The importance of corporate governance in today’s progressive and aggressive business environment

cannot be denied. According to the Financial Times, it’s “crucial to the achievement of a new frontier of
competitive advantage and profitability.” With so much attention focusing on this business practice, it
may be time to ask: What is corporate governance exactly, and what makes it so imperative to a
company’s success?

What Is Corporate Governance, and Why Is It Important?

Corporate governance is the system of rules, practices, and processes by which a firm is directed and
controlled. Corporate governance essentially involves balancing the interests of a company's
many stakeholders, such as shareholders, senior management executives, customers, suppliers,
financiers, the government, and the community.

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.

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.

Corporate governance entails the areas of environmental awareness, ethical behavior, corporate
strategy, compensation, and risk management. The basic principles of corporate governance are
accountability, transparency, fairness, and responsibility.

Importance-

 Ensure Corporate Social Responsibility

Corporate governance introduces is corporate social responsibility. It usually applies to how companies
interact with the environment in which they operate. Corporate social responsibility enables companies
to consider the impact their operations have on the environment. Similarly, it promotes sustainability
and social responsibility.

 Promotes Accountability

A good corporate governance system ensures that companies follow a sound, transparent, and credible
financial reporting system. This way, corporate governance helps promote accountability in a company.
This accountability can also help in the above aspects, helping attract more investors or protect
stakeholders.

 Protect Stakeholders

Apart from minimizing agency problems, corporate governance protects a company’s other stakeholders
as well. These may include both internal and external stakeholders. Corporate governance defines the
relationship that companies must have with their stakeholders. By doing so, it ascertains that each
stakeholder’s rights are clear for companies to fulfill.