Governance refers to structures and processes that are designed to certain accountability, rule of law, equity, responsiveness, transparency, stability, empowerment and broad based participation. It has been defined as a set of rules, controls, policies and resolutions through which public affairs are managed in a way that is transparent, participatory, inclusive and responsive. In a company’s governance policy, it is considered to be important for investors since it shows a company’s management and their integrity.
Corporate governance is defined as the system of set of rules, processed and practices by which a company is directed and controlled. It involves balancing the interest of many stakeholders in the business, external as well as internal parties, like shareholders, management executives, customers, creditors, suppliers, government authorities etc. It is considered very important for investors as it shows the company’s direction and integrity.
Corporate governance also provides a structure for attaining the company’s objectives. It considers the every sphere of management, from the action plan of a company to its measurement of performances and its corporate disclosure. A good corporate governance policy helps a company in building trust with the investors and the community. As a result, corporate governance helps in creating goodwill for the company and promoting financial viability by creating long term investment opportunity for the participants of the market. Communicating the corporate governance policies is an important component of community and investor relations.
A large number of companies make an effort to have a high level of corporate governance as for many shareholders, merely profitable company is not enough. Good corporate governance constructs a transparent set of rules, controls, policies and resolutions in which shareholders, directors and officers have aligned incentives.
The board of directors of a company is the direct stakeholder influencing corporate governance. A company’s business in managed under the board’s oversight. They must ensure that the company’s corporate governance policy includes the corporate strategy, risk management, accountability, transparency and other ethical business practices.
An example of good corporate governance is a well-defined and imposed structure that works for the benefit of everyone concerned by ensuring that the enterprise adheres to accepted ethical standards, best practices and formal laws. On the other hand, bad corporate governance is seen as poorly-structured, ambiguous and noncompliant, which could damage the image or financial health of a business.
Bad corporate governance policy can create a doubt on a company’s reliability, integrity and its obligation on shareholders, which will have an impact on the company’s financial robustness. The concern of the public and the government about corporate governance tends to ebb and flow. However, the highly publicized disclosures of corporate wrongdoing bring bank the interest in the subject. For example, corporate governance became an interest after Enron and Worldcom were found adopting fraudulent practices which resulted in their bankruptcy. As a result, Sarbanes Oxley Act came into force with more stringent requirements. The purpose was to reinstate the confidence of the public in public companies and their operations. Bad corporate governance practices which are generally practiced by companies are they do not cooperate with auditors or do not select auditors with the appropriate scale, which result in the publication of bogus financial documents; or bad executive compensation packages fails to build an optimal incentive for the officers; and poorly structured boards makes it hard for shareholders to remove ineffective officials.
The corporate governance structure may vary from organization to organization, but includes the following pivotal elements:
- All the shareholders should be treated equally and fairly. It must be confirmed that the shareholders are familiar with their rights and how to use them.
- The legal, social and contractual obligations to non-shareholder stakeholders must be upheld. It means that the relevant information should always becommunicated to employees, investors and vendors.
- The board of directors must maintain a commitment to ensure accountability, fairness, diversity and transparency within corporate governance.
- Organizations should properly define a code of conduct for board members and executives.
- All the policies and procedures related to corporate governance should be transparent or disclosed to relevant stakeholders.
One purpose of corporate governance is to apply a checks and balances system that reduces the conflicts of interest. Conflicts typically arise when 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.
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