What is corporate governance?
Corporate governance is the set of rules and practices that an organization has in place to determine direction and management within the business.
These internal controls are generally put together or amended by the company’s board of directors and cover all internal practices that influence performance and operations.
For most companies, the goal of corporate governance is to balance the interests of key stakeholders alongside customers, the local community, and any vendors the business works with. As these rules and practices impact everyone connected to the business, legal records of changes or additions are kept in enterprise legal management (ELM) software to manage this data.
Types of corporate governance
Every business will operate differently depending on the size and structure of the organization. But for any form of corporate governance, the business will need to decide between:
- Centralized governance. This type of governance gives decision-making authority to the highest levels of the company. This is considered a horizontal hierarchy, where the board and owners are responsible for the biggest decisions regarding operations.
- Decentralized governance. With this type of governance, employees and managers can make strategic decisions without prior approval. Rather than simply executing instructions from above, this structure gives employees the freedom to improve efficiency or change strategies when necessary.
Basic elements of corporate governance
Regardless of the organization’s size or structure, all formalized measures of corporate governance must include certain principles.
These are:
- Accountability. Those at the top of the corporate hierarchy must be held accountable for any decisions made. This often means being able to defend decisions made about the business’s operation to employees and customers.
- Awareness. Any board should be aware of the company’s place in the competitive landscape. Alongside this, they should also have a deep understanding of the overall success of the business as it relates to finances, employee performance, and growth strategy.
- Transparency. All decisions made by the board of directors should be documented and reported to the relevant people. Not only does this relate to any financial decisions made, but also conflicts or risks that come to light.
- Responsibility. The board and shareholders are responsible for overcoming any challenges, mitigating possible risks, and moving the business forward to success. An important role of this group is choosing the right leader for the company, which has a significant impact on the outcome of any work.
- Impartiality. It’s particularly important that any member of the board of directors can remain neutral in their decision making and act in the best interests of the business rather than their own personal interests.
Benefits of corporate governance
Having a firm set of rules in an organization is important for many reasons. Some of the benefits of corporate governance include:
- Building trust with stakeholders. Whether these are investors in the business, employees, or simply the local community, having a clear set of practices and controls gives these individuals confidence in the company's operating practices.
- Providing investors with a company vision. Investors want documentation like business plans to determine the company's possible future success. But corporate governance also gives an insight into how the business plans to operate and the direction they want to move in.
- Reducing corruption and waste. As a business grows and brings in more staff, the potential for loss and poor operations grows. A corporate governance system gives clear direction for what is expected of internal teams and can make dealing with conflicts much easier.
Best practices for corporate governance
Several best practices should be followed for businesses looking to create a new corporate governance system or overhaul an existing set of rules. These are:
- Recruiting a diverse board. The board should reflect both the employees and customers as much as possible. Creating a diverse board gives a voice to those who may have previously been marginalized, which is essential for building a company with integrity.
- Emphasizing ethical behavior. As the voice of the business, the board should be held to a high standard when it comes to behavior and decision making. Honesty and trust are key qualities companies should look for when choosing new board members.
- Defining clear responsibilities. Every organization member should have a clearly defined role, with responsibilities that align with this. Building committees of various employees can support the board and bring additional expertise to the table.
- Aligning strategic plans with business goals. Any plans the board puts in place through corporate governance systems should always be matched to overarching business goals where possible. These may not always refer to growth and profitability directly. For instance, keeping a high employee retention rate is often driven by employee satisfaction, so any plans or procedures relating to day-to-day work may need to consider the impact on staff.
Better manage your company policies and keep important documentation accessible with policy management software.