Importance of Corporate Governance

Importance Of Corporate Governance

In this sample essay, we will discuss the importance of corporate governance.

Corporate governance is about enabling organizations to achieve their goals, control risks, and ensuring compliance. Good corporate governance incorporates rules that define the relationship between stakeholders, management, and the board of directors of a company and influence how the company is operating. 

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What is corporate governance?

The term ‘Governance’ comes from the Latin word Gubernare which means to steer. In the context of companies, governance means direction and control of a company. Corporate governance covers both the social and institutional aspects of a business. Simply put, it is the system by which organizations are directing and managing. Corporate governance influences how the objectives of a firm are set and achieved, how risks are monitored and assessed, and how internal performance is optimized. 

Because of its broad scope, the general directives of corporate governance are as such: 

  • To act as a system of principles, policies, procedures, defined responsibilities, and accountabilities used by stakeholders to work through the inherent conflicts of interest in the corporate form. 
  • To control the interaction between various participants in shaping a corporation’s performance and the direction in which it is proceeding. These participants are usually a Shareholder, a Board of Directors, and Company Management. Corporate governance aims to determine the ways to reach the most effective strategic decisions. 
  • To ensure transparency, which in turn assures a firm and balanced economic development for the organization. Transparency also helps to keep the interest of all shareholders safeguarded.

The importance of Corporate Governance

A strong and effective corporate governance helps cultivate a company culture of integrity, leading to positive performance and a sustainable business overall. Essentially, it exists to increase the accountability of all individuals and teams within your company, working to avoid mistakes before they can even occur. 

Corporate governance is crucial for the following reasons:

  1. It shapes the growth and future of capital markets of the economy.
  2. It helps in raising adequate funds from capital markets.
  3. It links the company’s management system with its financial reporting system.
  4. It enables management to take innovative decisions for the effective functioning of an enterprise within the legal framework of accountability.
  5. It supports investors by making corporate accounting practices transparent. Corporate enterprises have to disclose financial reporting structures.
  6. It provides adequate and timely disclosure, reporting requirements, code of conduct. Companies present material price-sensitive information to outsiders and ensure that till the time this information is made public, insiders abstain from dealing in corporate securities. It, thus, avoids insider trading.
  7. It improves the efficiency and effectiveness of an enterprise and adds to the material wealth of the economy.
  8. It improves the international image of the corporate sector and enables home companies to raise global capital.

Benefits of Good Corporate Governance

With a good corporate governance framework in place, supported by a healthy corporate culture, the organization should see a direct benefit. Risk procedures are streamlined and consistent, as one commentator notes. These benefits include:

  • Efficient processes — Due to repeatability and consistency of tasks.
  • Visibility of errors — Repeatability and consistency quickly highlight non-conformities in the processes.
  • Reduced costs — repeatability and consistency eliminate waste from scrap, rework, and other costly inefficiencies.
  • Smoother-running operations — ‘fire-fighting eliminates, and operations are either ‘conform’ or non-conform.
  • Compliance is assured — with a culture that supports corporate governance and products in the market — the product that reaches the market meets the intended specifications and works correctly.

Elements to a Good Corporate Governance

Implementing effective corporate governance can be challenging to accomplish in its totality right away, but there are ten specific aspects you can look to for guidance when implementing corporate governance in your organization: 

Ensure a Suitable Board

The Board should be balanced, competent, and diverse if you want to achieve success through corporate governance. Aim to have directors who are qualified and who understand the business thoroughly but can also offer a fresh perspective.  

Review the Board Regularly

The composition of the Board of Directors is critical and can make or break the success of your organization’s corporate governance. Regularly reviewing your Board can help to identify any possible shortcomings quickly, which then allows you to make timely improvements and keep things on track. 

Build Solid Foundations for Oversight

Overseeing the work of both the Board and management is critical. Develop a systematic foundation you can use to establish, monitor, and regularly evaluate their roles and responsibilities. The Board needs to have visibility of management actions and be available during all key decision making. 

Aim for Long Term Value Creation

Gearing key performance indicators towards long-term value production, as opposed to short-term, will ensure sustainable success for your company. 

Prioritize Risk Management

Establish a risk management process and internal control framework that is both effective and conducive to your business needs and aim to review its effectiveness periodically. Disaster recovery plans are critical to any business endeavor, so regularly keeping yours up to date is never a bad idea. 

Ensure Reporting Integrity

Corporate reporting is critical, but so too is the insurance of its overall integrity. Aim to set up safeguards throughout the reporting processes, such as conducting external audits of the company. 

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