Corporate governance is the structure that defines the business relationships that exist, between company shareholders, management teams, the Board of Directors, and all other relevant stakeholders. Corporate governance comprises the social and institutional components of a business. Simply described, it is the system in charge of directing and managing companies.
There are several reasons why corporate governance is important, but let’s start with the most obvious.
The Importance of Corporate Governance
Strong and effective corporate governance contributes to the development of an integrity-driven company culture, which leads to improved performance and a more sustainable corporation overall. Essentially, it exists to raise the accountability of all individuals and teams within your firm, striving to prevent mistakes from occurring in the first place.
It is one thing to have operational corporate governance; it is quite another to have effective operational corporate governance. Here are pointers to establishing a functional and effective corporate governance system.
1. Recognize that effective governance is more than just compliance.
Boards must strike a balance between conformance (compliance with legislation, regulation, and codes of practice) and performance components of their work (i.e., improving the performance of the organization through strategy formulation and policy making). A board must develop its position and understanding of the primary functions it performs, in comparison to those performed by management as part of this process.
2. Keep track of organizational performance
Monitoring organizational performance is an important board duty, and maintaining legal compliance is a big part of that. Both ensure that corporate decisions are in line with the organization’s strategy and the expectations of the owners. This is best accomplished by defining the organization’s primary performance drivers and developing appropriate measurements of success.
3. Recognize that risk governance is a board responsibility.
Another critical responsibility of the board is to establish a solid system of risk oversight, management, and internal control. Effective risk management promotes improved decision-making by providing a greater understanding of the risk-reward trade-offs that all organizations encounter.
4. Establish and sustain an efficient governance infrastructure
Because the board is ultimately responsible for all of an organization’s activities and decisions, particular policies to guide organizational behavior must be in place. It is also crucial for the board to adopt delegation procedures to guarantee the line of duty between the board and management is clearly defined.
5. Evaluate board and director performance and look for ways to improve.
If boards are to govern effectively, they must be cognizant of their own strengths and flaws. Board effectiveness can only be measured if the board evaluates its own performance as well as that of individual directors on a regular basis. A board and director evaluation can result in improvements to areas as broad as board processes, director skills, competencies, motivation, and even boardroom relationships.