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Finance glossary

What is corporate governance?

Bristol James
6 Min

An effective corporate governance framework consists of rules, regulations, and best practices that dictate how a corporation operates. Corporate governance considers internal and external factors such as relationship management with stakeholders and customers, critical business practices, and even financial management. Touching every aspect of an organization, corporate governance is meant to protect a company and every entity it does business with while helping the corporation be as successful as possible.

An effective corporate governance framework consists of rules, regulations, and best practices that dictate how a corporation operates. Corporate governance considers internal and external factors such as relationship management with stakeholders and customers, critical business practices, and even financial management. Touching every aspect of an organization, corporate governance is meant to protect a company and every entity it does business with while helping the corporation be as successful as possible.

Why is corporate governance important?

As a company grows, there are more moving parts involved; people management, product quality, and external relationships all get more complex. Corporate governance puts a framework in place to insulate businesses from the risks associated with this growing complexity. The world has watched as bad corporate governance brought the fall of powerful organizations. The recent collapse of FTX is one example of an organization that lacked corporate governance, and in the end, its customers, employees, and stakeholders paid the price.

The people side: basic principles of corporate governance

Some aspects of corporate compliance are up to the discretion of a company’s leadership, while others are legal or regulatory requirements put in place by governing bodies. The basic principles of corporate governance are foundational best practices in any business.

Board of directors

Responsible for corporate governance internally, the board of directors is made up of various business leaders who are in place to protect the corporation and advocate for the shareholders. Members on the board of directors must be elected to their positions by other board members or the stakeholders themselves. The board is in charge of defining the company’s strategic goals, ensuring an effective leadership team is in place, and liaising with shareholders.

Shareholder rights

People can become shareholders of any public company simply by purchasing shares in that company. To be clear, owning one share of Verizon won’t automatically give that person major power within the organization, but shareholders are entitled to certain rights. Common shareholder rights consist of voting power, ownership, the ability to transfer ownership, dividends, permission to inspect corporate documents, and the option to sue for wrongful acts. Shareholders are not guaranteed financial benefits, but if a company does well, they can make money through dividend payments and the appreciation of the corporation’s value.

Duties of management

Just like a company’s board of directors plays an important role in corporate governance, the leadership team of a company must understand their responsibilities under the same umbrella. Management is responsible for running the day-to-day of the company, keeping the board of directors informed as necessary, moving toward strategic goals, mitigating potential risk exposure, and ensuring effective financial reporting. Some organizations have created a corporate governance role on the leadership team to monitor corporate compliance, while others choose to take a collaborative approach to the issue, placing equal responsibility on all executives.

Bases to cover: legal and regulatory requirements

In an effort to protect consumers and get ahead of the economic volatility that comes with bad corporate governance, governments around the world have begun to implement corporate governance requirements that companies are legally obligated to follow.

Federal regulations

The Australian Securities & Investments Commission (ASIC) is a national governing body that helps companies and their employees succeed with corporate governance in mind. Additionally, in 2001, the Corporations Act was signed into law. It imposes certain regulations on corporations including rules around constituent documents, the role of the board of directors and shareholders, and related corporate governance principles. Finally, to be listed on the Australian Securities Exchange (ASX) companies must comply with listing rules such as a one share-one vote requirement, periodic disclosure regulations, and more.

State regulations

In Australia, most corporate governance regulations are at the federal level, but that’s not the case in all countries. In other parts of the world, state governments may impose even tighter restrictions on companies that operate in that state. This is done to create a strong corporate governance policy that goes above and beyond what is dictated at the federal level.

Implementation: good corporate governance practices

It’s never too late to start implementing good corporate governance strategies. Be sure that you keep these three priorities in mind when developing your corporate governance approach:

Risk management

Probably the most important aspect of corporate governance, risk management must be the focal point of all corporate governance frameworks. It is up to the board of directors and company leadership to prevent damage from risks associated with financial investments, company policies and external activities. Managing risk is a massive undertaking, no matter what size your company is, but it’s so important to the longevity and overall success of your organization.

If risks are not mitigated and damage results from bad corporate governance, it could open your company up to litigation, financial loss, brand decline and even government sanctions. With new tools and technologies like Eftsure, a secure payment platform that allows you to automatically track and monitor outgoing vendor payments, risk management is streamlined, simplified and highly secure. A good practice for leaders is to identify the top three risks facing an organization, then assess are there technological solutions to simplify and mitigate those risks? It could be worth the investment.

Transparency

Keeping shareholders and company stakeholders in the dark about potential business issues is not only taboo, but it exposes your organization to more risk. The board of directors is responsible for notifying business stakeholders of important updates in a timely and accurate manner. When everyone has all the facts, a go-forward plan can be made in good faith.

Accountability

At the end of the day, the board of directors and the company leadership team are responsible for all corporate governance activities. If unmanaged risks turn into negative outcomes, it’s those at the top who are responsible for communicating to shareholders, putting in a contingency plan, and making changes to prevent these issues in the future. This is why, after corporate scandals, you’ll often see the CEO or Chairman of the board step down from their roles.

ROI: benefits of good corporate governance

Every action that helps a company reach its goals while avoiding pitfalls from unnecessary risks is part of its corporate governance strategy. Good corporate governance can take a corporation to the next level by streamlining how it’s managed and effectively implementing safeguards throughout the organization.

Since the leadership team and board of directors are the two responsible parties when it comes to corporate governance, they must prioritize its importance at the top and ensure its prioritization at all levels of the organization. If done well, corporate governance will result in a number of benefits:

Boosting trust and dependability

Creating a culture of trust and dependability is critical in every industry. This endeavour starts with corporate governance principles. Can customers trust you to keep their data safe? Can vendors rely on you to pay invoices on time? Do you set quality standards so people can feel good about using your products?

Enhancing company success

Although corporate governance doesn’t directly correlate to top-line or bottom-line wins, implementing a strong corporate governance structure plays is big role in making sure your company can survive challenging times and optimize business opportunities.

Built-in contingency planning

Many corporate governance plans include details on what to do in case things go wrong. Having these prepared before a disaster can reduce the impact of that event and shield your organization from fallout.

Strategic alignment

It can be challenging to keep shareholders, business partners, leadership teams, and the board of directors on the same page. But with corporate governance, strategic alignment is a natural result of the best practices put in place.

Money, money, money

Strong governance policies can make it easier to raise capital from investors, bring up stock prices, and even create higher revenue margins due to reduced costs.

In summary

  • Corporate governance isn’t a business priority that works in a silo; it enhances every single aspect of how you do business. Rules, regulations, and best practices in an organization drive alignment, improve strategic focus, and create more trust between businesses and their stakeholders.
  • Technology can help improve your corporate governance approach. More secure software solutions, tools that can track compliance concerns, and even better financial data analysis capabilities can all make corporate governance stronger.
  • Your leadership team and board of directors are responsible for the corporate governance policies within your organization. They should be proactive, thoughtful, and unified in all governance-related decisions.

 

 

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