What is Corporate Governance?

Corporate governance in simple language is a phrase used to describe how businesses are directed, managed and controlled.  It is the collection of sets of best practices that help stir the affairs of a company.  Forces coming from the government and regulatory bodies help to shape the way corporate governance is viewed.

Government and powerful regulatory bodies are not the only stakeholders in business environment that influences the way businesses are controlled and directed. Shareholders, employees, customers, fundamental analysts, consultants, peer groups, etc all contribute in helping company make decisions regarding how to control a business. The bulk of the work of management in controlling how an organization is managed and controlled is in managing the often conflicting needs of the different stakeholders.

Many management theorists have come up with some tools that can effectively deal with the conflicting views of people that affects and are been affected by the operations of a business. The suggestions all points to the institutionalization of good ethical practice in business. Good business ethics dwells more on transparency and accountability.

CORPORATE GOVERNANCE MECHANISMS AND PRINCIPLES

Suggestions on the principles and mechanisms of corporate governance are all aimed at ensuring the promotion of; fair treatments, transparency, honesty, and fair remunerations. Easing the likely occurrence of corporate moral hazard still tops the lists of the importance of implementing best practices of controlling and managing resources at the disposal of the directors of a company. To achieve the above listed qualities that must be present in the way a business is managed so as to instil confidence in the mind of stakeholders, especially the shareholders, certain features must be present in any system that is adopted to control the board of an entity.

Separation of responsibilities at the highest level of an organization helps promote the code and spirit of good corporate governance. Reports on how best to govern an organization like the Cadbury report and Turnbull report all points on the need to separate the position of the CEO from that of the chairman. The importances of having these two different individuals occupy the helm of affair are to ensure transparency and checkmating. The CEO runs the company while the Chairperson runs the board.

Having committees is not only in line with best practices of how businesses are controlled and managed, but also ensures the achievement of overall business objectives. The committees that are recommended by the various reports include; remuneration committee, appointment committee, audit committee, and risk management committee. Each of these committees works to complement the work of others.

Corporate social responsibility is one of the widely cited examples of good corporate governance practices in action. Other ways of showing that a company is taking care of its stakeholders include ethical accounting and corporate social reporting.

WHAT IS GOOD CORPORATE GOVERNANCE?

Well, good corporate governance is any system of controlling the resources of a business in such a way that transparency is upheld. There are two approaches to achieving that objective. A company can either follow the rule based approach or the principles based approach. There are debates going as to which approach is better, for me, the principles based approach is better than the rules based approach.

Rule based approach to corporate governance is the kind that is practiced in America where the application of the best practices is backed by law and punishable by law when not followed. Sarbanes Oxley’s (SOX) Act of 2002 is a good example, SOX has attracted many reaction and commentaries from both practitioners and industry watchers.

Principles based approach to corporate governance is what is practiced in the UK under what is now called the combined Code. This is a more principles based approach to managing a company. The principles based way of dealing with managing the conflicting interest of a company allows board of directors to either comply or explain why non compliance is best given the prevailing situation.

Good corporate governance is a vital ingredient that sets the pace for implementation of management accounting tools like balanced scorecard and strategic risk management.

I hope that this article has done justice to the question, what is corporate governance. Thanks for reading and do not forget to leave a comment to have your say on this great topic.