What is '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 a company's many stakeholders, such as shareholders,
management, customers, suppliers, financiers, government and the community.
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.

!--break--Governance refers specifically to the set of rules, controls, policies and

resolutions put in place to dictate corporate behavior. Proxy advisors and
shareholders are important stakeholders who indirectly affect governance, but
these are not examples of governance itself. The board of directors is pivotal in
governance, and it can have major ramifications for equity valuation.

The Board of Directors

The board of directors is the primary direct stakeholder influencing corporate
governance. Directors are elected by shareholders or appointed by other board
members, and they represent shareholders of the company. The board is tasked
with making important decisions, such as corporate officer appointments,
executive compensation and dividend policy. In some instances, board
obligations stretch beyond financial optimization, when shareholder resolutions
call for certain social or environmental concerns to be prioritized.

Boards are often comprised of inside and independent members. Insiders are
major shareholders, founders and executives. Independent directors do not
share the ties of the insiders, but they are chosen because of their experience
managing or directing other large companies. Independents are considered
helpful for governance, because they dilute the concentration of power and help
align shareholder interest with those of the insiders.

Good and Bad Governance

Bad corporate governance can cast doubt on a company's reliability, integrity or
obligation to shareholders. Tolerance or support of illegal activities can create
scandals like the one that rocked Volkswagen AG in 2015. Companies that do
not cooperate sufficiently with auditors or do not select auditors with the
appropriate scale can publish spurious or noncompliant financial results. Bad
executive compensation packages fail to create optimal incentive for corporate
officers. Poorly structured boards make it too difficult for shareholders to oust
ineffective incumbents. Corporate governance became a pressing issue following
the 2002 introduction of the Sarbanes-Oxley Act in the United States, which was
ushered in to restore public confidence in companies and markets after
accounting fraud bankrupted high-profile companies such
as Enron and WorldCom.

Good corporate governance creates a transparent set of rules and controls in

which shareholders, directors and officers have aligned incentives. Most
companies strive to have a high level of corporate governance. For many
shareholders, it is not enough for a company to merely be profitable; it also
needs to demonstrate good corporate citizenship through environmental
awareness, ethical behavior and sound corporate governance practices.

What is Corporate Governance?

Corporate Governance refers to the way a corporation is governed. It is the technique by which
companies are directed and managed. It means carrying the business as per the stakeholders’ desires. It
is actually conducted by the board of Directors and the concerned committees for the company’s
stakeholder’s benefit. It is all about balancing individual and societal goals, as well as, economic and
social goals.

Corporate Governance is the interaction between various participants (shareholders, board of directors,
and company’s management) in shaping corporation’s performance and the way it is proceeding towards.
The relationship between the owners and the managers in an organization must be healthy and there
should be no conflict between the two. The owners must see that individual’s actual performance is
according to the standard performance. These dimensions of corporate governance should not be
overlooked.

Corporate Governance deals with the manner the providers of finance guarantee themselves of getting a
fair return on their investment. Corporate Governance clearly distinguishes between the owners and the
managers. The managers are the deciding authority. In modern corporations, the functions/ tasks of
owners and managers should be clearly defined, rather, harmonizing.

Corporate Governance deals with determining ways to take effective strategic decisions. It gives ultimate
authority and complete responsibility to the Board of Directors. In today’s market- oriented economy, the
need for corporate governance arises. Also, efficiency as well as globalization are significant factors
urging corporate governance. Corporate Governance is essential to develop added value to the
stakeholders.

Corporate Governance ensures transparency which ensures strong and balanced economic
development. This also ensures that the interests of all shareholders (majority as well as minority
shareholders) are safeguarded. It ensures that all shareholders fully exercise their rights and that the
organization fully recognizes their rights.

Corporate Governance has a broad scope. It includes both social and institutional aspects. Corporate
Governance encourages a trustworthy, moral, as well as ethical environment.

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 lowers the capital cost.
4. There is a positive impact on the share price.
 5. It provides proper inducement to the owners as well as managers to achieve objectives that are in
interests of the shareholders and the organization.
6. Good corporate governance also minimizes wastages, corruption, risks and mismanagement.
7. It helps in brand formation and development.
8. It ensures organization in managed in a manner that fits the best interests of all.

