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What is Corporate Governance?

What is Corporate Governance?

Good corporate governance is integral to running a successful company. Read about what it is and how to do it well in this guide.

27th May 2016

What is Corporate Governance?

Corporate governance is a broad term that describes the legal and financial structure that controls the relationship between a company’s shareholders and its management within corporations. It encompasses the framework of rules, relationships, policies, systems and processes whereby authority within organisations is exercised and maintained.

If you require legal guidance regarding the mechanisms and structure of your business it is advised to contact a business lawyer.

What Role does Corporate Governance Play?

Corporate governance is pivotal in establishing a framework within which problems regarding the separation of ownership and control in companies are mitigated. The main aims of corporate governance are three-fold:

  1. To help drive enhanced organisational performance;
  2. To meet the reasonable expectation of investors in most situations; and
  3. To aid conformance with various requirements. These include “internal” requirements (e.g. company’s constitution, policies, controls and procedures) and “external” regulations and laws.

As stated, corporate governance can have regard to a number of internal and external requirements. Companies are able to establish their own corporate governance structure that best suits their unique circumstances. There are a number of factors that a company should consider in framing their corporate governance structure. These include:

  • Contributions of individual directors;
  • The Effectiveness of the board and board performance;
  • Way in which governance is applied throughout the organisation; and
  • The strength of the relationships the organisation fosters with its stakeholders.

Why is Corporate Governance Important?

Corporate governance can play an important role in the performance of companies. They differ across countries and firms and affects firm’s valuations. Furthermore, corporate governance standards utilised by multinational corporations may be used to attract international investors In recent years, poor corporate governance has been a cause of a number of recent corporate scandals, including the Enron collapse. It is thus the overarching goal for corporations to have the most effective governance framework that best meets their individual circumstances and needs.

Corporate governance not only aims to avoid disasters before they occur, it also tends to increase the accountability of your company. Well-executed corporate governance should weed out and eliminate problems within the company before they escalate to detrimental effects. They serve to mitigate the risks associated with your business and in some regards, are considered to be as important as its primary business plan.

Principles of Corporate Governance

There are numerous principles that corporate governance should aim to promote:

  1. Transparency – Lay the foundations for management and oversight in promoting shareholder trust.
  2. Structure the board to add value – Ensure that the board’s roles and responsibilities are clearly outlined. Furthermore it should ensure it discloses how an entity should choose an appropriate board size, composition, skills and commitment. Furthermore it should outline how and why their performance is monitored and evaluated.
  3. Ethical Behaviour – Act ethically and responsibly. Also safeguard integrity in corporate reporting. Ensuring they have formal rigorous processes that independently verify and safeguard integrity of corporate reporting is an essential component to Corporate governance.
  4. Make Timely and Balanced Disclosures – If there is information that a reasonable person would believe would be material in determining the price or value of the company, it should be disclosed in a timely and balanced manner.
  5. Shareholder Recognition – Companies should aim to ensure that all shareholders, regardless of their size. They should share appropriate informations to all to exercise those rights effectively.
  6. Recognise and Manage Risk – Corporate governance should ensure that a sound risk management framework is in effect and is effective through periodic review.
  7. Remunerate fairly and responsibly – Remuneration should be proportional and sufficient to attract, retain and motivate high quality personnel as directors or executives.

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William Goh

William is a Paralegal, working in our content team, which aims to provide free legal guides to facilitate public access to legal resources. With a passion for commercial and IP law, his research focuses on small businesses, how small businesses can navigate convoluted legal procedures and the protection of intellectual property.