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The Importance of Corporate Governance
Corporate governance is the framework that defines the business relationships that exist between company shareholders, management teams, the Board of directors, and all other key stakeholders. The importance of corporate governance cannot be understated, and the development of associated policies that are enforceable and applied consistently is also critical.
What is Corporate Governance?
Corporate governance covers both the social and institutional aspects of a business. Simply put, it is the system by which organizations are directed and managed. Corporate governance influences how the objectives of a business are set and achieved, how risks are monitored and assessed, and how internal performance is optimized.
Because of its broad scope, the general directives of corporate governance can be outlined as such:
- To act as a system of principles, policies, procedures, defined responsibilities, and accountabilities used by stakeholders to work through the inherent conflicts of interest that exist in the corporate form.
- To control the interaction between various participants in shaping a corporation’s performance and the direction in which it is proceeding. These participants are usually a Shareholder, a Board of Directors, and Company Management. Corporate governance aims to determine the ways to reach the most effective strategic decisions.
- To ensure transparency, which in turn ensures a strong and balanced economic development for the organization. Transparency also helps to keep the interest of all shareholders safeguarded.
The Corporate Governance Framework
The areas which corporate governance aims to encompass are:
- The explicit and implicit contracts between an organization and the stakeholders, for the distribution of responsibilities, rights, and rewards.
- The procedures for reconciling the occasional conflicting interests of stakeholders, in accordance with their duties, privileges, and roles.
- The procedures for proper supervision, control, and information-flows to serve as a system of checks-and-balances.
The Importance of Corporate Governance
Strong and effective corporate governance helps to cultivate a company culture of integrity, leading to positive performance and a sustainable business overall. Essentially, it exists to increase the accountability of all individuals and teams within your company, working to avoid mistakes before they can even occur.
When a company has solid corporate governance, it signals to the market that the organization is well managed and that the interests of management are aligned with external stakeholders. As a result, it can provide your company with a strong competitive advantage.
The Benefits of Good Corporate Governance
Corporate governance refers to all laws, regulations, codes, and practices that define how a company is administrated. It determines the rights and responsibilities of all active agents within an organization, attracting talent and financial capital, boosting internal efficiency, and providing economic value to stakeholders long-term.
The importance of corporate governance is made apparent by the positive impacts that occur when risks are controlled, and organizational procedures are streamlined and consistent. Organizations can see many direct benefits with good corporate governance, including:
- Efficient Processes – due to the repeatability and consistency of tasks performed.
- Visibility of Errors – this repeatability and consistently helps to quickly identify the nonconformities in processes.
- Reduced Costs – when tasks are streamlined, companies can eliminate the waste from scrap, rework, and any other costly inefficiencies.
- Smoother–Running Operations – regular disruptions from inconsistent processes are eliminated, as operation specifics become either ‘conform’ or ‘non-conform’.
- Compliance – a culture that supports corporate governance allows for its product to reach the market while meeting its intended specifications and working correctly.
The 10 Steps to Good Corporate Governance
Implementing effective corporate governance can be challenging to accomplish in its totality right away, but there are ten specific aspects you can look to for guidance when implementing corporate governance in your organization:
1. Ensure a Suitable Board.
The Board should be balanced, competent, and diverse if you are hoping to achieve success through corporate governance. Aim to have directors who are qualified, and who understand the business thoroughly but can also offer a fresh perspective.
2. Review the Board Regularly
The composition of the Board of Directors is critical and can make or break the success of your organization’s corporate governance. Regularly reviewing your Board can help to identify any possible shortcomings quickly, which then allows you to make timely improvements and keep things on track.
3. Build Solid Foundations for Oversight
Overseeing the work of both the Board and management is critical. Develop a systematic foundation you can use to establish, monitor, and regularly evaluate their roles and responsibilities. The Board needs to have visibility of management actions and be available during all key decision making.
4. Aim for Long Term Value Creation
Gearing key performance indicators towards long-term value production, as opposed to short-term, will ensure sustainable success for your company.
5. Prioritize Risk Management
Establish a risk management process and internal control framework that is both effective and conducive to your business needs and aim to review its effectiveness periodically. Disaster recovery plans are critical to any business endeavor, so regularly keeping yours up to date is never a bad idea.
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6. Ensure Reporting Integrity
Corporate reporting is critical, but so too is the insurance of its overall integrity. Aim to set up safeguards throughout the reporting processes, such as conducting external audits of the company.
7. Provide Timely and Balanced Information
Transparency with key stakeholders is essential, and this can only be accomplished when you aim to provide information regularly, both in the good and bad times. This promotes stakeholders’ confidence in the business and eliminates the risk of them distrusting your proceedings and pulling out.
8. Emphasize Integrity as a Whole
Practices of integrity do not stop at reporting. Be consistent in your promotion of ethical behaviors and consult shareholders on their interests and concerns when it comes to the integrity of your company.
9. Treat Stakeholders Equitably
Respect the rights of your shareholders and be open to changing your plans to suit them if needed and appropriate.
10. Ensure Adequate Disclosures
This refers to the disclosure of all related parties’ transactions, and the other interests of all director’s involved. If a director has external financial interests outside of the company, it could influence their decision-making.
Corporate governance is a system that aims to instill policies and rules that helps maintain the cohesiveness of an organization. It exists to help hold a company accountable, while helping them steer clear of financial, legal, and ethical pitfalls. The importance of corporate governance is made abundantly clear by the direct benefits seen when a good corporate governance framework is in place.