What is corporate governance?
Corporate Governance is the system of rules, practices, and processes by which a Corporate Entity is directed and controlled and defines both the way, as well as the purpose for which a Corporate Entity is governed. It also identifies the roles and responsibilities as well as the accountability of persons within a corporate hierarchy. It is highly recommended that corporate entities install governance systems from the very formation of their business.
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The framework of Corporate Governance
Since Corporate Governance provides the framework for attaining a Corporate Entity’s objectives, it encompasses practically every sphere of management, from adherence to shareholder agreements, Memorandums of Incorporation (MOIs), action plans, and internal controls to performance measurement and corporate disclosure.
What is the purpose of corporate governance?
It essentially aims to balance the interests of a Corporate Entity’s many stakeholders, such as shareholders, senior management executives, customers, suppliers, financiers, the government, and the community.
Corporate Governance entails more than the mere striving for profitability but also aims to build trust with investors and the communities around them and is a major driving force in building the reputation of a corporate entity and meeting its objectives to be a good corporate citizen.
Ineffective Corporate Governance or the lack thereof led to various corporate scandals in the past for instance the Volkswagen AG emission scandal as well as the Enron-Worldcom scandal.
Who is responsible for corporate governance?
The governing body of a corporate entity, e.g. the board of directors, is responsible for effective Corporate Governance, risk management, accountability, transparency, and ethical business practices and will regularly appoint independent members, for instance, independent directors to their boards as these independents will align shareholder/investor interest with those of outsiders and will further dilute the concentration of any power within an existing governing body.
Corporate governance obligations stem from both internal frameworks, such as voluntary commitments to certain ethical standards, as well as external frameworks like legislation, common law, codes of best practices, etc. A corporate entity’s external governance obligations are determined by the sector within which it operates, eg the Private Security Sector as well factors like its Public Interest Scoring, etc.
Effective corporate governance
Effective Corporate Governance offers various advantages to corporate entity’s, including, but not limited to:
- Compliance with external peremptory Governance Obligations
- Increased corporate reputation amongst communities, clients, and other stakeholders
- Reduced wastages
- Reduced occurrences of corruption
- Effective Risk Management
- Prevention of mismanagement; and
- Increased and effective Regulatory and Statutory Compliance