Corporate governance is the way of practices, rules, and processes by which a business organization is directed and controlled. It involves maintaining and balancing the interests of the organization’s stakeholders such as customers, shareholders, suppliers, employees, government, and the community. These factors can be internal or external.
Corporate governance is considered as a combination of processes, procedures, rules, and laws by which the business organization is operated or controlled. The board of directors is responsible for developing the framework for corporate governance in the organization. It is important that the corporate governance framework should be built aligning with organizational objectives and business conduct.
Since corporate governance provides a framework for organizational objectives, it includes every aspect of the management process, from action plans, internal controls that are in place to the performance measurements and dividend policies.
Communicating an organization’s corporate governance is a major element of community and investor relations. In the investor relations site of most companies, they outline their corporate relationship, board of directors, executive team, and corporate governance.
Most growing companies are trying hard to have a high level of corporate governance. For the investors and shareholders, it is not sufficient for the business organization to have only profits, but also it should demonstrate a high level of corporate citizenship. This is mainly done through ethical and behavioral practices, environmental awareness, and sound corporate governance practices.
When a company is maintaining good corporate governance, it helps to build transparent rules, processes, and controls where the stakeholders of the business can identify and understand relevant details about the organization.
Principles of Corporate Governance
The structure of corporate governance can vary from organization to organization. However, most organizations include the following principles in their corporate governance structures.
– All shareholders of the business should be treated equally and fairly. It is important for the shareholders to be aware of their rights according to the share type they are holding and to know how to exercise their rights.
– The obligations of the business such as legal and social to non-shareholder stakeholders of the company should be completed. It is important for the business to always communicate required information accurately and transparently.
– The business organization should define a code of conduct for the organization’s executives and the members of the board. The new members should be appointed only if they meet the standards set by the code of conduct.
– The board of directors of the business organization should maintain a commitment to the company ensuring accountability, reasonable behavior, diversity, and transparency within the corporate governance. Apart from that, they should possess the necessary skills that are required to evaluate management practices in the organization.
– All policies in the business related to corporate governance should be transparent to the relevant parties and disclosed to the stakeholders according to the need and requirement.
Importance of Corporate Governance
Maintaining a strong and effective corporate governance can create many positive impacts for organizational growth and success. It helps to develop integrity in the organizational culture, leads to building positive business performance, and helps to create a sustainable business practice. Most importantly, it helps to build accountability of all employees and teams within the organization, assisting them to work as a team with the intention of eliminating mistakes before they occur.
When the business organization maintains strong corporate governance, it works as a sign to the market that the business is well managed and the interests and expectations of the management of the business are aligned with the stakeholders of the business. This allows the business to create a strong positive image in the industry they are operating in and helps the business to achieve a competitive advantage over its rival products.