Corporate Governance
What
is Corporate Governance?
Corporate
governance is something altogether different from the daily operational
management activities enacted by a company’s executives. It is a system of direction and control that
dictates how a board of directors governs and oversees a company.
A Key Principle of Corporate Governance – Shareholder Primacy
Perhaps one of the most important principles of corporate
governance is the recognition of shareholders. The recognition is two-fold. First, there
is the basic recognition of the importance of shareholders to any company –
people who buy the company’s stock fund its operations. Equity is one of the
major sources of funding for businesses. Second, from the basic recognition of
shareholder importance follows the principle of responsibility to shareholders.
The policy of allowing shareholders to elect a board of
directors is critical. The board’s “prime directive” is to be always seeking
the best interests of shareholders. The board of directors hires and oversees
the executives who comprise the team that manages the day-to-day operations of
a company. This means that shareholders, effectively, have a direct say in how
a company is run.
Transparency
Shareholder interest is a major part of corporate governance.
Shareholders may reach out to the members of the community who don’t
necessarily hold an interest in the company but who can nonetheless benefit
from its goods or services.
Reaching out to the members of the community encourages lines
of communication that promote company transparency.
It means that all members of the community – those who are directly or
indirectly affected by the company – and members of the press get a clear sense
of the company’s goals, tactics, and how it is doing in general. Transparency
means that anyone, whether inside or outside the company, can choose to review
and verify the company’s actions. This fosters trust and is likely to encourage
more individuals to patronize the company and possibly become shareholders as
well.
Security
An increasingly important aspect of corporate governance is
security. Shareholders and customers/clients need to feel confident that their
personal information is not being leaked or accessed by unauthorized users.
It’s equally important to ensure that the company’s proprietary processes and
trade secrets are secure. A data breach is not just very expensive. It also
weakens public trust in the company, which can have a drastically negative
effect on its stock price. Losing investor trust means losing access to capital
that is necessary for corporate growth.
Everyone in a company, from entry-level staffers to members
of the board, needs to be well-versed in corporate security procedures such as
passwords and authentication methods.
Consequences of Poor Corporate
Governance
One of the biggest purposes of corporate governance is to set
up a system of rules, policies, and practices for a company – in other words,
to account for accountability. Each major piece of the “government” – the
shareholders, the board of directors, the executive management team, and the
company’s employees – is responsible to the others, therefore keeping them all
accountable. Part of this accountability is the fact that the board regularly
reports financial information to the shareholders, which reflects the corporate
governance principle of transparency.
Poor corporate governance is best explained with an example,
and there is no better example than Enron corp. Many of the executives used shady tactics
and covert accounting methods to cover up the fact that they were essentially
stealing from the company. Erroneous figures were passed along to the board of
directors, who failed to report the information to shareholders.
With responsible accounting methods gone out the window,
shareholders were unaware that the company’s debts and liabilities totaled much
more than the company could ever repay. The executives were eventually
charged with a number of felonies, and the company went bankrupt. It killed employee pensions and hurt shareholders immeasurably.
When good corporate governance is abandoned, a company runs
the risk of collapse, and shareholders stand to suffer substantially.
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