Lexicon

What is Corporate Governance?

by Stephen Conmy on Jul 16, 2022

What is Corporate Governance

Corporate governance is a set of rules, practices, and processes used to direct and control an organisation. Boards of directors are the primary force determining corporate governance.

Accounting, transparency, fairness, and responsibility are the four fundamental principles of corporate governance.

What is the definition of Corporate Governance?

The term Corporate Governance refers to how companies are run and for what purpose.

Corporate governance also defines an organisation’s power structure, accountability structure, and decision-making process.

It is essentially a set of tools that enables management and the board to run an organisation more efficiently and effectively.

Environmental awareness, ethical behaviour, corporate strategy, compensation, and risk management are all aspects of corporate governance.

A company’s operation and profitability can be negatively impacted by poor governance.

Further reading on corporate governance:

How it works

The purpose of good governance is to ensure that businesses have the appropriate decision-making processes and controls to ensure that all stakeholders’ interests (shareholders, employees, suppliers, customers and the community) are balanced.

At the corporate level, governance involves setting and achieving the company’s goals while considering the social, regulatory, and market contexts.

In other words, this concept refers to practices and procedures for ensuring that a company runs in a manner to meet its objectives while ensuring that its stakeholders can have confidence that they can trust the company.

The Corporate Governance Institute is the home of good governance and believes that good governance is critical to improving the quality of decisions made by management.

The ability to make ethical and high-quality decisions is essential to building a sustainable business.

What is a board of directors?

The board of directors is an organisation’s governing body. It consists of a group of individuals elected by shareholders.

Boards of directors set company policies and supervise the managers of the organisation. Good governance is about separating ownership and control.

Company shareholders own the company, but its managers control its operations.

In an ideal world, the directors would work to align shareholders, and managers’ interests and the company’s best interests should remain their top priority.

There must be a board of directors for all publicly owned companies. Private companies often have boards of directors as well. Boards typically meet a few times a year.

A board of directors often includes the following:

  • Inside directors (executives and managers)
  • Outside directors (non-executive directors)
  • A chairperson

Directors on a board can either be insiders or outsiders. Good boards do include non-executive directors.

Executives, such as the chief executive officer (CEO), are considered inside directors. In addition to serving on the company’s governing body, these people handle managerial duties.

A non-executive director or NED is not part of the company’s executive team. They are independent professionals selected based on their industry experience and expertise. In addition, NEDs serve only one role, which is to serve as directors. This makes them more unbiased than company managers.

The chairperson can be either an inside or an outside director.

Among the responsibilities of the board of directors are:

  • Recruiting top executives
  • Establishing executive compensation
  • Monitoring executive performance
  • Dismissing executives as needed
  • Approving the issuance of stock
  • Paying dividends
  • Managing internal controls and corporate governance
  • Establishing other company policies

Video – how to join a board of directors

Watch Julie Sinnamon, former CEO of Enterprise Ireland explain how to join a board of directors.

Become a certified board member. Take the Diploma in Corporate Governance. Enrol today.

Download the course brochure. Enrol today.
Tags
Corporate Governance
Lexicons
Practices
Rules

Related Posts