The Importance of Corporate Governance

importance of corporate governanceWhen people think about corporations, they usually imagine a large company with hundreds or even thousands of employees. With so many people working within one company, there has to be an order and structure that keeps the areas of communication clear and easy to understand. This form of structure is known as corporate governance.

Corporate governance isn’t just one structure though, but instead it consists of the various duties, obligations, and rights that control and direct a corporation. The point of this governance is to properly distribute the responsibilities that those who participate in the corporation have, such as the managers, stakeholders, creditors, regulators, and of course those in the board of directors. In addition to informing these people of their responsibilities, the corporate governance also informs people of their rights within the company.

Corporate governance is an important aspect of business. If you’ve ever wanted to create a business, then it’s important to explore the importance of corporate governance and how it can help your company. There’s a lot that goes into running a business obviously, and understanding things like corporate governance is only one small part of the big picture. On that note, consider checking out Udemy courses such as Introduction to Business to start walking down the path of someday owning your own corporation.

The Goals of Corporate Governance

When corporate governance is done properly, it allows the corporation to work smoothly due to the existence of a clear level of accountability and communication amongst the organization, as well as people understanding what their roles and responsibilities are.

To properly understand and utilize corporate governance it is important to understand and follow its most important principles. These principles help establish the roles and responsibilities of the key members of the corporation. The general principles of all forms of corporate governance are generally related to the shareholders, board members, and stakeholders. In addition to this, corporate governance also places a strong emphasis on the behavior of the corporation and how much the corporation discloses to the public.

Below you can find a detailed explanation of the principles that the corporate governance follows and the people that these principles have an effect on.

  • Keep the Interest of Stakeholders in Mind

Corporate governance acknowledges that the stakeholders in the company must be recognized in all areas of society, the market, legality, and their contracts. The stakeholders are important members of the corporation that don’t hold any shares. Stakeholders include people such as investors, creditors, customers, suppliers, and employees.

  • Treating Shareholders Equally

As a corporation, the business should not only respect shareholders and their rights, but help the shareholders when it comes to exercising their rights. The best way this is done is by allowing and encouraging shareholders to participate in the activities in the company such as meetings.

  • Identifying the Roles of the Board of Directors

The board of the directors are those that stand at the head of a corporation. The responsibilities of the board are diverse and it requires people needing both skill and knowledge to evaluate employee performance. In addition to this, the corporate governance helps to make sure that the board has the level of commitment and the size that it needs in order to properly run the business.

  • Ethical Behavior

Ethics and integrity are also key principles of corporate governance. The integrity of anyone placed in corporate office or in the board should have a high level of integrity. They must also follow a code of conduct and exhibit ethical behavior during the decision making process of the business.

  • Transparency

The final principle of corporate governance is the concept of disclosure or transparency. This is the idea that the corporation should always let it be known what the responsibilities and duties are of those that work for the corporation as well as who is management in order to keep stakeholders accountable. Another aspect of transparency is disclosing material related to the corporation that should be given out in a way that promises anyone who is invested in the company can have clear access to information.

A company’s corporate governance sets the stage for how it is run, as well as what the roles and duties of those who work in the corporation may be. When creating a business plan, it would be wise to consider how corporate governance will be implemented into the business model. A company with a poor business plan is essentially doomed to fail.

The two Udemy courses The Business Plan and Business Planning: How to Write a Business Plan has a huge amount of focus on what you should do to make sure that your business plan is structurally sound.

The Importance of Corporate Governance

Through seeing how corporate governance works, you can tell why it is important. It helps streamline the process and gives people accountability. The point of corporate governance is to help the decision making process. As mentioned above in the principles of corporate governance, one of the main goals is to clearly explain to the board, the stakeholders, and the shareholders what their duties and responsibilities are within the company.

With knowing those roles and responsibilities, the people within the corporation can understand what they are held accountable for. For example, the board has the responsibility of properly evaluating the management in the company. If the company has poor management, then it is the fault of the board for not properly evaluating the manager. In this regard, the blame cannot be placed on other members of the corporation. This prevents situations in which there is no way to know who is accountable for what action.

Accountability is what helps people within the company make decisions, whether it is finding out what person should be terminated from their position due to the mistakes that they’ve made or who should be acknowledged for their good work due to doing something exceptional in their field. With good corporate governance, it’s pretty simple to know what the key members of the business are supposed to do.

Lowering Risk 

Another important aspect of corporate governance is mitigating or reducing the amount of risk that is involved. Through corporate governance, scandals, fraud, and criminal liability of the company can be prevented or avoided altogether.

Since the people involved in the organization know what they are accountable for, the actions of one person doesn’t mean the downfall of the entire corporation. Properly identifying what the roles in the corporation are allows decisions to be made that won’t have a negative effect on the overall corporation, and it means that the offender can be much more quickly identified and punished instead.

Corporate governance is also great because it is a form of self-policing. Before outside forces are able to do anything to a corporation, it’s possible for the corporation to handle matters itself. With corporate governance, everyone is held to a specific standard and communication is made easier due to their being an established hierarchy and role that everyone involved in the corporation plays. This level of handling business on its own instead of being forced into making decisions outside of the company helps keep the corporation sustaining itself.

Public Acceptance

In terms of business, a company with corporate governance is widely accepted by the public. This is mostly due to the idea of disclosure and transparency that comes with corporate governance. With full disclosure and the ability for people who work in the business to get information, as well as the general public, there is a higher level of trust. There’s also the fact that due to the way that corporate governance is setup, there is a lower chance of fraud and company-wide criminal activity, which helps gain the trust of the public as well.

Public Image

Today many corporations hold a high level of corporate governance. This is because a corporation has a public image to maintain. With corporate governance, the corporation takes more responsibility for its actions, and also allows it to keep tabs on what is going on as well as helps those in charge remain more aware of the public image of the corporation.

With the way that businesses are run today, it can be difficult for a corporation to become successful just by having a high level of profit. Due to the fact that a corporation is also evaluated based on its image, corporate governance is established to help ensure that image remains clean. Making sure there is a high level of awareness, ethical behavior, and understanding of what the public wants is all encompassed in corporate governance.

It would be hard to develop strategies for your business to grow, something you can learn more about in this Udemy blog post, if you didn’t fully utilize corporate governance to keep things in check

Having a Successful Business

Corporate governance is an aspect of business that’s become incredibly important in recent years, but it isn’t the only part of business a person has to understand. If you’ve been holding on to a business idea, but you haven’t gotten it up off the ground then you will need to learn quite a bit.

Try the Udemy course From Business Idea to a Business, which can teach you how to make your business dreams become a reality with the helpful opinions of over 300,000 business owners.