Corporate governance is the set of processes, customs, policies, laws, and institutions affecting the way a corporation (or company) is directed, administered or controlled. Corporate governance also includes the relationships among the many stakeholders involved and the goals for which the corporation is governed. The principal stakeholders are the shareholders, management, and the board of directors. Other stakeholders include employees, customers, creditors, suppliers, regulators, and the community at large.

Corporate governance is a multi-faceted subject. An important theme of corporate governance is to ensure the accountability of certain individuals in an organization through mechanisms that try to reduce or eliminate the principal-agent problem. A related but separate thread of discussions focuses on the impact of a corporate governance system in economic efficiency, with a strong emphasis on shareholders’ welfare. There are yet other aspects to the corporate governance subject, such as the stakeholder view and the corporate governance models around the world.

Components of Corporate Governance

1. Transparency:

Transparency is no longer just an option, but nearly a legal requirement that a company has to comply with.

For a company, this means it allows its processes and transactions observable to outsiders. It also makes necessary disclosures, informs everyone affected about its decisions, and complies with legal requirements.

Why Transparency?

1. Aside from stopping the next illegal moneymaking scheme, transparency also builds a good reputation for the company in question. When shareholders feel they can trust a company, they are willing to invest more, and this greatly helps in lowering the cost of capital.
2. Transparency is a critical component of corporate governance because it ensures that all of a company’s actions can be checked at any given time by an outside observer. This makes its processes and transactions verifiable, so if a question does come up about a step, the company can provide a clear answer.
3. Ensure timely, accurate disclosure on all material matters, including the financial situation, performance, ownership, and corporate governance.

Transparency should have no exceptions, especially when your company’s goals are involved. All stakeholders — from employees to investors — have the right to know about the direction your company is headed for.

2. Accountability

It takes more than transparency to build integrity as a company. It also takes accountability, which can also mean answerability or liability.

Why Accountability?

1. Shareholders are deeply interested in who will take the blame when something goes wrong in one of a company’s many processes. And even when everything goes smoothly as expected, knowing that someone will be held accountable for future mishaps increases shareholders’ confidence, which in turn increases their desire to invest more.
2. Accountability is more than that. It’s about having ownership over one’s actions whether the consequences of those actions are good or bad. Thus, accountability covers not only failings but also accomplishments.
3. When the idea of accountability is approached with this positive outlook, people will be more open to it as a means to improve their performance. This applies from the staff all the way up to the corporate board.

3. Security

A company is expected to make its processes transparent and their people accountable while keeping their enterprise data secure from unauthorized access. There is simply no compromise for this. Companies that experience security breaches involving the exposure of their clients’ personal information quickly lose their credibility.

Why Security?

1. Even with accountability and transparency, a company without inadequate security measures will have a hard time attracting shareholders. After all, any scandal — even a breach caused by third-party hackers — can have a negative effect on a company’s stock market performance.
2. The increasing threat of cybercrime in recent years puts security at a high priority for many companies. Complying with security standards isn’t enough — a company needs to imbibe a culture of security to ensure that trade secrets, corporate data, and client information are all kept safe from unauthorized access from inside and out. Security is not just an IT concern anymore, unlike in the past.
3. Directors should be made aware of the seriousness of cybercrime and the gravity of its consequences. A security breach — especially involving client information — can make the public easily lose their trust. Trust is a big factor that will be considered by shareholders before making an investment in a company.

Need for Corporate Governance

Corporate Governance is needed to create a corporate culture of transparency, accountability, and disclosure.

1. Corporate Performance: Improved governance structures and processes ensure quality decision-making, encourage effective succession planning for senior management, and enhance the long-term prosperity of companies, independent of the type of company and its sources of finance. This can be linked with improved corporate performance- either in terms of share price or profitability.
2. Enhanced Investor Trust: Investors consider corporate governance as important as financial performance when evaluating companies for investment. Investors who are provided with high levels of disclosure and transparency are likely to invest openly in those companies. The consulting firm McKinsey surveyed and determined that global institutional investors are prepared to pay a premium of up to 40 percent for shares in companies with superior corporate governance practices.
3. Better Access to Global Market: Good corporate governance systems attract investment from global investors, which subsequently leads to greater efficiencies in the financial sector.
4. Combating Corruption: Companies that are transparent, and have sound systems that provide full disclosure of accounting and auditing procedures, allow transparency in all business transactions, provide an environment where corruption would certainly fade out. Corporate Governance enables a corporation to compete more efficiently and prevent fraud and malpractices within the organization.
5. Easy Finance from Institutions: Several structural changes like the increased role of financial intermediaries and institutional investors, size of the enterprises, investment choices available to investors, increased competition, and increased risk exposure have made monitoring the use of capital more complex thereby increasing the need of Good Corporate Governance. Evidence indicate that well-governed companies receive higher market valuations. The creditworthiness of a company can be trusted on the basis of corporate governance practiced in the company.
6. Enhancing Enterprise Valuation: Improved management accountability and operational transparency fulfill investors’ expectations and confidence in management and corporations, and in return, increase the value of corporations.
7. Reduced Risk of Corporate Crisis and Scandals: Effective Corporate Governance ensures an efficient risk mitigation system in place. A transparent and accountable system makes the Board of a company aware of the majority of the mask risks involved in a particular strategy, thereby, placing various control systems in place to facilitate the monitoring of the related issues.
8. Accountability: Investor relations are an essential part of good corporate governance. Investors directly/ indirectly entrust the management of the company to create enhanced value for their investment. The company is hence obliged to make timely disclosures on a regular basis to all its shareholders in Corporate Governance is integral to the existence of the company. Lesson 3 Conceptual framework of Corporate Governance 47 in order to maintain good investor relations. Good Corporate Governance practices create an environment whereby Boards cannot ignore their accountability to these stakeholders.

