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What Is Corporate Governance?

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Corporate governance is the system of practices and processes by which a firm is directed, controlled, and managed. High-quality practices and processes are crucial to the short- and long-term success of a business. Developing these practices and processes involves weighing the wants and needs of the different stakeholders within the company, as well as those who have a vested interest in the company. This includes shareholders, employees, customers, and ultimately the community that your business serves.

The Four Ps of Corporate Governance

Corporate governance can be broken down into the four Ps: people, process, performance, and purpose.

Are you taking care of the people you employ? Are your processes saving time, energy, and resources? Is your performance adequate and creating positive trends for the organization? From a public relations perspective, is your purpose more than just “making money"?

If you can answer these questions comfortably, then you will be able to run a company that all stakeholders are pleased with.

More Than a Focus on Profitability

Effective corporate governance focuses on more than just profitability. After cases of failed corporate governance, such as Enron and Volkswagen, made national headlines, the government tightened regulations. Stakeholders and shareholders are now more cautious than ever. To ensure ethical decision-making and avoid legal difficulties, corporate governors need to consider a wide range of perspectives, including public relations. You may need to focus on social responsibility as much as the day-to-day operations of the business.

Your company will struggle to thrive if you cannot look beyond profit. And if your business fails, you will face business debt and even bankruptcy. So setting up good company governance right from the start is imperative for long-term success.

Who Makes the Decisions?

Corporate governance goes beyond just you. It involves many people within the structure of a business, including shareholders, a board of directors, and general management.

Shareholders

Shareholders are vital stakeholders who indirectly affect the governance of a company. They should be represented in all business decisions and have some influence on operations, such as the ability to oust ineffective directors.

It is also important to balance how much control they have. One example of a failure in shareholder intervention was Volkswagen in 2015. Its supervisory board, which was composed mainly of shareholders, lacked an independent supervisor. This resulted in a failure of oversight and the "Dieselgate" emissions scandal.

Board of Directors

By definition, a board of directors is a group elected to represent the shareholders. Public corporations must have one.

The board is responsible for decisions regarding the hiring and firing of personnel, dividend policies and payouts, and executive compensation. It is also responsible for incorporating risk management, accountability, transparency, and ethical business practices into all planning.

Each board member should be subject to expedited removal if they violate legal or ethical rules.

General Management

General management is responsible for business operations, including managing insurance costs, marketing, technology implementation, and much more. Because they have a closer view of day-to-day operations, it's up to them to ensure the four Ps are being considered.

Good Governance Is Important for Businesses of All Sizes

A successful company — no matter the size — wants others to be confident in its leadership and its goals. Whether you are already operating your firm or are still figuring out how to start your own small business, consider having leadership that inspires others and provides an independent perspective in the boardroom.

Many people involved in startups are either related to or share an extremely close connection with the company's founder. It is extremely important to have independent governors who balance the perspectives of shareholders and stakeholders with the day-to-day needs of the business.

The importance of good governance grows exponentially as your company expands. Once your firm is in the public eye, those four Ps become critical in creating public trust and, ultimately, shareholder value.

Corporate Governance Law and Industry Standards

All companies are required to follow the law. Most state laws and federal rules regulating corporate governance relate to financial data and disclosures. There are also industry organizations that have published governance standards for businesses to follow.

  • The Securities Act of 1933 and the Securities Exchange Act of 1934 regulate the offer and exchange of securities. They require annual, quarterly, and interim reporting of financial information
  • The New York Stock Exchange and NASDAQ impose many rules relating to director independence, the composition of board committees, and voting
  • Industry organizations such as Institutional Shareholder Services (ISS) provide guidelines and recommendations for companies to consider

The responsibilities associated with good corporate governance grow as the business develops. Shareholders and stakeholders alike demand positive impact. The business needs to be concerned with community outreach and company culture. The leadership of each company must navigate nuanced and ever-evolving expectations to provide effective corporate governance for your organization.

Next Steps

Contact a qualified business attorney to help you address you business's operational needs.

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