What is Corporate Governance? (2022 Update)

Aug 11, 2020
Reading Time: 3 minutes
Written by William Goh

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

If you want further legal guidance regarding the structure of your business, you should contact a business lawyer.

What role does corporate governance play?

Corporate governance establishes a framework where problems relating to the separation of ownership and control in companies is managed. Further, it’s aims 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. a company’s constitution, policies, controls and also 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 structure. These include:

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

Why is it important?

Corporate governance plays an important role in the performance of companies. They differ across countries and firms and affects a firm’s valuation. Furthermore, corporate governance standards utilised by multinational corporations may help attract international investors. In recent years, poor corporate governance has been a cause of a number of corporate scandals, including the Enron collapse in the United States. It is thus the overarching goal for corporations to have the most effective 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 strategies 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.

Key principles

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

Transparency

Lay the foundations for management and oversight in promoting shareholder trust.

Structure

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.

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 company reporting is an essential component of Corporate governance.

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.

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.

Recognise and manage risk

Corporate governance should ensure that a sound risk management framework is in effect and is effective through periodic review.

Remuneration

Remuneration should be proportional and sufficient to attract, retain and motivate high quality personnel as directors or executives.

Finally

Good corporate governance is an integral part of running an efficient and profitable company. Although Australia does not have a mandatory code for companies to follow, a good starting point is the ASX’s principles and recommendations. If you have further questions about managing your company, it may be worth getting in touch with a company lawyer.

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