The Importance of Corporate Governance

The Role and Importance of Corporate Governance

Corporate governance is largely what protects and projects the image of any business. It acts as the custodian of ethics that handles conflict and ensures the smooth running of an organization. There is something about big businesses that causes them to be seen as money-minded and heartless. The importance of corporate governance is vital here. 

Without Corporate Governance, meeting organizational goals can be construed as giving primacy to ends over means. Deviation from core standards could well become the norm. The governance framework ensures that every entity, department, and position is accountable for its decisions and actions. In this context, an entity can be a decision mechanism or set of objectives that help with corporate risk management.

Building Trust and Ensuring Accountability

The corporate governance guidelines of a company ensure that an organization keeps its flag of trust flying high amongst the market and the general public. Moreover, when the principles of a governance framework are not in place, spending is high. Executives and top management make decisions regardless of how they affect business goals. In the interest of preserving integrity, firms today respect the role of corporate governance.

An ideal corporate governance policy is one that gives limited importance to stakeholders. It needs to be supported by a framework where the regulatory authority keeps up a meaningful hold over businesses through laws. It reminds stakeholders that the performance of the stock on the market indices is a short-term consideration. The overall long-term performance of the business and improvement in the value of the stock is more valuable. Organizational goals should be formulated in keeping with the latter.

Insights from Research

A Bain & Co. survey of companies reveals that valuing company performance has its benefits. A board of directors should be focused on the top performance metrics and not on distractions brought about by the performance of the stocks.

Best Practices for Corporate Governance

1. Strategic Vision: Directors should come up with their own strategy to spearhead better performance. Executive strategies can usually use a revamp. A board can be visionary and far-seeing, something even the CEO might lack.

2. Building the Right Team: Building a team should include the involvement of the board of directors. The hands-on approach ensures the firm’s core values are reflected in the personnel that is hired. Especially where successors are chosen, this is deeply essential.

3. Performance-Based Remuneration: Financial decisions with regard to salary should be made in conjunction with the value the employee adds to the business. This can be tough in the face of spiraling remuneration packages. The board’s role in performance evaluation is imperative.

4. Financial Oversight: The board should always be involved in financial decision-making, planning, and budgeting. They need to be on top of all cash flow, expense, and revenue statements. For instance, the debt-equity ratio is something no director can ignore. Following the number trail lends discipline to decision-making.

5. Corporate Communication: Corporate communication can get evasive – it can often lead to issues not getting resolved. The board can cast itself into the breach and control reputation.

6. Collaboration with the CEO: Try to act as a team with the CEO. Managing dissent and handling collective decisions smoothly will help with the furtherance of corporate governance practices.

Conclusion

The role of corporate governance pays off in huge dividends in terms of brand value and in developing a respectable image. It forms the difference between mere business operation and one that is cohesive and purpose-led.

Reference:
Alan Bird, Robin Buchanan and Paul Rogers, Corporate Governance: The Seven Habits Of An Effective Board, Bain & Company, November 24, 2003