Corporate Governance

In this article, we’ll cover the definition of corporate governance, its guiding principles, purpose, benefits, and introduce various corporate governance models to operate within your overall GRC framework.

What is corporate governance?

The definition of corporate governance is the way in which companies are directed and controlled. But it’s different to everyday governance, like the management of daily operations. Instead, corporate governance is a system of rules, policies and practices that help a board of directors to oversee, direct, control and manage a company effectively.

Governance means ensuring that all activities within your company – from IT to HR – are running smoothly and aligned to support your overall goals and objectives. By governance, we also mean how corporate boards are made up, how information is disclosed, how you gather and share data, and how you communicate with key stakeholders.

Usually, it’s the board of directors who are responsible for corporate governance, and it’s the shareholders’ role to appoint these directors, ensuring an appropriate and sustainable governance structure is in place.

A strong corporate governance system is one that also encompasses the ‘four Ps’: people, purpose, process and performance.

Why is corporate governance important?

The purpose of corporate governance is to ensure effective management of a company, delivering long-term success, accountability and transparency of policies, procedures and operations.

With a strong governance strategy, you can:

• Act quickly
• Manage risk
• Respond to a changing market
• Maximize value for investors

What are the principles of corporate governance?
 

Some of the key principles of corporate governance include transparency, accountability, and security.

Governance ensures that an organization’s corporate model follows appropriate and transparent decision-making processes, protecting the interests of all stakeholders – from shareholders and managers, to employees and customers.

With transparency and accountability, an environment of trust is created, which is crucial for building financial stability and business integrity. Transparent companies are stronger in growth, long-term investment and people power. And corporate governance ensures a clear distinction between the role of shareholders and board of directors, so that decision-making can be effective, strategic and transparent.

A system of corporate governance also means that all people involved in a company are held accountable, ensuring their roles and responsibilities are aligned with the overall interests of the company.

Another key principle is the recognition of shareholders. When a company has shareholders, their equity is a major source of funding, so recognising those shareholders is an important principle of corporate governance. 

Essentially, it comes down to ethics. Corporate governance is necessary to protect the interests of everyone involved in your company (which can sometimes differ), so a strong system of corporate governance facilitates ethical behavior, monitors performance and creates an environment of transparency, accountability, and security.

Attributes of good corporate governance

Good corporate governance is more than rules and processes to be followed. A strong organization is one with an environment of trust, transparency and accountability. Your company’s culture is maintained by the people within, and strong corporate governance leads to a strong and positive culture, thereby boosting overall productivity and making your organization more attractive to investors.

Therefore, corporate governance is about how the board of directors sets the values of the company from a top-level perspective, separate from the daily operational management. A good corporate governance framework incorporates a future vision: always looking to improve transparency and accountability within the organization. Your board of directors should have a growth mindset, with a purpose and plan for sustainable, long-term growth.

        
Benefits of strong corporate governance

Good corporate governance:

• Ensures transparency and protects the interests of all shareholders, big and small, at all levels of the company
• Helps with economic growth and long-term success;
• Ensures control over management and information systems, like security and enterprise risk management
• Helps investors to feel confident, thereby raising capital
• Positively impacts the price of shares
• Builds an environment of trust, accountability and transparency
• Helps create a strong and trusted reputation
• Ensures smooth and streamline processes for various roles and responsibilities within the company
• Guides owners and managers on the purpose, goals and overall strategy of the company for good corporate performance management
• Ensures long-term success and sustainability. 

Consequences of poor corporate governance

The consequences of poor corporate governance can range from a company failing to achieve its goals, to significant financial losses or the collapse of the organization.

When a company fails on corporate governance, this can affect its sustainability and long-term success, and lead to: 

• regulatory entanglements and compliance management problems 
• legal challenges and issues of fraud.

Responsible reporting is key, incorporating the principles of corporate governance: transparency, accountability, and security. 

Corporate governance models

As globalization continues to impact the corporate world, corporate governance models are increasingly analyzed. There are two dominant corporate governance models: the Anglo-American Model of Corporate Governance and the Continental European Model of Corporate Governance. The difference lies mainly within the focus of their systems.
 

Anglo-American Model of Corporate Governance

Otherwise known as the Anglo-Saxon or Anglo-US model, this model presents the board of directors and shareholders as the controlling parties, with managers and chief officers having secondary authority. The board reports to the shareholders, while the managers report to the board; however, many systems within companies dictate some legislative control over the shareholders’ ability to influence the company’s day-to-day management and operations. The US Securities and Exchange Commission (SEC) explicitly supports shareholders taking authority over boards and managers.
 

Continental European Model of Corporate Governance 

Sometimes referred to as the German model, the Continental European Model of Corporate Governance asserts that governance belongs to a supervisory council, which controls the executive board, and the executive board, which is in charge of corporate management. The key factor of the European model is that the supervisory council is elected by employees and shareholders. This model is also influenced by government and national interest, with a focus on the corporation’s responsibility to meet government objectives and contribute to a better society.