Playing by the Rulebook The important of Corporate Governance
The important of Corporate Governance
Corporate Governance
Corporate governance is the system of rules, practices and processes by which a company is directed and controlled. Corporate governance essentially involves balancing the interests of the many stakeholders in a company - these include its shareholders, management, customers, suppliers, financiers, government and the community. The term can refer to internal factors defined by the officers, stockholders or constitution of a corporation, as well as to external forces such as consumer, groups, clients, and government regulations. Since corporate governance also provides the framework for attaining a company's objectives, it encompasses practically every sphere of management, from action plans and internal controls to performance measurement and corporate disclosure.
Corporate governance also takes into account audit procedures in order to monitor outcomes and how closely they adhere to goals, and to motivate the organization as a whole to work toward corporate goals. By using corporate governance procedures wisely and sharing results, a corporation can motivate all stakeholders to work toward the corporation’s goals by demonstrating the benefits, to stakeholders, of the corporation’s success.
Why Corporate Governance matters?
As markets become more open and global, and business becomes more complex, societies around the world are placing greater reliance on the private sector as the engine of economic growth. In both developed and developing nations, a growing proportion of economic activity takes place in firms organized as corporations. Corporations are creatures of law; societies allow corporations to be created by law because they recognize
That incorporation provides an efficient form of organization, and society benefits as a result. Corporations mobilize and combine capital, raw material, labor, management expertise and intellectual property from a variety of sources to produce goods and services that are useful to members of society. In so doing, corporations purchase goods and services, generate jobs and income, distribute profits, pay taxes, and contribute to foreign exchange. In sum, corporations contribute to economic growth and development, which
Lead to improved standards of living and poverty alleviation, which in turn should lead to more stable political systems
Elements of Corporate Governance:
In order to maximize the effect of corporate governance, the structure should have the following elements:
1. A controlled environment
2. Transparent Disclosure
3. Well-defined shareholder rights
4. Board Commitment
5. Accountability
6. Fairness
7. Independence
8. Responsiveness
9. Equity and Inclusiveness
10. Consensus Oriented
Goals of Corporate Governance
Keep the Interest of Stakeholders in Mind: Corporate governance acknowledges that the stakeholders in the company must be recognized in all areas of society, the market, legality, and their contracts. The stakeholders are important members of the corporation that don’t hold any shares. Stakeholders include people such as investors, creditors, customers, suppliers, and employees.
Treating Shareholders Equally: As a corporation, the business should not only respect shareholders and their rights, but also help the shareholders when it comes to exercising their rights. The best way this is done is by allowing and encouraging shareholders to participate in the activities in the company such as meetings.
Identifying the Roles of the Board of Directors: The boards of the directors are those that stand at the head of a corporation. The responsibilities of the board are diverse and it requires people needing both skill and knowledge to evaluate employee performance. In addition to this, the corporate governance helps to make sure that the board has the level of commitment and the size that it needs in order to properly run the business.
Ethical Behavior: Ethics and integrity are also key principles of corporate governance. The integrity of anyone placed in corporate office or in the board should have a high level of integrity. They must also follow a code of conduct and exhibit ethical behavior during the decision making process of the business.
Transparency: The final principle of corporate governance is the concept of disclosure or transparency. This is the idea that the corporation should always let it be known what the responsibilities and duties are of those that work for the corporation as well as who is management in order to keep stakeholders accountable. Another aspect of transparency is disclosing material related to the corporation that should be given out in a way that promises anyone who is invested in the company can have clear access to information.
Benefits of Corporate Governance:
1. Good corporate governance ensures corporate success and economic growth.
2. Strong corporate governance maintains investors’ confidence, as a result of which, company can raise capital efficiently and effectively.
3. It provides proper inducement to the owners as well as managers to achieve objectives that are in interests of the shareholders and the organization.
4. Good corporate governance also minimizes wastages, corruption, risks and mismanagement.
5. It helps in brand formation and development.
6. It ensures organization in managed in a manner that fits the best interests of all.
7. Corporate governance consists of rules that direct the roles and actions of key people rather than processes.
8. A corporate governance program can boost your company's reputation.
9. Corporate governance includes instituting policies that require the company to take specific steps to stay compliant with local, state and federal rules, regulations and laws.
10. Corporate governance limits the potential for bad behavior of employees by instituting rules to reduce potential fraud and conflict of interest.
Importance of Corporate Governance: Corporate governance is of paramount importance to a company and is almost as important as its primary business plan. When executed effectively, it can prevent corporate scandals, fraud and the civil and criminal liability of the company. It also enhances a company’s image in the public eye as a self-policing company that is responsible and worthy of shareholder and debt holder capital. It dictates the shared philosophy, practices and culture of an organization and its employees.
A corporation without a system of corporate governance is often regarded as a body without a soul or conscience. Corporate governance keeps a company honest and out of trouble. If this shared philosophy breaks down, then corners will be cut, products will be defective and management will grow complacent and corrupt. The end result is a fall that will occur when gravity – in the form of audited financial reports, criminal investigations and federal probes – finally catches up, bankrupting the company overnight. Dishonest and unethical dealings can cause shareholders to flee out of fear, distrust and disgust.
Lowering Risk: Since the people involved in the organization know what they are accountable for, the actions of one person doesn’t mean the downfall of the entire corporation. Properly identifying what the roles in the corporation are allows decisions to be made that won’t have a negative effect on the overall corporation, and it means that the offender can be much more quickly identified and punished instead.
Public Acceptance: In terms of business, a company with corporate governance is widely accepted by the public. This is mostly due to the idea of disclosure and transparency that comes with corporate governance. With full disclosure and the ability for people who work in the business to get information, as well as the general public, there is a higher level of trust. There’s also the fact that due to the way that corporate governance is setup, there is a lower chance of fraud and company-wide criminal activity, which helps gain the trust of the public as well.
Public Image: Today many corporations hold a high level of corporate governance. This is because a corporation has a public image to maintain. With corporate governance, the corporation takes more responsibility for its actions, and also allows it to keep tabs on what is going on as well as helps those in charge remain more aware of the public image of the corporation.
Improved Reputation: If you publicize your corporate governance policies and detail how they work, more stakeholders will be willing to work with you. This can include lenders who see you have strong fiscal policies and internal controls, charities you might partner with to promote your business, government agencies, employees, the media, vendors and suppliers. The practice of sharing internal information with key stakeholders is known as transparency, which allows people to feel more confident you have little or nothing to hide.
Decreased Conflicts and Fraud: Corporate governance institute rules to limits the bad behavior of employees to reduce potential fraud and conflict of interest. For example, the company might draft a conflict of interest statement that top executives must sign, requiring them to disclose and avoid potential conflicts, such as awarding contracts to family members or contracts in which an executive has an ownership interest. The company might forbid loans to officers and family members or the hiring of family members. External audits or requiring checks over a certain amount to be approved and signed by two people help reduce errors and fraud.