Corporate governance is nothing more than how a corporation is administered or controlled. Corporate governance takes into consideration company stakeholders as governmental participants, the principal participants being shareholders, company management, and the board of directors.
Adjunct participants may include employees and suppliers, partners, customers, governmental and professional organization regulators, and the community in which the corporation has a presence.
Because there are so many interested parties, it’s inefficient to allow them to control the company directly. Instead, the corporation operates under a system of regulations that allow stakeholders to have a voice in the corporation commensurate with their stake, yet allow the corporation to continue operating in an efficient manner.
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.
Corporate governance may include:
- Control and direction processes
- Regulatory compliance
- Active ownership and investment in a company
Primarily, though, corporate governance refers to the framework of all rules and relationships by which a corporation must abide, including internal processes as well as governmental regulations and the demands of stakeholders.
It also takes into account systems and processes, which deals with the daily working of the business, reporting requirements, audit information, and long-term goal plans.
Corporate governance provides a roadmap for a corporation, helping the leaders of a company make decisions based on the rule of law, benefits to stakeholders, and practical processes. It allows a company to set realistic goals and methodologies for attaining those goals.
Development of corporate governance
In the 1800s, state corporation laws assisted in the creation of corporate boards, who could govern, much like state congresses, without the unanimous consent of shareholders.
This made the running of corporations much more efficient. As time passes, corporate boards seem to be gathering more and more power, particularly with the inception of large mutual funds and similar cash-building entities, which place another layer of organization between stakeholders and corporate governors.
Fortunately, most people directly involved in corporate governance are honest and interested in what’s best for the company, though there have been glaring and destructive exceptions to that lately.
Parties involved directly in corporate governance do not just include the Board of Directors, but also the SEC, the company’s CEO, management, and the more important shareholders.
Shareholders typically delegate their decision-making rights to managers to act in their best interests.
Corporate governance is based largely on trust – the trust, by the stakeholders, that revenues will be fairly shared, and that those directly involved in running the company are running it in an aboveboard, honest, and open manner, and that they represent the best interests of the company and of the shareholders.
Therefore, key elements of corporate governance are honesty, trust and integrity, openness, responsibility, and accountability. Recent new governmental regulation has attempted to reinforce these elements.
