Corporate governance refers to the system or process that organizations are controlled and directed. It involves a blend of regulations practices by the private sector that enables organizations or corporations to get the attention of the financial and human resources. This allows the organizations to perform effectively acquiring economic value in the long run for shareholders of the organization and at the same time respecting the views of the society at large. It is essential to note that good governance requires voluntary measures and regulations since it contributes immensely to the prosperity of most businesses. This implies that for effective corporate governance to be realized, organizations need to insist on a set of working relationship between the stakeholders, management, and the board of directors. Ultimately, corporate governance provides a means through which organizational objectives and goals are achieved.
Principles and elements of corporate governance
Corporate governance is crucial in business operations as it provides a link between performance and the governance of such a business (Malla, 2004). An effective corporate governance involves the issues of fiduciary duty and accountability. Corporate governance uses principles and elements to ensure that policies are implemented and insist on corporate behavior so as shareholders are protected. These duties include: the right of the shareholders, integrity and ethical behavior, stakeholder interest, accountability and transparency and responsible board.
Corporate governance relies much on the principle of transparency and full disclosure (Steen, 2004). Organizations are directed by this principle to be accountable and open on the activities and operation of the business. All information regarding the financial and non financial rewards given to executives, the objectives and goals of the company, any current and future projects carried out by the company and the financial overview of the organization should be accounted for and disclosed to the public. This corporate principle also requires that organizations be responsible enough to provide clarification on the responsibilities and duties of management and the board. This information needs to be in the public scrutiny so that the management and the board are held responsible and accountable for their roles.
Another principle of corporate governance is the duty to protect the interest of all stakeholders, especially the non shareholders (Theresa, & Christine, 2002). Corporate governance dictates that organizations are responsible enough to care and protect the interests of all stakeholders. This implies that business has a legal and social obligation to other stakeholders such as suppliers, the local community, creditors, employees and customers. All organizations are bound to respect the rights and freedom of such stakeholders through provision of information on the day to day running of the organization.
The organization is also supposed to encourage these stakeholders to participate in the operation of the company so that there is openness. The companies are bound to care for the society at large under this principle of corporate governance (Nicole, 2012). Society live in an environment that should be respected and cared for by organization operating in such environments. The interest of those other stakeholders call for more attention and the neglect of their rights and participation might affect the economic progression of organizations.
The shareholders in companies have a right that should be protected at all times. Corporate governance dictates that organization give these shareholders equal treatment and respect their roles and presence in organizations. Shareholders are essential to organizations and therefore their rights should not only be protected but also their participation should be encouraged (Giuseppina, 2011). This will facilitate the organization’s accountability and transparency role in the business market. The fact that organizations are the basic unit of economy in society implies that they are there to provide the society with goods and services while maximizing their profitability. This can only be realized depending on how well the rights of shareholders are applied by the organization. Shareholders provide the required capital for maximization of profits and improved performance. Therefore, corporate governance is essential in providing means for shareholders’ protection in organizations.
Ethical behavior and integrity
Taking profit maximization as the only view of the organization is no longer adequate to generate satisfaction and increase performance by organizations. Linking the economic gain to the society and respecting the interest of both is critical to company success. Ethical responsibility thus, refers to behavior by an organization, that is not required by law and might not serve to the best of the organization’s economic gains. Corporate governance therefore requires organization to be fair, impartial, provide equal treatment and respect the rights of all individuals equally. Integrity requires that the organization be fair and just in the recruitment of employees, board members and executive officers. Organizations are also required to develop a code of conduct that respects and upholds ethical behavior. The management should be fair and ethical in their decision making process to avoid conflict with society and other stakeholders.
Furthermore, ethical responsibility is voluntary and often guided by the desire to be socially responsible. This implies that corporate governance does not allow organizations to benefit at the expense of others in society. Organizations need to do what is right in all their operations and avoid harming the society (Chrisostomos, 2008).
The board of directors of organizations or companies should be responsible for their actions when dealing with matters relating to the organizations. The board plays a role of supervision and giving guidance to the strategic positioning of the company. In addition the board is responsible for the selection and recruitment of management and controlling of the operation of the organization and the subsequent activities. These actions and roles come with responsibilities that must be upheld at all times. The board in their decision making and controlling, is subject to criticism and questioning by the shareholders and the public. Power and responsibility should be balanced so that there is no dominance over the other.
This is an element of corporate governance that has been on the rice in the recent past and continues to influence how organizations perform in their business operations. This is a responsibility that is not mandated by law or ethics, but the desire of companies to voluntarily make contributions to society. These activities and contributions include generous contributions to society, the cleaning of the environment and care of the less privileged in society. These dictionary responsibilities determines the reception of companies in the local community and the world at large and often give companies a competitive edge. The effective social responsibility of companies that goes beyond the expectations of the society improves the performance of the company and facilitates the society’s ownership of the company.
The principles and elements show clearly that corporate governance deals with the balance between the responsibility and roles of stakeholders of the organization or company. These groups that are part of the organization’s management include the shareholders, board of directors, stakeholders, and executive officers.
The role of corporate governance in this case, is to provide a platform and structures that ensure a productive relationship between the groups and minimize conflict and unhealthy competition. A strict adherence to these principles of governance will result in lower costs for the company will be at a lesser risk. The company will benefit immensely since there will be better flow and sharing of information and rigorous decision making process. This will effectively avoid legal battles and increase the economic value of the business.
