CONCEPT OF CORPORATE GOVERNANCE

CONCEPT OF CORPORATE GOVERNANCE

Corporate governance is the mechanisms, processes and relations by which corporations are controlled and directed. Governance structures and principles identify the distribution of rights and responsibilities among different participants in the corporation (such as the board of directors, managers, shareholders, creditors, auditors, regulators, and other stakeholders) and includes the rules and procedures for making decisions in corporate affairs.

Corporate governance includes the processes through which corporations’ objectives are set and pursued in the context of the social, regulatory and market environment. Governance mechanisms include monitoring the actions, policies, practices, and decisions of corporations, their agents, and affected stakeholders. Corporate governance practices are affected by attempts to align the interests of stakeholders.

Corporate governance has also been more narrowly defined as “a system of law and sound approaches by which corporations are directed and controlled focusing on the internal and external corporate structures with the intention of monitoring the actions of management and directors and thereby, mitigating agency risks which may stem from the misdeeds of corporate officers.

Corporate governance is the acceptance by management of the inalienable rights of shareholders as the true owners of the corporation and of their own role as trustees on behalf of the shareholders. It is about commitment to values, about ethical business conduct and about making a distinction between personal and corporate funds in the management of a company.”

CATEGORY OF CORPORATE GOVERNANCE

Corporate governance is the policies and procedures a company implements to control and protect the interests of internal and external business stakeholders. It often represents the framework of policies and guidelines for each individual in the business. Larger organizations often use corporate governance mechanisms to manage their businesses because of their size and complexity. Publicly held corporations are also primary users of corporate governance mechanisms.

1. POLICIES AND PROCEDURES

The first type of corporate governance is a set of policies and procedures that a corporation uses to control and protect the business interest whether they are internal or external. This is represented by the policies and guidelines that need to be followed by every individual in the business. This type of corporate governance is oftentimes utilized by large corporations. This is due to the fact that large corporations are complex and this type of corporate governance is a means of simplifying the complexities that entails having a large corporation. In addition to that, publicly held corporations also utilize this type of corporate governance.

2. BOARD OF DIRECTORS

Another type of corporate governance is the board of directors. The board of directors is actually a mechanism that represents the stakeholders of the company. It protects their interest in the business. Board of directors is actually composed of the stakeholders that are elected by them. The board is tasked to manage and or review the company’s overall performance and to remove individuals if necessary to enhance the company’s financial performance. The board of directors is the means employed by the stakeholders to bridge the gap between them and the company owners. The existence of the board of directors will lose its essence if a corporation or company does not have stakeholders. Board of directors may be utilized by large private organizations and corporations.

A board of directors protects the interests of a company’s shareholders. The shareholders use the board to bridge the gap between them and company owners, directors and managers. The board is often responsible for reviewing company management and removing individuals who don’t improve the company’s overall financial performance. Shareholders often elect individual board members at the corporation’s annual shareholder meeting or conference. Large private organizations may use a board of directors, but their influence in the absence of shareholders may diminish.

3. AUDITS:

Auditing is another type of corporate governance mechanism. Basically audits are reviews of the corporation’s financial transactions. Audits ensure that the business or corporation is in concurrence to the guidelines set by the national accounting authorities. Audits also ensure that the regulations and other external guidelines are met by the corporation. Auditing is an integral tool in the gathering of information by the shareholders or investors or even the general public in their assessment of the business or corporation. Audits can help improve the corporation’s standing n the business scene. This is because business will be conducted willingly by other company if the companies they will be doing business with have a good track record.

Audits are an independent review of a company’s business and financial operations. These corporate governance mechanisms ensure that businesses or organizations follow national accounting standards, regulations or other external guidelines. Shareholders, investors, banks and the general public rely on this information to provide an objective assessment of an organization. Audits also can improve an organization’s standing in the business environment. Other companies may be more willing to work with a company that has a strong track record of operations.

4. BALANCE OF POWER

The last type of corporate governance mechanism is the balance of power. This ensures that no one person is vested with all the controlling powers of the company. This distributes the powers to the board members, the directors and the shareholders. The roles established by this balance make sure that the company is flexible and bend with the changing times. This makes the operation of the company smoother and without interruptions to the normal operations of the company.

Balancing power in an organization ensures that no one individual has the ability to overextend resources. Segregating duties between board members, directors, managers and other individuals ensures that each individual’s responsibility is well within reason for the organization. Corporate governance also can separate the number of functions that one division or department completes within an organization. Creating well-defined roles also keep the organization flexible, ensuring that operational changes or new hires can be made without interrupting current operations.

CONCLUSION

Effective corporate governance is essential if a business wants to set and meet its strategic goals. A corporate governance structure combines controls, policies and guidelines that drive the organization toward its objectives while also satisfying stakeholders’ needs.

REFERENCES

Shailer, Greg. An Introduction to Corporate Governance in Australia, Pearson Education Australia, Sydney, 2004.

  Luigi Zingales, 2008. “corporate governance,” The New Palgrave Dictionary of Economics, 2nd Edition.

Williamson, Oliver E. (2002). “The Theory of the Firm as Governance Structure: From Choice to Contract,” Journal of Economic Perspectives, 16(3), pp. 178–87, 191–92. [Pp. 171–95.]

Pagano, Marco, and Paolo F. Volpin (2005). “The Political Economy of Corporate Governance,” American Economic Review, 95(4), pp. 1005–1030.

Williamson, Oliver E. (1988). “Corporate Finance and Corporate Governance,” Journal of Finance, 43(3), pp. 567–591.

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