The overall system, including the practices, processes, and rules, by which a corporation is operated, controlled, and directed is known as corporate governance. Corporate governance is a complex concept, as it requires the balancing of the multiple interests held by the company’s stakeholders, which includes its management team, shareholders, customers, vendors, financiers, its community, and the government entities, which regulate it. A company also uses its corporate governance to provide its framework to work towards meeting the company’s goals and objectives, so it encompasses every area of the company’s management structure, including internal controls, corporate disclosure, and performance measurement.
Corporate Governance Definition
Corporate governance is the combination of controls, rules, procedures, and policies that are enacted to control the behavior and actions of a corporation. A corporations shareholders and their proxies are key stakeholders who may, indirectly, impact the governance of corporations, but they are not corporate governance examples. A major piece of the puzzle in corporate governance is the corporation’s board of directors. The board heavily influences the direction of the corporation and ensures the necessary controls, rules, and procedures are put into to place and are adhered to by the corporation’s management team. An important piece of both investor relations and regulatory compliance is communicating company’s corporate governance to the public, which is why most corporations include information on its leadership team, including board of directors and executives, as well as its governance documents, such as stock ownership guidelines, bylaws, and articles of incorporation, on its website.
Corporate Governance Principles
Effective corporate governance requires adherence to the basic principles of corporate governance. These principals may evidence themselves in different ways based on the structure and overall organization of given corporations but are essential in establishing good, quality corporate governance.
Principle No. 1 – The Board of Directors should, at all times, be accountable to the shareholders of the corporation.
Principle No. 2 – Each shareholder should be entitled to hold voting rights in proportion to that individual’s economic interest in the corporation.
Principle No. 3 – The Board of Directors should strive to be responsive to all shareholders and should ensure it takes steps to be proactive to understand the perspective of the shareholders.
Principle No. 4 – The Board of Directors should have a structure, which is strong and features independent leadership.
Principle No. 5 – The Board of Directors Should enact practices and put in place structures that are designed to enhance the effectiveness of the Board.
Principle No. 6 – The Board of Directors should implement incentive structures for management that is designed with the long-term goals and strategy of the company in mind.
Corporate Governance Structure – Board of Directors
In any given corporation, it is the board of directors that is the most influential stakeholder when it comes to influencing corporate governance. Because the directors seated on the board of directors are seated by the election of the shareholders or appointed by other members who have been elected, it is their duty and obligation to represent the interests of the shareholders of the corporation. The board of directors takes on the obligation to make tough decisions on behalf of the corporation and its shareholders, including the appointment of corporate executives and officers, crafting of executive compensation and bonus structure, and policy related to stock dividends. The duty of the directors of the board of directors may extend further to include carrying out shareholder resolutions related to other concerns, such as community, social, or environmental issues.
The structure of the Board of Directors may vary from corporation to corporation but typically includes both independent and inside members. Insiders are often selected from groups like executives, founders, or major shareholders. On the contrary, independent directors have no ties to the corporation but are chosen instead based on their experience directing or managing other large companies. Independents offer the benefit of diluting the concentration of power in a corporate setting and ensuring the shareholder’s interest are aligned with the interests of the management team and other insiders.
Good Governance VS Bad Governance
When people as “what is corporate governance,” they often mean what is good corporate governance. Corporations are looking to ensure they have good corporate governance in place because poor governance can cast serious doubt on the corporation’s integrity, reliability, and commitment to shareholders. As a result, poor governance can lead to poor stock prices and can have major implications for the financial viability of a corporation. Additionally, poor corporate governance can lead to legal issues, and even to criminal charges. In fact, poor corporate governance and tolerance of illegal actions or activities have created some of the largest corporate scandals in American history, including Enron, World-Com, and the Volkswagen emissions scandal. In order to ensure proper corporate governance is in place within a corporation, the corporation should select and participate with quality auditors. Additionally, corporations must ensure they offer compensation packages to their executives which are sufficient to draw quality officers, but which are also tied to compliance with corporate governance policies. Corporations should ensure their boards are structured in a way that allows shareholders to remove ineffective or unqualified board members.
Transparency should surround a good corporate governance structure, allowing stakeholders to easily access and understand the controls and rules by which the board, officers, and shareholders are governed, and under which their interests are aligned. Today’s shareholders don’t only want to invest in corporations that will make them money, but they also want to invest with corporations that demonstrate good corporate citizenship through ethical behavior, sound governance practice, and awareness and respect of important social issues.
Getting all the pieces in place for a strong and successful corporate governance structure can be difficult. Corporations should rely heavily on the experience of corporate attorneys who are well suited and familiar with establishing strong governance practices. An experienced corporate governance attorney will be familiar with the many nuances of sound corporate governance practices and can assist a corporation with ensuring their governance practices, policies, and rules are in line with regulatory guidelines and stakeholder expectations.