Respecting and applying corporate governance places a company to a growth path and increased profitability. This will be enhanced by the confidence of the investors accorded to the company. Investors are drawn to organizations that respect and uphold their rights and reduces unexpected surprises. In addition, effective governance means that the return on investment is higher and improved operational performance since the allocation of resources is well considered.
Business people are always safe with businesses that uphold integrity. Companies that articulate strong ethical values and responsibility, and have a management team that maintains these values in their operation, have a competitive advantage. Corporate governance is a collective responsibility that should be ensured by all the groups of the company for effective benefit of the company.
Elements of corporate governance for business
There are several key elements that should be considered by any business leader for the better fulfillment of company goals.
Reliability of procedures and systems
It is crucial that organizations procedures and systems are designed in a way that they are easily manageable and be reliable. Reliability of systems implies that investors and the stakeholders are confident in the company and can help it to make maximum profits. Inadequate reliability has affected business negatively driving away investors and being unattractive to potential investors. The reliability requires that the company can have a succession plan so that without the owner, it still remains in operation. Effective corporate governance must include possible exit strategies so that the organization is running smoothly with limited interference. This is essential in the case that the owner decides to harvest the company to sell it. There should be tangible documentation of the company procedures and systems that will facilitate any transition of the company in the future from the seller to the buyer. This is a good element of corporate governance.
Independence of duties
The implementation of procedures and policies is the major concern of corporate governance in eliminating conflict of interest and bias in organizations (Ralph, & William, 2012). More often, managers and directors are faced with the problem of making independent decisions due to the influence of the owners or investor interest. This is more pronounced in the case of a family company where the family is involved in the management and running of the organization thus bringing conflict of interest. In such scenarios, corporate governance ensures that an independent board members are hired to make decisions with no bias and insist on activities and decisions that serve the interest of the company as opposed to individual. The duties of strategic person and operation should be separated to ensure adherence to corporate governance.
Performance indicators and transparency
Key performance indicators are a crucial element that should be used by business to improve their performance. The indicators may involve operational goals and financial measurement to evaluate the position of the company. Corporate governance will facilitate the acquiring and maintaining key performance indicators to help develop and maintain good performance. It is crucial to note that performance indicators are a core component of corporate governance in any organization. The organization uses them to evaluate and determine their performance level periodically. Transparency on the other hand, is an element that protects investors in business operation (Morrison, & Linda, 2007). It reduces cases of unethical behavior and mismanagement that works to damage the reputation of the organization. Efficient corporate governance will reduce these vices and build confidence with investors and attract the employees who will provide quality performance.
The application of corporate governance
Corporate governance is a set of procedures that are meant to govern the behaviors of individuals in organizations all over the world. The a availability of these procedures is crucial to the success of all organizations. Governance is applied in the actual business environment though explanation and the practice of relating well in the organization between the stakeholders. Good corporate governance if applied, ensures that conflicts are resolved and behaviors shaped in accordance to the set standards of the organization.
A working application of corporate governance is for instance, the right of shareholders of a company to participate in the activities of businesses such as attending the annual general meetings and election of board members. At times, other organizations do not practice this activity by allowing shareholders to elect board members and minimize the public participation in the running of the company business. This is usually brought about by lack of knowledge of the stakeholders on their right.
Management always uses this to manipulate the process. The possibility of investors taking little care on their participation in the company may result to management being reluctant to disclose information. This ultimately results in poor performance for the board members and employees may get confused about their responsibilities and roles which threatens the existence of such an organization. In application corporate governance makes small businesses or companies to have a greater burden of compliance thus resulting to escaping the main market. There still exists a big gap between the formulation of corporate governance procedures and the real application of these practices in the business environment. This calls for a combined effort to facilitate the application of corporate governance in business.
The business should ensure that members and directors have cognitive development in corporate governance with regard to the public. Additionally, the organizations should increase public participation and make them aware of the systems of corporate governance, their responsibilities and rights. Organizations need to formulate procedures that enhance involvement of corporate governance at all levels of company operation.
In conclusion, corporate governance regards organization and companies as institutions that require management, control and supervision so that the benefits of stakeholders are realized. Corporation governance insists on the use of ethical and legal practices in the operation of the business. Therefore, the success of the company entirely depends on the relationship between the parts of the organization, that is the stakeholders.
Chrisostomos, F. (2008). Agency costs and corporate governance mechanisms: evidence for UK firms. International Journal of Managerial Finance, 4 (1), 37 – 59.
Giuseppina, T. (2011). Corporate governance and capital flows. Corporate Governance, 11 (3), 228 – 243.
Malla, B. (2004). Understanding the corporate governance quadrilateral. Corporate Governance, 4 (4), 7 – 15.
Morrison, H., & Linda, J. (2007). Corporate governance in the financial services sector. Corporate Governance, 7 (5), 623 – 634.
Ralph, T., & William, S. (2012). Corporate Social Irresponsibility: A Challenging Concept: Critical Studies on Corporate Responsibility, Governance and Sustainability. Bingley: Emerald Group Publishing Limited.
Steen, T. (2004). Corporate values and corporate governance. Corporate Governance, 4 (4), 29 – 46.
Nicole, L. (2012). The Structural Dynamics of Corporate Social Irresponsibility: The Case of the Canadian Mining Industry. Emerald Group Publishing Limited, 4 (2), 207-230.
Theresa, D., & Christine V. (2002). The Ludwig report: implications for corporate governance. Corporate Governance, 2 (3), 26 – 31.
Use the order calculator below and get started! Contact our live support team for any assistance or inquiry.[order_calculator]