Importance of Good Corporate Governance and Why Is It Important?

“The real mechanism for corporate governance is the active involvement of the owners”

-Louis Gerstner

What is Corporate Governance?

Corporate governance means the administration of a corporation or business. It refers to the ways of managing and controlling the companies, nurturing work culture, increasing the performance of the teams, and maintaining positive business growth. Although these tasks are managed by directors and managers of the companies, the role of the board of directors holds immense importance. It is the responsibility of the board of directors of the corporation to build a team that can manage these tasks efficiently. Therefore, the interaction between different actors of the corporations such as the board of directors, the management, and the involved stakeholders holds high significance. This increases the importance of corporate governance to study and analyze every aspect of a business.

To understand its working, it is necessary to understand the four P’s of corporate governance that acts as a basic philosophy of its operation.

1. People
2. Purpose
3. Process
4. Performance

1. People

It refers to the people from both sides of the business including the owners of the business, the board of directors, the shareholders, and the consumer. These are the people who design the process of working keeping in view the purpose of the company and consumers who evaluate the services.

2. Purpose

Then comes the purpose of the corporation that guides in making the principles, policies, and motto of said company. Without a clear and well-defined purpose, the company cannot stand in the long run.

3. Process

The process is the governance of the corporation itself that is essential to achieving the purposes of the company. The process is longer than defining the purposes of the corporation, as it takes time and experience to analyze performances and make plans according to continuous developments. These processes lead a corporation towards success or even failure (if not made properly).

4. Performance

Lastly, it comes down to performance in every field. Through performance, the success or failure of the business can be gauged. The performance of every field and individual of the company is necessary to make a final decision about the success of a certain project/task.

How Businesses Apply Corporate Governance?

Businesses whether small or big need corporate governance to function well and yield a healthy profit. It is mandatory (by law) for registered businesses to have good corporate governance. The main task of the company is to build company policies – that include clear rules and regulations, the duties of all staff members, and the tasks of each team.

Additionally, companies hire efficient leadership that ensures that the workers are following the ethical guideline provided by the company, performing their roles diligently, promoting accountability and fairness; and boosting the morale of the team. The role of shareholders and the board of directors holds high importance in a company. Businesses held regular meetings among managers and the board of directors to discuss the company agenda and the role of each actor in promoting the business. Unsatisfactory or unethical performance often leads to the dismissal of management or even members of the board of directors.

Businesses maintain a hierarchy and management structure to cater to the purpose of the business and cater to the interests of shareholders. Moreover, businesses try to maintain transparency in their financial matters to resist hurdles in the process of audit. In modern times, businesses focus especially to incorporate modern technology into their tasks for the easy and sustainable functionality of the company. Lastly, every business tries to incorporate diversity either in terms of ideas or employees, as it gives a better and more open picture of the company.

10 Steps to Good Corporate Governance

Every business deals with good governance in its own way and has personalized guidelines for good governance. However, let’s discuss some steps that big or small corporations can adopt to move forward toward good corporate governance.

1. Clearly define the role of the board to avoid confusion and any chance of exploitation of their powers. This is done by discussion among the board of members and later discussing it with the management of the business. Any additional role the board wants to adopt – other than the formulation of policies and strategies for the business – should be discussed beforehand.
2. Maintain a proper hierarchy to avoid confusion of divided responsibilities. A properly maintain structure in the company is essential to carry forward the tasks more smoothly – without any interruption. It also declares that in case of any mishap in a certain task, who will take responsibility and resolve the issue?
3. Make no compromise on accountability and transparency of the process. This should go beyond any discrimination and bias regarding ranks in the business. Even from the CEO and board of directors to the task managers, everyone should be accountable for their actions. In case of any dishonesty or unethical behavior, serious repercussions should be followed according to the internal policies or rulebook of the business.
4. Instead of giving orders to the management and other staff, it is important to build teamwork. Regularly discuss the issues of the company and try to resolve the issues that cause hindrance in the performances. As the manager of every team has more knowledge about the workings of their respective teams, it is better to take their advice. Simply giving orders would not solve the issues.
5. Examine the organization’s performance regularly to ensure smooth working. These regular evaluations motivate employees to work hard while following ethical guidelines set by the company and the law of the country. Similarly, these regular evaluations will help to identify any error in its initial phase and hence make it easy to resolve.
6. The governance of a corporate is a complex task; often requires multiple responsibilities and quick decision-making abilities. Therefore, it helps a great deal to hire experts in the field who have experience or quick wits to deal with the repercussions of everyday governance tasks.
7. As the role of the leader is highly important in a company’s progress, therefore, it is crucial to appoint a competent and honest CEO. The role of a CEO is no less than that of a leader. A CEO who is well-informed of the company’s internal policies and has a detailed idea about the performance of every department can, naturally, design strategies that will improve the collective performance of the company.
8. Not only the CEO should be competent but all board members should be skilled and experienced in dealing with their company’s issues and forming strategies that best work for their business. This also involves knowledge about their company but also having up-to-date knowledge of the current trends of the society. It will create a better understanding of their target consumers, hence improving the strategies and outcomes of the business.
9. Create a healthy work environment to facilitate the workers (of every rank and department). This may seem a difficult option initially but in the long run, this will prove to become a positive aspect of a business. Not only will it make the name of the business in the market but gain the loyalty of the workers for their company. It will also yield better outcomes due to the positive mental health of the workers.
10. Reduce the communication gap between the employees and management. The purpose of open communication is to identify the issues and resolve them on an immediate basis. This is the way to create a near-optimal condition to easily apply good corporate governance policies.
    

Importance of Corporate Governance

Corporate governance is the key to the improvement and evolution of businesses’ policies. It gives a clear picture to management regarding the performance and outcome, which can lead to developing clear and improved strategies. Every stakeholder of the business plays their part honestly consequently leading the corporation in the right direction.

In today’s world where competition is high and the trends are changing faster than before, it becomes important to have effective corporate governance policies. It boasts a business in the right direction and constant development in the company’s strategies after analyzing their performance can turn into a perfect business model for the said company.

Conclusion

Corporate governance is all about facilitating businesses to fulfill their purpose, enhance their performance, and develop well-suited strategies for the business. It develops communication between management, shareholders, and directors of the corporation to yield better results. Businesses whether big or small apply corporate governance in different forms depending upon the scale of their business. Only this way the progress of the business can be tracked and can be used to make better strategies. Though the method of applying these policies may differ; the crux remains the same that is to develop the corporation for betterment. These corporate governance policies do not leave out any actor of the business market, be it shareholders, owners, management, or the consumer. Obtaining mutual benefit is the key that highlights the importance of corporate governance in any business. Moreover, good corporate governance is about the balance between a company’s policies and the constitution of the state. Lastly, it is an effective way to improve accountability and transparency of a company’s finances and policies.