The fundamentals of corporate governance

Corporate governance has changed a lot, and that change means way more responsibility. 

“Corporate governance” refers to everything connected to a company’s board of directors. Many still perceive boards to be weak bodies of “yes-men” who simply show up to endorse the CEO’s decisions and head home again. 

That’s a decades-old idea. Frankly, with all today’s regulations and stakeholder expectations, boards of this nature in the modern world could quickly sink a company. 

Here’s what proper corporate governance looks like:

Corporate governance concerns any process, person or mechanism that feeds into the running of a company. 

This vast responsibility is rarely ever held by one person (except for small startups). A team of people is needed to do the job. This team is the board of directors. 

So, when we talk about corporate governance, we inevitably end up talking about the board. They are the group that gives life to the responsibility.

A board of directors is a group of individuals elected by shareholders to oversee and make decisions on behalf of the company. This body is responsible for setting the company’s strategic direction, ensuring that it operates within the bounds of the law, and safeguarding the interests of shareholders.

The board primarily answers to the shareholders of the company. 

The board’s power usually derives from the shareholders, who elected and re-elect each member to their position on a predefined basis. As such, the board is always bound to act in the shareholders’ best interests. Not doing so is generally considered a breach of fiduciary duty.

In most cases, the board doesn’t have a day-to-day role in running the company. This is on purpose – to give the board space to focus on long-term strategy and direction. 

When the board does interact with the business, it’s through a well-defined structure. 

It usually appoints senior executives, such as the CEO, who are responsible for the company’s day-to-day management. Some senior executives will also sit on the board to increase connection and overlap. 

Aside from this, the board’s role primarily oversees, guides, and assesses the company’s activities against its goals.

Understanding the fundamentals of corporate governance means understanding why it’s so important.

Essentially, it’s the DNA of any organisation – the blueprint from which the company is built and how it functions from one year to the next. Never underestimate its importance.

Well-structured corporate governance provides a platform to make clear decisions and establishes responsibility for those decisions. 

Within this setup is a clear chain of command and a system of checks and balances to ensure that each level of the organisation has a productive relationship with the others.

Corporate governance has many rules devoted to disclosing essential information keeping everyone on the same page. 

Examples of where this happens include corporate finances, decision-making, and conflicts of interest. Everyone, from shareholders to the most junior employees – often the public too – has access to this essential information. It builds trust.

Risk is one of the biggest challenges in business. It changes both in the long and short term, meaning the board and management must always come together and assess it. 

Risk management is built into the foundations of corporate governance. Good governance gives us a structured approach to identifying, assessing, and mitigating risks. Not only does this protect a company from negative consequences, it also pushes a company towards positive ones.

Any company’s code of ethics comes from those in charge. Ethical behaviour is a cornerstone of effective corporate governance. It ensures that companies operate responsibly and never commit runaway acts of profit-making while ignoring common principles. 

Ultimately, many stakeholders place ethics near the top of their priority lists, so those in governance need to remember it.

Think back to some of the biggest corporate scandals that directly impact firms’ long-term sustainability, and you will nearly always find lousy governance as a critical factor.

Good governance is the key to a business’s long, healthy life. Everyone’s interests are aligned and respected under a sound board, turning a business into a community that naturally seeks to safeguard its future on various fronts.

Corporate governance is not just a buzzword, and it’s certainly not a box-ticking businesses need to tick to please investors. 

It’s a fundamental pillar of responsible and sustainable business practices. Newcomers to the field should prioritise understanding the significance of governance, the role of the board, and how it connects to the rest of the business.