GOOD CORPORATE GOVERNANCE
Corporate governance is mainly how an organization is managed, organized, and directed. It consists of an array of laws, policies, regulations, rules, and processes that affect governance, thus affecting the direction the corporation is aimed at. It also involves the interaction and association of its various stakeholders.
Stakeholders, in a modern business set up, are composed of two groups, the external stakeholders and the internal stakeholders. The external stakeholders are those not directly connected to an organization but has limited dealings and transactions with it. These are the tradesmen, suppliers, customers, shareholders, and the communities in which the actions and movements of the corporation has an effect on. Internal stakeholders are those that are directly connected to an organization. These are the executives and management, the board of directors, and the employees. A particular aspect of corporate governance is the scope and range of an individual’s accountability.
Corporate governance influences the economic efficiency of the organization. An organization is said to be economically efficient if it can optimize the manufacture of its goods and/or services without the use of additional resources.
Different countries have contributed to the development of the corporate governance codes and principles with the collaboration of various corporations, stock exchanges, investors, associations of managers and directors and the support of international bodies. Technically, an organization is not compelled to abide by the set codes and principles as these are not mandated but only recommended except for the listing requirements of stock exchange. Consequently, if they are quoted in a particular Stock Exchange, they should provide documents disclosing whether they are following the recommended codes and guidelines. If not, written explanations on their deviating practices should be provided. This requirement compels most companies to comply instead to set corporate guidelines.
The 2004 revised OECD Principles of Corporate Governance is the most used and referenced guideline. Its core values are fairness, responsibility, transparency, and accountability. This served as the basis of the United Nations’ “Guidance on Good Practices in Corporate Governance Disclosure” wherein five benchmarks were agreed upon. The categories are as follows: [i]auditing, board and management structure and process, corporate responsibility and compliance, financial transparency and information disclosure, and ownership structure and exercise of control rights.
A report, “Corporate Governance – the Foundation for Corporate Citizenship and Sustainable Business” was released in 2009 by the UN Global Compact and the International Finance Corporation, wherein it connected the social, environmental, and governance accountabilities of an organization to its performance and sustainability.
The most vital and strategic position in corporate governance is that of the board of directors who owns the accountability of promoting strategy, developing policy directions, promoting and delegating executives, and guaranteeing responsibility of the organization to its shareholders and the authorities.
Commonly adapted corporate governance principles are the rights and equal treatment of shareholders, the interests of stakeholders, functions and accountabilities of the board, veracity and ethical actions, and transparency and disclosure. Empirical evidence points out that practice of good corporate governance facilitates competitiveness and easier access to financial markets. Accordingly, they aid in the development of capital markets and pushes growth of economy.
At present, more organizations worldwide put more importance on how their organizations are operated and how they react and respond to the organization’s demands. They also found out that the process of decision-making is much improved when practices for good governance are applied, consequently promoting and boosting operational efficiencies.
It also minimizes the threat of fraud by employees particularly the officers because it improves the system of accountability. It also guarantees obedience to existing laws and regulations, thus acquiring and/or maintaining their reputation and standing in the market or industry. Well-governed organizations tend to stimulate and motivate employees to perform better thereby improving the company’s operational efficiency. It can also reduce cost of capital and increase the value or worth of its assets.
Practicing good corporate governance is an ongoing process. It is strongly recommended to review and update processes regularly as the market has the tendency or is inclined towards giving more value to companies intent on making lasting commitments to practices of good governance.
[i] En.wikipedia.org
Credit:ivythesis.typepad.com
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