Compliance Glossary

Corporate Governance

What is Corporate Governance?

Corporate governance is the practice of creating systems, policies, procedures and rules that regulate how a firm is administered or controlled. 

Corporate governance begins with the creation and filing of a corporate charter (also called articles of incorporation), a document that legally creates and registers the corporation. A corporate charter gives the corporation a name, establishes its legal structure, and authorizes the issuance of shares. 

Within each firm, the board of directors typically plays the largest role in maintaining corporate governance. Its role is to establish a strategic direction for the organization, implement practices and procedures to move the organization toward its objectives, and communicate with investors and external stakeholders about the firm’s strategy and activities. In doing so, the board may form committees with specialized charters or mandates, establish and update stock ownership guidelines, and pass new corporate bylaws that govern decision-making and conflict resolution.

Why Is Corporate Governance Important?

Effective corporate governance accomplishes several objectives, such as:

  • Effectively and efficiently distributing rights and responsibilities between the organization and its shareholders.
  • Reconciling conflicts of interest that occur between stakeholders as a result of their various duties, obligations, and roles within the organization.
  • Establishing procedures for information management and accountability within the organization. 

What are the Key Elements of Corporate Governance?

Corporate governance can include any practice or procedure that protects the interests of the corporation and helps it achieve its goals. As a result, corporate governance policies play a role in virtually all departments or spheres of management within the organization. 

The key elements of corporate governance include:

  1. Shareholder Primacy – Shareholder primacy is a foundational theory in corporate governance which states that the organization should assign the highest priority to the interests of its equity shareholders. Shareholder primacy establishes that the shareholders are the true owners of the corporation, and that corporate executives have a direct responsibility to maximize value for shareholders.
  2. Transparency – Effective corporate governance establishes policies and procedures for ensuring organizational transparency. To win the confidence of investors and shareholders, corporations must provide accurate and timely information with respect to their activities, financial position, performance, and other relevant factors. This information should be made available to all current and prospective stakeholders in the company.
  3. Roles & Responsibilities – Effective corporate governance establishes the roles and responsibilities associated with each position within the organization.
  4. Accountability – Effective corporate governance establishes a system of accountability between stakeholders within the organization. Employees are made accountable to their managers, managers to their corporate executives, executives to the board of directors, and the board of directors to the shareholders.
  5. Compliance – Effective corporate governance establishes policies and procedures that ensure compliance with business law, the tax code, and industry-specific regulations.

What is an Example of Corporate Governance?

Some examples of corporate governance include:

  • Establishing a sales compensation plan that aligns the incentives of the sales department with shareholder incentives.
  • Creating a policy requiring all employees to disclose any potential conflicts of interest that arise during their work.
  • Establishing a procedure for routine internal audits of the firm’s production processes and financial accounting. The results of these audits will be reported to shareholders and used to hold managers accountable for their performance.

Implementing a software-based compliance management platform to support policy deployments and effective risk management while managing conflicts of interest.

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