Corporate Governance Attorney: What is corporate Governance
Corporate governance principle is the system of rules, processes, and practices used to control and direct a firm. It includes balancing the interests of all the stakeholders such as executives, shareholders, senior management, customers, financiers, the community, and the government. Corporate governance is the framework for achieving the company’s objectives and includes performance measurement, action plans, and internal controls.
It is vital that companies have the right checks and balances to avoid abuse of office or wholesale fraud. The roles of boards of directors, individual directors, board committees, and executive officers are constantly changing with new regulations from stock exchanges, Congress, and the Securities and Exchange Commission.
- Corporate governance is the framework of processes, practices, and rule to manage and direct a company.
- The board of directors is the main force influencing corporate governance.
- Bad corporate governance can reflect poorly on a company and make it seem unreliable, lacking integrity and transparency, and affect its financial health.
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8 Pillars of Corporate Governance
Governance is the controls, policies, resolutions, and rules in place to control corporate behavior. Shareholders and proxy advisors are some of the stakeholders who can indirectly affect governance. The board of directors directly control governance, and therefore, the actions of the board of directors can affect the value of the company.
Investors take corporate governance seriously, though they have little control over it. If a company has good corporate governance, the community and investors trust the company. Therefore, corporate governance can affect a company’s financial viability. A key part of investor and community relations is communicating a firm’s corporate governance. Some companies choose to include the following information on their investor relations site:
- Corporate leadership team
- Committee charters
- Governance documents
- Stock ownership guidelines
- Articles of incorporation
Most companies actively pursue a high level of corporate governance. Many shareholders now look at other metrics besides profit, such as ethical behavior, environmental awareness, and good corporate governance practices. Good corporate governance means transparency and aligned incentives for all parties.
Corporate Governance and the Board of Directors
Our of all stakeholders, the board of directors has the biggest influence on corporate governance. These directors represent the shareholders of the company in important business decisions including:
- Executive compensation
- Dividend policy
- Corporate officer appointments
- Social concerns
- Environmental concerns
The board of directors will often be a mix of independent and inside members. Independent board members are external to the company but have expertise in directing or managing over companies. They are considered vital to governance as they dilute the biased parties and represent shareholder interest. Inside members of the boars are founders, executives, and major shareholders. They will have ties and interest in the company.
An effective board of directors will ensure the following areas are considered in corporate governance policies:
- Risk management
- Corporate strategy
- Ethical business practices
Bad Corporate Governance
Bad corporate governance can damage a company’s reputation in the eyes of the community and shareholders, which can affect the company’s financial health. When a company is seen as having a lack of integrity, or transparency, it can be devastating. Companies who have covered up scandals or conducted illegal activity see their stock prices fall dramatically when the truth came to light.
Concern for corporate governance is not a popular issue in government or public discussions. However, revelations of illegal or unethical business practices revive discussions. The government will often impose new regulations following a scandal. In 2002 they passed the Sarbanes-Oxley Act requiring tougher recordkeeping requirements following the Enron and WorldCom scandals.
Other examples of bad governance include:
- Not cooperating with auditors or selecting auditors with inappropriate scale so that financial documents are inaccurate.
- Low executive compensation packages do not give incentive to corporate officers.
- Heavily biased boards mean that ineffective directors are not ousted.
In summary, good corporate governance is important for a company’s long-term success. A corporate governance lawyer can help companies struggling with their corporate governance and advise them on areas to improve. They can assist in creating policies and procedures that will greatly improve corporate governance and turn the company around.