Internal corporate governance controls

Internal corporate governance controls monitor activities and then take corrective action to accomplish organizational goals. Examples include:

1. Monitoring by the board of directors: The board of directors, with its legal authority to hire, fire and compensate top management, safeguards invested capital. Regular board meetings allow potential problems to be identified, discussed, and avoided. Whilst non-executive directors are thought to be more independent, they may not always result in more effective corporate governance and may not increase performance. Different board structures are optimal for different firms. Moreover, the ability of the board to monitor the firm’s executives is a function of its access to information. Executive directors possess superior knowledge of the decision-making process and therefore evaluate top management on the basis of the quality of its decisions that lead to financial performance outcomes, ex-ante. It could be argued, therefore, that executive directors look beyond the financial criteria.
2. Internal control procedures and internal auditors: Internal control procedures are policies implemented by an entity’s board of directors, audit committee, management, and other personnel to provide reasonable assurance of the entity achieving its objectives related to reliable financial reporting, operating efficiency, and compliance with laws and regulations. Internal auditors are personnel within an organization who test the design and implementation of the entity’s internal control procedures and the reliability of its financial reporting.
3. Balance of power: The simplest balance of power is very common; it requires that the President be a different person from the Treasurer. This application of separation of power is further developed in companies where separate divisions check and balance each other’s actions. One group may propose company-wide administrative changes, another group review, and can veto the changes, and a third group checks that the interests of people (customers, shareholders, employees) outside the three groups are being met.
4. Remuneration: Performance-based remuneration is designed to relate some proportion of salary to individual performance. It may be in the form of cash or non-cash payments such as shares and share options, superannuation, or other benefits. Such incentive schemes, however, are reactive in the sense that they provide no mechanism for preventing mistakes or opportunistic behavior, and can elicit myopic behavior.

External corporate governance controls

External corporate governance controls encompass the controls external stakeholders exercise over the organization. Examples include:

1. Competition
2. debt covenants
3. demand for and assessment of performance information (especially financial statements)
4. government regulations
5. managerial Labour market
6. media pressure
7. takeovers

Corporate Governance Principles

Corporate governance refers to all laws, regulations, codes, and practices, which defines how the institution is administrated and inspected, determines rights and responsibilities of different partners, attracts human and financial capital, makes institution work efficiently, provides economic value to stack holders in the long turn while respecting the values of the community it belongs. For corporate governance, the management approach should be in accordance with the following principles.

1. Governance structure: All Organizations should be headed by an effective Board. responsibilities and accountabilities within the organization should be clearly identified.
2. The structure of the board and its committees: The board should comprise independent-minded directors. It should include an appropriate combination of executive directors, independent directors, and non-independent non-executive directors to prevent one individual or a small group of individuals from dominating the board’s decision taking. The board should be of a size and level of diversity commensurate with the sophistication and scale of the organization. Appropriate board committees may be formed to assist the board in the effective performance of its duties.
3. Director appointment procedure: There should be a formal, rigorous, and transparent process for the appointment, election, induction, and re-election of directors. The search for board candidates should be conducted, and appointments made, on merit, against objective criteria (to include skills, knowledge, experience, and independence and with due regard for the benefits of diversity on the board, including gender). The board should ensure that a formal, rigorous, and transparent procedure is in place for planning the succession of all key officeholders.
4. Director’s duties, remuneration, and performance: Directors should be aware of their legal duties. Directors should observe and foster high ethical standards and a strong ethical culture in their organization. Each director must be able to allocate sufficient time to discharge his or her duties effectively. Conflicts of interest should be disclosed and managed. The board is responsible for the governance of the organization’s information, information technology, and information security. The board, committees, and individual directors should be supplied with information in a timely manner and in an appropriate form and quality in order to perform to required standards. The board, committees, and individual directors should have their performance evaluated and be held accountable to appropriate stakeholders. The board should be transparent, fair, and consistent in determining the remuneration policy for directors and senior executives.
5. Risk governance and internal control: The board should be responsible for risk governance and should ensure that the organization develops and executes a comprehensive and robust system of risk management. The board should ensure the maintenance of a sound internal control system
6. Reporting and integrity: The board should present a fair, balanced and understandable assessment of the organization’s financial, environmental, social and governance position, performance and outlook in its annual report and on its website.
7. Audit: Organizations should consider having an effective and independent internal audit function that has the respect, confidence, and cooperation of both the board and the management. The board should establish formal and transparent arrangements to appoint and maintain an appropriate relationship with the organization’s auditors.
8. Relations with shareholders and other key shareholders: The board should be responsible for ensuring that an appropriate dialogue takes place among the organization, its shareholders, and other key stakeholders. The board should respect the interests of its shareholders and other key stakeholders within the context of its fundamental purpose.