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Why good corporate governance is so important

Why good corporate governance is so important

Corporate governance is the corner stone of any good business. It encompasses the processes, practices and policies that a company relies on to make formal decisions and to manage the company. Good corporate governance helps to prevent corporate scandals, fraud, and potential civil and criminal liability of the business. A good corporate governance image enhances the reputation of the business and makes it more attractive to customers, investors, suppliers and in the case of non?profit businesses, contributors.

Corporate governance provides a framework for how the company operates, corporate governance should encompass the following:

  • The company’s performance and the performance of the board
  • The relationship between the board and executive management
  • The appointment and assessment of the board’s directors
  • Board membership and responsibilities
  • The “ethical tone” of the company, and how the company conducts itself
  • Risk management, corporate compliance and internal controls
  • Communication between the board and the C-suite
  • Communication with the shareholders
  • Financial reporting

This list provides a bird’s-eye view of corporate governance in action, and conveys the extent to which it can influence business.

Implementing an excellent corporate governance system will also ensure that the company protects its members, officers and management. By ensuring that the company retains its records in the company books and maintains its statutory registers, they will be protected. Maintaining these records also means that officers of the company can be held accountable through documentation for their actions if necessary. It also means that a shareholder cannot unnecessarily contest the actions of the officers. They can be shown the company books, approved resolutions and board minutes if necessary and rest assured that the officers are acting within their authorities.

Principles of Corporate Governance

  • Shareholder recognition is key to maintaining a company's stock price. More often than not, however, small shareholders with little impact on the stock price are brushed aside to make way for the interests of majority shareholders and the executive board. Good corporate governance seeks to make sure that all shareholders get a voice at general meetings and are allowed to participate.
  • Stakeholder interests should also be recognized by corporate governance. In particular, taking the time to address non-shareholder stakeholders can help your company establish a positive relationship with the community and the press.
  • Board responsibilities must be clearly outlined to majority shareholders. All board members must be on the same page and share a similar vision for the future of the company.
  • Ethical behavior violations in favor of higher profits can cause massive civil and legal problems down the road. Underpaying and abusing outsourced employees or skirting around lax environmental regulations can come back and bite the company hard if ignored. A code of conduct regarding ethical decisions should be established for all members of the board.
  • Business transparency is the key to promoting shareholder trust. Financial records, earnings reports and forward guidance should all be clearly stated without exaggeration or "creative" accounting. Falsified financial records can cause your company to become a Ponzi scheme, and will be dealt with accordingly.

Don't understand the elements of corporate governance? Find out more about the corporate governance courses we offer at London TFE.


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