Just like the name suggests, corporate governance refers to how a corporation governs itself. It incorporates the laws, policies and customs that direct and control a corporation. Corporate governance allows people to understand what their roles and responsibilities are, thus streamlining operations at corporations. However, to be effective, corporate governance must adhere to the following principles:
- Shareholder recognition – Good corporate governance recognizes all stakeholders of the company. This includes people like employees, suppliers, customers, creditors and investors
- Equal treatment of shareholders - Besides acknowledging shareholders, corporate governance should treat them equally. This could mean involving them in major decisions which affect the company
- Clearly defined roles of the board – Each member of the board of governors has a specific role to fulfill. Corporate governance should clearly define the composition and roles of the board of directors
- Ethical behavior – Good corporate governance should have integrity and ethics at its core. Everyone who is part of the company must demonstrate ethical behavior and follow a clear code of conduct when carrying out their activities
- Transparency – Transparency is very important for winning the trust of shareholders. Corporate governance should allow stakeholders to have free access to materials such as financial records
Here are some of the reasons why corporate governance is vital for every corporation:
As mentioned earlier, corporate governance helps define roles and responsibilities in a corporation. This makes it easy to hold people accountable for their actions. For instance, the role of the board of directors is to ensure the proper management of a company. Therefore, in case there is poor management, the blame rests squarely on the board. Accountability allows companies to make decisions about who should be recognized and rewarded for their good work, and who should be terminated due to negligence.
Every company needs to have a way of reducing or mitigating day to day risks. Corporate governance allows companies to avoid or reduce incidences of criminal liability, fraud and scandals. Having accountability makes it easy for companies to identify perpetrators quickly and deal with them. This protects the company from incurring any further damage. Corporate governance can therefore be viewed as a kind of self-policing. It allows companies to handle their affairs quickly before involving external parties.
As mentioned earlier, corporate governance comes with the principle of transparency. When stakeholders and the general public can readily access information about the company, it builds trust. Thus, companies that have corporate governance are likely to enjoy more public acceptance than those that don’t. Having reduced incidence of criminal activity also plays a major role in gaining public trust.
Most donors are concerned about the management of nonprofit organizations. Before releasing any funding, they would want to first peruse all the essential documents of the organization. For instance, they would be interested to look at the financial records to see how money is being spent. Good corporate governance allows you to make your organization’s information readily available, thus enhancing your chances of securing funding.
See Also: How to Become a Corporate Administrator
What other benefits of corporate governance do you know of? Feel free to share with us in the comments section below.