Who is responsible for corporate governance and what their responsibilities are?

Corporate governance refers to the rules, practices, policies, and customs by which a company is managed and controlled.

Effective corporate governance sets the values for a company and balances the interests of critical stakeholders, including shareholders, management, and the community.

Effective corporate governance provides an effective outline for how the company can reach its goals while benefiting stakeholders and providing transparency and accountability.

The primary responsibility for determining corporate governance belongs to a company’s board of directors.

Corporate Governance Explained

Corporate governance essentially refers to the manners in which a company is governed and why.

Corporate governance identifies who has power and makes decisions and who will be held accountable.

It also determines how a company’s objectives are set and how they will be pursued.

Clear and effective corporate governance can provide clarity and transparency to all stakeholders and help a company’s board and managers to more effectively make decisions and identify responsibilities.

One of the most central concepts of corporate governance has long been the concept of shareholder primacy.

This concept places the focus of corporate governance on its responsibility to shareholders who own the company’s stock and to maximize their value.

The focus on shareholder primacy has declined in recent years to focus more on shareholders as one of the key stakeholders in addition to management and the community.

However, shareholders continue to play a central role in corporate governance.

One key part of this concept is that shareholders are responsible for appointing a company’s board of directors who are responsible for acting in the shareholders’ best interests.

The board of directors will then play a more direct role in controlling the company meaning that shareholders can have a major impact on corporate governance.

Key Principles of Corporate Governance

There are some key principles that should be considered in determining a company’s policies and systems for corporate governance.

Fairness

Fairness should always be a central principle in corporate governance.

First of all, it means that all shareholders should receive fair and equal consideration and treatment.

Additionally, policies and practices should always strive to treat all stakeholders fairly.

This is crucial for ensuring that the company presents a positive image both to shareholders and the public.

Transparency

Another important principle of corporate governance is transparency.

This means that both shareholders and other stakeholders are kept informed of the company’s activities, goals, and strategies.

This means maintaining general openness in a company’s actions.

Some examples of transparency include providing timely disclosures concerning financial performance, making roles and responsibilities of members of management and the board clearly visible, and providing regular updates to surrounding communities concerning the company’s activities.

Maintaining transparency helps to build trust and confidence both from shareholders and other stakeholders.

Security

As threats to companies’ computer systems have grown at increasing speeds, security has grown to be a key principle of corporate governance.

Shareholders, customers, and other stakeholders want to know that information, including the personal information of customers and other proprietary information, is kept secure.

A significant breach of data can greatly affect revenue and lead to a loss of trust both by shareholders and the public as a whole.

Everyone in a company must be aware of the importance of maintaining security and trained in the company’s procedures for securing data.

Responsibility

This principle is in some ways a sum of all other principles and means that a company’s policies and actions should demonstrate responsibility.

This means not taking unnecessary risks, acting against the best interests of shareholders and other stakeholders, and acting in a fair and transparent manner.

Acting responsibly is key to maintaining the trust of stakeholders and maintaining a positive image that will maintain stock prices.

The Board of Directors’ Role in Corporate Governance

A company’s board of directors plays the largest role in maintaining corporate governance.

The members of the board are primarily determined through election by the company’s shareholders and represent their interests. However, other members may be appointed.

Boards typically include inside members who include significant shareholders, company employees, and company founders, as well as independent members who may have relevant professional experience that would help with managing the company. Independent members help to avoid conflicts of interest and ensure that shareholder interests are aligned with those of insider members.

Board members make significant decisions, including the appointment and removal of corporate officers, setting company goals, and approving dividends.

In administering these responsibilities, the board of directors is responsible for ensuring that the principles of corporate governance are reflected and solidified in the company’s corporate strategy and business practices.

The Results of Poor Corporate Governance

The potential consequences of failing to maintain effective governance may be severe.

This can have adverse impacts on business success and potentially lead to business ruins and far-reaching consequences affecting other stakeholders.

There are many examples of the consequences of failing to maintain effective corporate governance; however, one of the best known and strongest examples comes from the Enron Scandal, which came to light in 2001.

This former Wall Street darling was a clear example of a failure of corporate governance in virtually every way.

The company used voodoo accounting practices to misdirect analysts as to the company’s financial performance, used deceptive business practices, ignored its code of ethics, and in some cases, outright lied to the public to cover up its practices.

Enron’s board of directors waived several of its rules pertaining to conflict of interest, allowing its chief financial officer to hide many of the company’s debts and liabilities.

These debts quickly grew to an enormous sum that the company could never repay.

This would eventually result in the company’s collapse, and when the public became aware of the unethical practices which led to the company’s bankruptcy as well as multiple other now-infamous business scandals, the U.S. government passed the Sarbanes-Oxley Act, which imposes far stricter requirements pertaining to record-keeping and corporate responsibility.

However, for the shareholders and employees of Enron, these changes came too late to prevent near immeasurable harm.

The billions in losses to shareholders and thousands of employees who lost their jobs and pensions serve to remind the business community of the importance of maintaining effective corporate governance.

In Conclusion

Corporate governance encompasses all of the principles and practices by which a company is controlled and run.

This includes a company’s strategy, how it treats workers, and how it affects other stakeholders.

Effective corporate governance guides a company to make transparent and ethical decisions that will benefit its shareholders and other stakeholders.

Poor corporate governance can lead to a loss of confidence among a company’s shareholders and the public and potentially its eventual collapse.

Key Takeaways

• Corporate governance refers to the rules, practices, policies, and customs which are followed in directing and managing a company.
• A company’s board of directors generally plays the primary role in determining its corporate governance.
• Effective corporate governance is crucial for ensuring ethical behavior and accountability as well as for setting corporate strategy and achieving stated goals.

Article Sources & Citations

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1. Harvard Law School "Principles of Corporate Governance" Page 1 . May 2, 2022

2. SEC "CORPORATE GOVERNANCE GUIDELINES" Page 1 . May 2, 2022

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