CONCEPT OF CORPORATE GOVERNANCE

CONCEPTOF CORPORATE GOVERNANCE

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

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

Corporate governancehas also been more narrowly defined as “a system of law and soundapproaches by which corporations are directed and controlled focusing on theinternal and external corporate structures with the intention of monitoring theactions of management and directors and thereby, mitigating agency risks whichmay stem from the misdeeds of corporate officers.

Corporategovernance is the acceptance by management of the inalienable rights ofshareholders as the true owners of the corporation and of their own role astrustees on behalf of the shareholders. It is about commitment to values, aboutethical business conduct and about making a distinction between personal andcorporate funds in the management of a company.”

CATEGORYOF CORPORATE GOVERNANCE

Corporate governanceis the policies and procedures a company implements to control and protect theinterests of internal and external business stakeholders. It often representsthe framework of policies and guidelines for each individual in the business.Larger organizations often use corporate governance mechanisms to manage theirbusinesses because of their size and complexity. Publicly held corporations arealso primary users of corporate governance mechanisms.

1.POLICIES AND PROCEDURES

The first typeof corporate governance is a set of policies and procedures that a corporationuses to control and protect the business interest whether they are internal orexternal. This is represented by the policies and guidelines that need to befollowed by every individual in the business. This type of corporate governanceis oftentimes utilized by large corporations. This is due to the fact thatlarge corporations are complex and this type of corporate governance is a meansof simplifying the complexities that entails having a large corporation. Inaddition to that, publicly held corporations also utilize this type ofcorporate governance.

2.BOARD OF DIRECTORS

Another type ofcorporate governance is the board of directors. The board of directors isactually a mechanism that represents the stakeholders of the company. Itprotects their interest in the business. Board of directors is actuallycomposed of the stakeholders that are elected by them. The board is tasked tomanage and or review the company’s overall performance and to removeindividuals if necessary to enhance the company’s financial performance. Theboard of directors is the means employed by the stakeholders to bridge the gapbetween them and the company owners. The existence of the board of directorswill lose its essence if a corporation or company does not have stakeholders.Board of directors may be utilized by large private organizations andcorporations.

A board ofdirectors protects the interests of a company’s shareholders. The shareholdersuse the board to bridge the gap between them and company owners, directors andmanagers. The board is often responsible for reviewing company management andremoving individuals who don’t improve the company’s overall financialperformance. Shareholders often elect individual board members at thecorporation’s annual shareholder meeting or conference. Large privateorganizations may use a board of directors, but their influence in the absenceof shareholders may diminish.

3.AUDITS:

Auditing is another type of corporate governance mechanism. Basicallyaudits are reviews of the corporation’s financial transactions. Audits ensurethat the business or corporation is in concurrence to the guidelines set by thenational accounting authorities. Audits also ensure that the regulations andother external guidelines are met by the corporation. Auditing is an integraltool in the gathering of information by the shareholders or investors or eventhe general public in their assessment of the business or corporation. Auditscan help improve the corporation’s standing n the business scene. This isbecause business will be conducted willingly by other company if the companiesthey will be doing business with have a good track record.

Audits are an independentreview of a company’s business and financial operations. These corporategovernance mechanisms ensure that businesses or organizations follow nationalaccounting standards, regulations or other external guidelines. Shareholders,investors, banks and the general public rely on this information to provide anobjective assessment of an organization. Audits also can improve anorganization’s standing in the business environment. Other companies may bemore willing to work with a company that has a strong track record ofoperations.

4.BALANCE OF POWER

The last type ofcorporate governance mechanism is the balance of power. This ensures that noone person is vested with all the controlling powers of the company. Thisdistributes the powers to the board members, the directors and theshareholders. The roles established by this balance make sure that the companyis flexible and bend with the changing times. This makes the operation of thecompany smoother and without interruptions to the normal operations of thecompany.

Balancing powerin an organization ensures that no one individual has the ability to overextendresources. Segregating duties between board members, directors, managers andother individuals ensures that each individual’s responsibility is well withinreason for the organization. Corporate governance also can separate the numberof functions that one division or department completes within an organization.Creating well-defined roles also keep the organization flexible, ensuring thatoperational changes or new hires can be made without interrupting currentoperations.

CONCLUSION

Effectivecorporate governance is essential if a business wants to set and meet itsstrategic goals. A corporate governance structure combines controls, policiesand guidelines that drive the organization toward its objectives while alsosatisfying stakeholders’ needs.

REFERENCES

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

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

Williamson, Oliver E. (2002).“The Theory of the Firm as Governance Structure: From Choice toContract,” 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,” AmericanEconomic Review, 95(4), pp. 1005–1030.

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