What Is Corporate Governance, and Why Is It

Important?
In its January 2017 Quarterly Board Matters report, Ernst & Young (EY)’s Center for
Board Matters examined corporate governance trends at Russell 2000 and S&P 500
companies. While it found that corporate governance is a “topic of increasing interest
to policymakers, investors and other stakeholders,” the way it’s enacted by
businesses isn’t always consistent.

Some organizations concentrate on independent board leadership, EY says. Others

have shifted from staggered to annual elections. Just as no two business strategies
are alike, a corporate governance policy is likely to vary from one company to the
next.

The inner workings of corporate governance strategies may differ, but the business
practices they comprise are generally more uniform. ICSA: The Governance
Institute defines corporate governance as “the way in which companies are governed
and to what purpose.” To elaborate, corporate governance impacts all aspects of an
organization, from communication to leadership and strategic decision-making, but it
primarily involves the board of directors, how the board conducts itself and how it
governs the company.

Business advisory firm PricewaterhouseCoopers (PwC) calls corporate governance “a

performance issue,” because it provides a framework for how the company operates.
According to PwC, corporate governance should encompass the following:

 The company’s performance and the performance of the board

 The relationship between the board and executive management
 The appointment and assessment of the board’s directors
 Board membership and responsibilities
 The “ethical tone” of the company, and how the company conducts itself
 Risk management, corporate compliance and internal controls
 Communication between the board and the C-suite
 Communication with the shareholders
 Financial reporting
This list provides a bird’s-eye view of corporate governance in action, and conveys
the extent to which it can influence business. To help organizations navigate
corporate governance, Deloitte offers a Governance Framework that outlines the
board’s objectives and responsibilities, and how they relate to the corporate
governance infrastructure.

But simply implementing a corporate governance strategy isn’t the same as

achieving success. Most examples of good corporate governance have something in
common, too: they’re built on a foundation of transparency, accountability and trust.

Time and time again, these three terms enter into the corporate governance
discourse. They have immense value, whether a business is family-run, a nonprofit
or a publicly traded company. That’s one of the reasons why corporate governance
is top of mind for so many business professionals. Above all, the role of corporate
governance in modern organizations is to demonstrate these key principles to
shareholders, stakeholders and the public.

The Role of Corporate Governance in Modern

Organizations
Let’s take a closer look at two of these principles: transparency and trust.
Businesses today are held to incredibly high standards by investors and customers
alike — consider that 66 percent of global consumers told research firm Nielsen they
would be willing to pay more for products from a company that demonstrates
corporate social good. Being honest and open about process and operations counts
a great deal. Both shareholders and consumers want to see companies operating
with integrity.

Corporate governance allows companies to put their positive traits on display. With
their intentions made visible to all, companies are more likely to be held accountable
for their behavior and actions — and thus more willing to distance themselves from
duplicity.

This is especially crucial now that trust in businesses is on the decline.

Communications and marketing firm Edelman’s annual Edelman Trust Barometer, a
global survey that measures consumers’ trust in business, the media, the
government and nongovernmental organizations, found that trust in all four is down
for the first time in 17 years.

The credibility of CEOs is at an all-time low too, with 63 percent of survey

respondents saying CEOs are somewhat credible or not credible at all. “Just 52
percent of respondents to our survey said they trust business to do what is right,”
reports Matthew Harrington, global chief operating officer of Edelman, in an overview
of the survey published by the Harvard Business Review. But when trust is waning,
corporate governance can lift it up again.
Displaying Social Responsibility
In an attempt to minimize the risk of distrust, companies go out of their way to
emphasize their social responsibility in their corporate governance materials.
Organizations of all kinds, including Royal Bank of Canada and Hong Kong’s Link Real
Estate Investment Trust, choose to make their corporate governance frameworks
public. Doing so can go a long way toward putting shareholders’ and customers’
minds at ease.

The Corporate Governance and Ethics section of Microsoft’s website, meanwhile,

stresses that the company strives to “build and maintain trust through a shared
commitment to ethical behavior and to act with integrity in everything we do.” Making
— and keeping — this kind of promise can have a considerable impact on an
organization’s reputation and success. As explained in a recent PRWeekmagazine
article, corporate governance “affects and dictates the internal functioning and
morale of a company, and it also projects externally to the public.”

