that a combined effort is made to achieve business goals.
Corporate governance serves the following purposes:
- It gives the business its direction, vision, mission, and core values when performing day-to-day operations and developing policies and strategies.
- It assigns responsibilities to each member of the organization, creating a balanced division of labour that saves time resources and builds work efficiency.
- It serves as a rule book by which internal conflicts and disputes are resolved.
- It acts as an evaluation standard by which performances are monitored and managed.
- It ensures coordination and communication as the board members are supposed to meet regularly to discuss matters.
- It safeguards against the risk of business failures and financial losses.
- It maintains a positive public image of the organization.
Corporations are complex institutions where it gets common to deviate from main objectives if a corporate governance system is not set in place. Therefore, to promote successful and competent businesses and avoid conflicts, all stakeholders should join hands and comply with the corporate governance system.