Corporate Governance – Definition, Principles, Characteristics, Benefits

Posted on by Aditya Jain

Introduction

Corporate Governance is the practice to dictate the rules and regulations which are used to oversee the board of directors and management regarding the practices in the organization. A system of direction and control that dictates how a board of directors governs and oversees a company.

Corporate Governance is the interaction between various participants (shareholders, board of directors, and company’s management) in shaping corporation’s performance and the way it is proceeding towards. The relationship between the owners and the managers in an organization must be healthy and there should be no conflict between the two. The owners must see that individual’s actual performance is according to the standard performance. These dimensions of corporate governance should not be overlooked.

  • The four P’s of corporate governance are people, process, performance, and purpose.
  • The basic principles of corporate governance are accountability, transparency, fairness, and responsibility.
  • Examples of good corporate governance practices include:
    • Calculation of the company’s carbon footprint;
    • Respect for human rights in the company;
    • Transparency of executive salaries;
    • Implementation of a code of conduct for employees.

Guiding Principles of Corporate Governance

Business Roundtable supports the following core guiding principles:

  1. The board approves corporate strategies that are intended to build sustainable long-term value; selects a chief executive officer (CEO); oversees the CEO and senior management in operating the company’s business, including allocating capital for long-term growth and assessing and managing risks; and sets the “tone at the top” for ethical conduct.
  2. Management develops and implements corporate strategy and operates the company’s business under the board’s oversight, with the goal of producing sustainable long-term value creation.
  3. Management, under the oversight of the board and its audit committee, produces financial statements that fairly present the company’s financial condition and results of operations and makes the timely disclosures investors need to assess the financial and business soundness and risks of the company.
  4. The audit committee of the board retains and manages the relationship with the outside auditor, oversees the company’s annual financial statement audit and internal controls over financial reporting, and oversees the company’s risk management and compliance programs.
  5. The nominating/corporate governance committee of the board plays a leadership role in shaping the corporate governance of the company, strives to build an engaged and diverse board whose composition is appropriate in light of the company’s needs and strategy, and actively conducts succession planning for the board.
  6. The compensation committee of the board develops an executive compensation philosophy, adopts and oversees the implementation of compensation policies that fit within its philosophy, designs compensation packages for the CEO and senior management to incentivize the creation of long-term value, and develops meaningful goals for performance-based compensation that support the company’s long-term value creation strategy.
  7. The board and management should engage with long-term shareholders on issues and concerns that are of widespread interest to them and that affect the company’s long-term value creation. Shareholders that engage with the board and management in a manner that may affect corporate decision making or strategies are encouraged to disclose appropriate identifying information and to assume some accountability for the long-term interests of the company and its shareholders as a whole. As part of this responsibility, shareholders should recognize that the board must continually weigh both short-term and long-term uses of capital when determining how to allocate it in a way that is most beneficial to shareholders and to building long-term value.
  8. In making decisions, the board may consider the interests of all of the company’s constituencies, including stakeholders such as employees, customers, suppliers and the community in which the company does business, when doing so contributes in a direct and meaningful way to building long-term value creation.

Characteristics of Corporate Governance

Clear Organizational Strategy

Good corporate governance starts with a clear strategy for the organization. At each stage, knowing the overall strategy helps the company’s workforce stay focused on the organizational mission: meeting the needs of the consumers in that target market.

Effective Risk Management

Even if your company implements smart policies, competitors might steal your customers, unexpected disasters might cripple your operations and economy fluctuations might erode the buying capabilities of your target market. You can’t avoid risk, so it’s vital to implement effective strategic risk management.

Fairness to Employees and Customers

Fairness must always be a high priority for management. For example, managers must push their employees to be their best, but they should also recognize that a heavy workload can have negative long-term effects, such as low morale and high turnover.

Regular Self-Evaluation

Mistakes will be made, no matter how well you manage your company. The key is to perform regular self-evaluations to identify and mitigate brewing problems.

Transparency and Information Sharing

Managers sometimes keep their own counsel, limiting the information that filters down to employees. But corporate transparency helps unify an organization: When employees understand management’s strategies and are allowed to monitor the company’s financial performance, they understand their roles within the company.

Discipline and Commitment

Corporate policies are only as effective as their implementation. A company’s management can spend years developing a strategy to push into new markets, but if it can’t mobilize its workforce to implement the strategy, the initiative will fail.

Corporate Social Responsibility

Social responsibility at the corporate level is increasingly a topic of concern. Consumers expect companies to be good community members, for example, by initiating recycling efforts and reducing waste and pollution. Good corporate governance identifies ways to improve company practices and also promotes social good by reinvesting in the local community.

Benefits of Corporate Governance

Here are a few benefits listed below:

  • a vision of long-term goals
  • effective risk management
  • responsible running of the company
  • a synergy between the different stakeholders that creates value.

Conclusion

Corporate governance consists of the guiding principles that a company puts in place to direct all of its operations, from compensation to risk management to employee treatment to reporting unfair practices to its impact on the climate, and more. A strong, transparent corporate governance leads a company to make ethical decisions that benefit all of its stakeholders, allowing the company to place itself as an attractive option to investors if its financials are also healthy.

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