In essence, companies must make a choice: embrace corporate governance and its
implied conventions, or reject them. And as expressed by Claudia Gioia, president and
CEO of Hill+Knowlton Latin America, those who “turn away from the policies of
honesty and transparency lose credibility and competitive advantages.”

Considering Company Culture

Business priorities aside, another explanation for different corporate governance
strategies comes down to different company cultures. A company’s unique culture
permeates everything from vision to values, organizational structure, work
environment and hiring practices, so it stands to reason that it should affect
corporate governance, too.

According to EY, “Corporate culture is emerging as an important consideration for

boards and audit committees, touching as it does every aspect of a company, from
strategy to compliance.” Culture is cropping up in the corporate governance policies
of companies like Bank of America and Nestlé. The more involved boards become in
corporate governance, the more they influence company culture — and vice versa.
For example, on its website, Nestlé writes:

“Our Board of Directors sets our long-term strategy and provides oversight on the basis of
strong principles and an appropriate tone from the top. It ensures the long-term success of
our company based on a clear strategy and good corporate governance. Its focus on
corporate culture helps us align the interests between our business, our wider stakeholders
and society.”

In other words, corporate governance has value beyond demonstrating a company’s

social responsibility efforts and overall principles. It can also shape a company’s
culture, which, in turn, shapes the way an organization’s leaders lead, the way its
workers work and how customers perceive the businesses with which they choose to
engage.

Security Matters
Given that good corporate governance is linked to transparency, accountability and
trust, the issue of security warrants special attention. Communication may be just
one facet of corporate governance, but the fact that it includes the internal and
external exchange of invaluable data and information makes
prioritizing cybersecurity a key part of company policy.

Drafting a board communications plan is a good way to ensure all parties are on the
same page about communication best practices. In its study of trends in board portal
adoption, online resource Corporate Secretary wrote, “Other methods of digital
document distribution cannot match the controlled collaboration environment offered
by board portal technology.”

Control is the word to note here. Aside from communication, gaining and maintaining
control over an organization’s security has a positive effect on many other areas of
corporate governance policy, including risk management, financial reporting, board
performance and how the company chooses to conduct itself.

The Financial Times writes, “Good corporate governance is a competitive advantage.”

Without it, a company cannot reach its potential, and that makes corporate
governance indispensable.

Interested in learning more about good corporate governance and how board portals
can complement and enhance it? Contact us for a demo today.

Corporate governance is the way a corporation polices itself. In short, it is a method of

governing the company like a sovereign state, instating its own customs, policies and
laws to its employees from the highest to the lowest levels. Corporate governance is
intended to increase the accountability of your company and to avoid massive disasters
before they occur. Failed energy giant Enron, and its bankrupt employees and
shareholders, is a prime argument for the importance of solid corporate governance.
Well-executed corporate governance should be similar to a police department's internal
affairs unit, weeding out and eliminating problems with extreme prejudice. A company
can also hold meetings with internal members, such as shareholders and debtholders -
as well as suppliers, customers and community leaders, to address the request and
needs of the affected parties.
Principles of Corporate Governance
 Shareholder recognition is key to maintaining a company's stock price. More
often than not, however, small shareholders with little impact on the stock price are
brushed aside to make way for the interests of majority shareholders and the
 executive board. Good corporate governance seeks to make sure that all
shareholders get a voice at general meetings and are allowed to participate.

 Stakeholder interests should also be recognized by corporate governance. In

particular, taking the time to address non-shareholder stakeholders can help your
company establish a positive relationship with the community and the press.

 Board responsibilities must be clearly outlined to majority shareholders. All

board members must be on the same page and share a similar vision for the future of
the company.

 Ethical behavior violations in favor of higher profits can cause massive civil and
legal problems down the road. Underpaying and abusing outsourced employees or
skirting around lax environmental regulations can come back and bite the company
hard if ignored. A code of conduct regarding ethical decisions should be established
for all members of the board.

 Business transparency is the key to promoting shareholder trust. Financial

records, earnings reports and forward guidance should all be clearly stated without
exaggeration or "creative" accounting. Falsified financial records can cause your
company to become a Ponzi scheme, and will be dealt with accordingly.

Corporate Governance as Risk Mitigation

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 debtholder 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.